Posted by Eduardo (OR) on June 22, 2000 at 18:45:49:
Paul–
Maybe I can shed some some light for you by answering this way: The more of a “discount” off the fair market value that you require, the fewer deals you’ll find. Say, for example, that you want to use a formula or rule of thumb that requires that you buy property at 25% below FMV and that you, with your knowledge, experience and time available to look for property, find one deal every three months. This is four deals a year. Let’s say that your properties average out at $100,000 each for FMV at time of purchase. To make things simple, let’s say your cost is $75,000 each and you resell them for what they’re worth, $100,000 each. In a year’s time you’d make $100,000 (four deals at $25,000 each). To make the point, I’m leaving out acquisition, fix-up, holding, and marketing costs. Now, if you required 50% off maybe you’d only be able to find two deals a year in your market. If you required only 10% off, maybe you could find ten deals a year. You still make the same $100,000 (2x50,000=100,000; 10x10,000=100,000). Your time and effort is the same in all cases because it is much harder to find deep discount deals than shallow discount deals. Note that we haven’t taken into account any risk factors. The point is, where are you comfortable? Some investors have good skills finding and negotiating good buys. Others are good at keeping acquisition, fix-up and holding costs down. Pick a figure that you are comfortable with. There is no such thing as a “one size fits all” rule regarding this. I am able to find property at about one/third off FMV. But I do fewer deals than others. Most new investor wannabes get nowhere near the discount they could because they haven’t acquired the skills yet. Hope this helps. --Eduardo P.S. The average agent-listed property in “normal” markets (not excessively hot or cold) sells for about 5% below list price. Take the discount you settle on from this lower figure if you are looking at listed property because it more accurately reflects FMV.