Fast Offer Formula for Distressed Properties

When you find a house with a façade only another investor would love, you might be one step closer to a good investment deal. Time to lace up your jogging shoes and run those numbers!

In my previous post, I showed a simple formula for determining fair market value (or after repair value) on your target property. Although this number is an estimate, it’s really important to get it is accurate as possible. For this example, let’s assume you came up with \$349,000.

Now you must estimate what it’s going to cost to purchase the house, fix it up, hold it long enough for repairs to take place and then get it sold again. It’s a bit like fortunetelling and if you want to make a small fortune, your numbers need to reflect a very realistic story, not a fairytale. Here are the costs that must come out of that magical fair market value:

• Repairs – get an itemized estimate from a licensed contractor until you have enough experience to estimate these costs yourself (valuable advice coming in the next post)
• Closing costs – may include escrow fees, title search and insurance, home inspection and appraisals {roughly 3% of the ARV}
• Holding costs – may include insurance, property taxes, mortgage payments and utilities {90 days}
• Agent commissions – in case you need help buying or selling; additional profit if not {6%}
• Profit – depends on how competitive your offer is \$5000 to \$15,000 +

Use the fast offer formula to determine your maximum offer amount. This applies to wholesale deals or assigned contracts and homes you plan to flip for profit:
ARV = \$349,000
– \$10560 materials and labor
– \$10470 closing costs {3% of ARV}
– \$9700 holding costs {90 days}
– \$20940 agent commission {6% of ARV}
– \$10000 profit
= \$287,330 maximum offer amount

Starting with the \$10,000 profit gives you some negotiating room if the seller declines your first offer. However, if you’re bidding on a bank owned foreclosure and competing with other buyers, you may want to start with your highest offer amount or risk losing the property to a competitor. If your market is slow, you may want to factor a longer hold time such as 6 months instead of 90 days. Also, consider staging the house with a professional stager or interior decorator. This can help you sell faster and get better offers.

Always remember to do your due diligence and don’t skimp on your estimates – it can hurt you in the long-run. Be careful about going too low on low-ball offers, such as offering half of the asking price when the comps support it. The best players in the game of real estate know how to stay inside the ballpark.

In my next post, I’ll introduce you to someone who can teach you how to turn all these numbers into professional looking presentations for banks or hard money lenders. You definitely don’t want to miss that one!