Calculating Purchase and Profit Amounts
One of the most difficult aspects of real estate wholesaling is calculating the probable purchase and profit amounts for a property you have identified as possibly being undervalued. A property that you hope that you can make money on…
I’ve established the following steps as the most effective means of determining if it is worth pursuing. Once you have been in the business for a while you may arrive at your own best method, but in all my years in the business and working with and educating people new to the business, I have found that taking the following steps and using the following formulas provide a fairly accurate picture of what returns a property will bring, after repairs.
Determine A.R.V.
A.R.V. stands for After Repair Value.
It’s extremely important to determine what the subject property is worth after you or someone has rehabbed it and it is ready to sell. Only by determining A.R.V. can you accurately project profit margins and enter negotiations knowing how flexible you can be with the price.
There are Two preferred methods for establishing A.R.V.:
- ~ Have a trusted real estate agent (preferably one on your team –) perform a comparative market analysis for you
- ~ Have a trusted appraiser (perhaps a team member) give you a value based on the square foot price of similar homes in the neighborhood.
It’s vital that you perform your due diligence on determining your A.R.V. because repair costs and the amount of your purchase and sell amount will be based on this number.
1. Determine Rehab/Repair Costs
There are a couple of ways to arrive at the cost to rehab the subject property.
- Ask the contract (preferably on your team) to go by and give the property a quick “guestimate” of repair costs based on experience.
- Arrive at your own “guestimate”. It’s been my experience that cosmetic rehabs on the west coast are approximately $12,000 to $20,000 and that major rehabs tend to be in the $20,000 to $40,000 range. As you do more and more deals, and continue to evaluate properties, this number will be easier to determine.
2. Calculate Purchase Price and Profit Amounts
The Purchase Price is the amount we expect to get for the property once it has been rehabbed. This price is arrived at by multiplying the A.R.V. by 65% minus the cost of repairs. (The A.R.V. is multiplied by 65% because 35% is the lowest difference we will accept between what we will pay for the undervalued property and the final purchase price). Then we add what would be the minimum profit we would accept for this deal (I usually enter $15,000). We have now arrived at the Maximum Acceptable Offer (MAO).
When I was learning these formulas, often referred to as “crunching the numbers”
My mentor kept stressing the importance of my having the ability to do this on a
napkin on the fly and not having to be dependent on software and spreadsheets.
I still do it the same way…. with my calculator and a piece of paper.
If you’re new…don’t be discouraged or worried just keep practicing ,ask questions and really grasp the concept so that it’ll become reflexive.
To your success,
Karen
