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