Junkers vs. Cosmetic Repairs Formula - Posted by Troy W. (NC)

Posted by HR on February 23, 2001 at 21:33:28:

Troy,

This point illustrates Joe’s point perfectly. See how you have now turned the mao formula into a new formula? Mao - 20%? Don’t do that!

Don’t arbitrarily create a formula like that. Formulas express realities, and if you don’t understand those realities, then you are not going to skillfully use the formula tool.

Think about the different costs in a rehab: purchase costs, sale costs, holding costs, repairs, profit, contingency factor. Most of those can be expressed as a percentage of after repaired value, assuming a 6 month turn around in your rehab. If you have a true cosmetic repair (which I have never seen, by the way), then your holding percentage could decrease with the assumption it wont take 6 months to fix and sell. If you can sell yourself, you also could change your formula. The formula, though, expresses different realities.

Here’s a biggie: If your formula is off, you will get burned in two common ways. 1) If your formula doesn’t adequately account for cost, you will offer too much. Ouch. 2) If your formula is too stringent, you will offer too little and get fewer deals. Ouch.

If I was just starting as a rehabber, I definately would lean to 2 and avoid 1. Arbitrarily deducting another 20% puts you in error #2 category. If you can live with this, fine.

Instead, use a formula to get to mao, and then negotiate with the seller to get it as cheap as possible. There is no formula here, other than asking questions and shutting up to listen to the answers. Don’t arbitrarily subtract another 20%; listen to their needs and make an offer that “makes sense for you and them” (a favorite Kaiser line of mine).

Good luck,

HR

Junkers vs. Cosmetic Repairs Formula - Posted by Troy W. (NC)

Posted by Troy W. (NC) on February 23, 2001 at 06:47:46:

Trying to get a survey when it comes to figuring up formulas. Normally when you find a house that is a junker and is falling apart you might use a formula of ARV X 70% minus repairs = maxiumum allowable offer.

Question: what formula would you use if you find a house only needing cosmetic repairs??

Please help

Troy

Re: Junkers vs. Cosmetic Repairs Formula - Posted by mike

Posted by mike on February 23, 2001 at 20:38:20:

What does ARV stand for? I’m guessing Achievable
Repaired Value." Sorry for the stupid question.
Thanks
Mike

Re: Junkers vs. Cosmetic Repairs Formula - Posted by Steve

Posted by Steve on February 23, 2001 at 13:49:02:

I am still new at this and am wondering what formulas you are referring to. Would you be willing to share what is included in them and how they are calculated? Thanks for the help.

Don’t let Joe sidetrack you - Posted by Ron (MD)

Posted by Ron (MD) on February 23, 2001 at 10:45:14:

Troy,

It makes absolutely good sense to use a formula when evaluating a house…at least if you use it properly.

The formula you gave as an example is widely used and it is sound. What Joe (who I respect a lot) overlooked is that your formula didn’t calculate the “offer” or the “price”. It calculated the “maximum allowable offer”. No one that I know of advocates that you do the calculation and use the answer as your offer. It sets an upper threshold that you shouldn’t go beyond.

I sometimes go to auctions and am almost always amazed at what other investors will pay for a property. What also amazes me is that “seasoned” investors will reach a point where they stop bidding, then allow themselves to be coaxed back into the bidding by the auctioneer.

When I’m at an auction, or talking with a seller, or making an offer on a multiple listed property, I almost always have a MAO written down that I’ve calculated with a formula. I try to buy as low as I can, but the formula tells me when to stop.

To answer your question, Troy, my formula is a bit different, but the idea (and the answer) are similar. I start with the ARV and subtract: the repair costs plus $6k or $7k plus $20k. The $20k is the profit I want to make on any deal. The $6k or $7k reflects holding and transaction costs ($1.5 closing costs when I buy, $1.5 closing costs when I sell, $2.0 contribution toward my buyer’s closing costs, and $1.0 for insurance, utilities, property taxes, etc.). I use $6k on a house with a $60k ARV and $7k for a house with a $75k ARV.

A couple of observations: There’s nothing in there for financing costs. That’s because I don’t take mortages on my properties, so it’s hard to quantify. I figure the $20k covers my real profit and the opportunity cost of my money. Secondly, there is no provision here for a realtor commission. Sometimes I pay them, but usually I FSBO. When I pay a realtor, I try to reduce my contribution to the buyer’s closing costs. Nevertheless, I figure if I have to resort to paying a commission, it comes out of my $20k. Finally, the closing costs in Maryland are relatively high. In most states, you won’t need $1.5k on each end.

By the way, most of my houses need more than light cosmetics. I typically buy townhouses that need $15k-$20k in work. As Steve Cook suggested, if a house needs an extraordinary amount of work, I’ll look for a bit higher profit…partly because I deserve it because of the extra headaches, but partly because it is a tougher house for the seller to unload.

Ron Guy

Forumlas (formuli?) will get you creamed . . . - Posted by JoeKaiser

Posted by JoeKaiser on February 23, 2001 at 10:05:03:

Your argument is fatally flawed. You’re confusing value with purchase price. There is no corrolation between the two.

You must first get this into your head . . . what you will agree to pay for a property has no bearing on what the property is worth. What you pay is based solely on your ability to negotiate in relationship to the seller’s degree of motivation.

If you’ve making offers (good grief) based on forumuli (good grief), you’re still in Real Estate 101. Time to move on, my friend.

Real estate is a numbers business, but you have to use actual numbers, and ARV X 70% minus repairs = you gotta be kidding me. That’s the way we used to approach things when we didn’t actually know what we were doing.

Until you have a signed purchase offer that’s acceptable to you, you really don’t know what the thing is worth. You can guess, but you just don’t know. And estimating repairs? Forget about it. So you’re left with a guess on the value and a rough estimate on repairs. Not good. Try plugging those figures into some formula and you’ll get a number that is as meaningless to you as my hat size (7 1/4, btw).

We’re closing today on a junker house we bought a couple months ago. Cleaned it up, hauled tons of trash away, but it’s still a junker. Our total costs are $18k to purchase it and $6k to make it presentable, so we’re into it $24k. We negotiated our very best price without regard to value. Again, value and purchase price have no actual relationship to each other.

We guessed the value had to be at least twice what we’re paying for the place, and we ultimately got a cash offer of $58,500.

Do you see a formula there?

Me neither.

Once you understand and have a good handle on “value,” and once you’ve supported your estimate of value by actually closing on a property or two, you can easily determine whether or not your negotiated deal makes sense.

Confused?

It’s not that confusing. Just remember this . . . negotiate directly with sellers. Don’t make offers. Instead, sign purchase and sale agreements that the two of you have worked through. What you agree to pay is not a percentage of the property’s value. Instead, you agree to pay the absolute least amount the seller is willing to take without regard to the value of the property.

If you’re a numbers guy and you run around town making offers on properties at 70% of asking price, what happens when you find some who accepts but who, in reality, would have taken 40%. Someone gets a windfall, and that someone isn’t you. Not good.

Now, don’t get me started on “rules of thumb.”

Joe

Re: Junkers vs. Cosmetic Repairs Formula - Posted by SCook85

Posted by SCook85 on February 23, 2001 at 07:56:52:

Troy,

The formula that you mentioned is the one that I would use for cosmetic repairs, and for the real beauties (junkers) I would lower my LTV sometimes to 50%.

Happy Investing!

Steve

After repaired value (nt) - Posted by HR

Posted by HR on February 23, 2001 at 21:13:27:

nt

Re: Junkers vs. Cosmetic Repairs Formula - Posted by Terry (Houston)

Posted by Terry (Houston) on February 23, 2001 at 14:51:04:

MAO = Maximum Allowable offer.

ARV - $100,000

  • 70% = $70,000, this covers closing costs, holding, insurance, profit etc…

  • Repairs = $15,000 (as an example)

=$55,000 MAO

That is a MAO example.

You don’t offer $55,000 to start. That is the maximum.

I’m with Ron on this one… - Posted by HR

Posted by HR on February 23, 2001 at 21:23:45:

I think Joe’s point, which becomes clear with his subsequent posts, is that the “formula” whatever it is, is only a guide at best. I agree. However, I still think a formula is a very valuable tool.

My formula, like Ron’s, is slightly different. I take the arv X .85 - repairs - the profit I want = mao. I don’t like my profit as a percentage. Each rehab is different and requires a different profit margin based on difficulty of rehab, resale, neighborhood, home desirability, etc.

Still, this formula is only a guide. It sets a max threshold I won’t cross under any circumstances.

My real formula would be: Just how cheap can I steal this thing? That’s the formula! And I think that’s Joe’s point: listen to the seller, determine just how cheap he/she will sell, and go for that amount. I just make sure that amount is always below mao.

HR

Points well taken . . . - Posted by JoeKaiser

Posted by JoeKaiser on February 23, 2001 at 11:40:02:

The problem I see all the time, though, is investors using the very formula to determine what to offer. The “maximum allowable offer,” in reality, simply becomes “the offer.”

Joe

Re: Forumlas (formuli?) will get you creamed . . . - Posted by J. Clifton

Posted by J. Clifton on February 23, 2001 at 19:00:26:

Both Cook and Kaiser (despite his denial) employ formuli, and both are clearly successful. Joe just substitutes a procedural formula for a numerical one.

Kaiser’s is “write no offers, just sign it up now (usually with back-out language), figure it out later.”

Cook’s is “make tons of offers, with estimated value and expenses figured out up front, sign some up (usually without contingencies).”

Cook hasn’t gotten creamed, and neither has Kaiser. So take your pick.

Re: Forumlas (formuli?) will get you creamed . . . - Posted by Katie

Posted by Katie on February 23, 2001 at 13:37:52:

JoeKaiser

Is any of this discussed in Carlton Sheets No Down Payment Course?

I am getting ready to send my check out for that course and I’m just wondering if that course will fill me in on all of this negotiation stuff?

You sound like you been studying up on this and was wondering what courses you have taken?

thanks so much, and bless you

Katie

Re: Forumlas (formuli?) will get you creamed . . . - Posted by Bob (Md)

Posted by Bob (Md) on February 23, 2001 at 11:04:55:

Anyone who knows me will eventually hear about “the junkman” over and over. Here’s another one. He had a couple of rules about price and profit.

The price of a thing is what someone will pay for it. Period. The number on the tag is only an offer - you decide to take it, leave it, or offer something else. If the tag says $1000 but nobody will pay more than $100, the price is $100. That’s why comps are so valuable. There’s no law that says you have to pay what the price tag says. (Obviously there’s no law that says someone has to sell at a discount either). Want to have an interesting experience? Go into McDonalds with $1.50 in your pocket. Ask to speak to the manager, tell him that you only have $1.50 on you and ask if he’d sell you a Big Mac for that much (regular price is probably $2.50-$2.75. I’ll bet you that 4 out of 5 times, you’ll buy the Big Mac for $1.50. Obviously, $2.50 is only the price IF YOU AGREE TO PAY $2.50. CLUE: Your biggest problem won’t be the manager. It’ll be your pride.

Profit is determined by taking what you sold it for, and subtracting what it cost you to sell it. That cost has to include buying it, holding it, fixing it, your time to futz around with it, your gas and automobile expenses, phone, office rent, and anything else that you have to pay for yourself. Make sure you count all those things into your “cost”, or you’ll be running a charity rather than a business. In real estate, those costs had better include financing, insurance, utilities, commissions, and any other holding or selling expenses.

The guy made a lot of sense. My problem is that it took me a LOT of years before I realized how smart he was.

Formula? Formulii? Who cares… I like this post! - Posted by Eric C

Posted by Eric C on February 23, 2001 at 10:14:49:

Great job, Joe!

“Rules of thumb” are a sore spot for me as well. And, as usual, you said it so much more clearly than I.

Yours,

Eric C

Did you miss my post? - Posted by Jeff in MKE

Posted by Jeff in MKE on February 24, 2001 at 14:49:24:

http://www.creonline.com/wwwboard/messages/12978.html

Joe… - Posted by Bill

Posted by Bill on February 23, 2001 at 13:24:09:

So…You’re saying that Ron LeGrands “MAO” formula is worthless?

Bill

How’s Cook? - Posted by JoeKaiser

Posted by JoeKaiser on February 23, 2001 at 20:49:43:

And what makes you think I’ve never been creamed.?

I think formulas are fine, provided you understand that they’re not something you want to ulimtately hang your hat on.

Joe

Consider This - Posted by Justin

Posted by Justin on February 23, 2001 at 18:30:06:

You may consider reading more books before you put money into a course. There are a lot of great books out there (and granted some bad ones too) but, you can buy a lot of books for the price of some of these “Courses.” After reading some of those books you may decide that real estate isn’t for you and you won’t be out the $300 or $1500 (whatever the courses cost.) I’m not saying courses aren’t for anybody, but I do think many people can do well without them. I would be interested to learn what the other fine particapents of this board think.

Re: Forumlas (formuli?) will get you creamed . . . - Posted by Matt B

Posted by Matt B on February 23, 2001 at 14:25:23:

I’m kind of chuckling a bit as I’m sure Stacy was. While I am curious as well as to what courses Joe has studied, you may want to look on this site under Books and Courses (the link on the left) and take a look at the courses that Joe has written.

And yes, Joe has been studying up, I’ve heard.