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Making Offers

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Making Offers

How to make real estate offers:  There are several things that you need to think about when you are going to make an offer on a piece of property:

1)  Is the property in a good location?

2)  Is it the worst house in the area?  Is it the eye sore in the subdivision?

3)  What are the fix up costs?

4)  Is there enough profit range?

Once you find a property that you think could be a good fix-n-flip you will need to walk the property and determine an estimate of fix up costs.  To do this, basic knowledge of fix up prices are needed.  If you are a new investor I would recommend starting with rehabs that need only cosmetic fixes (carpet, paint, windows, appliances).  Once you have an estimate in mind an offer price needs to be determined.  I use a simple formula on every rehab to determine if it works for me. 

That formula is MAO = ARV x 70% - fix up costs.

MAO is max allowable offer.  This is the highest you can offer on the property.  Start off offering less than MAO so you have room to negotiate.

ARV is after repair value.  The best way to find this is using comps from a realtor.  Make sure the comps are within a mile of the subject property, same demographics (bedrooms, baths, garage) and same style of home.

70% is to give room for profit, holding and closing costs, and oops costs.  As investors we need to make sure we make at least 20% on each deal.  The 10% remaining is closing costs and holding costs.

Example:  ARV $100,000 with about $20,000 fix up costs.  Formula is $100,000*.7=$70,000-$20,000=$50,000 MAO.  If the numbers don't work do not put in an offer that is too high.

Use this formula for every rehab.  When investors stop using this formula mistakes can happen.

 

Now that you know the formula for putting in offers, what's next..........

Next blog will go over writing the purchase and sale contract.

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