newbie ratio question - Posted by rick m

Posted by Patrick on April 09, 2006 at 22:59:43:

I am not expierenced or anything but from what I read and the one deal I have in the works now I wouldnt even give him a price. Make him give you a price and work him down from there. If you offer him 70k how are you going to feel if he would have been willing to go 50k?(that might be extreme but hey ya never know)even if he wants more then your willing to pay say youll take it and bring it under contract. Make sure your contract is subject to partner/inspector aproval. After you have it under contract get a buyer to tell you how much he will pay. Call back the seller and tell him your partner says your only willing to pay $xx or after inspection it will cost more then estimated to fix it. Of course Im not expierenced so dont take my word for it.

newbie ratio question - Posted by rick m

Posted by rick m on April 09, 2006 at 21:20:27:

I am new to this site but I love it! As a newbie I had a quick question about some quick ratio calculations I came up with to value distressed property. Please take a moment to comment on this and if I have made any errors or omissions please help me out, I don’t want to lose money on my first deal! Thanks!

Here what I have come up with:

  1. Estimated Value of Property based on comps
  2. Automatic discount of 20% price for quick resale
  3. Minus Estimated Repairs
  4. Minus 10% profit

Using the house I saw today worth $131,000 here is how it would work:

Value: $131,000
Discount: ($26,200)
Repairs: ($20,000)
Profit: ($8,480)
Offer: $76,320

I will start the offer at $70K and go from there.

On the side of the spreadsheet, as a check and balance, I have quick ratios of 50%, 60% and my max EVER (not in this case) of 70%

The ratios are
50% $65,500.00
60% $78,600.00
70% $91,700.00

My question is less about is this a good deal as is this a good way to estimate a quick offer price?

Re: newbie ratio question - Posted by Fil

Posted by Fil on April 12, 2006 at 20:48:25:

The way I structure an offer…
Value (131,000) X .70 = $91,700
4% Closing cost (hard money, etc.) $88,032
Taxes, ins., Atty (-3,000) $85,032
Repairs (-20,000) $65,032
Your profit $10,000 = $55,032

$55,032 is the most you will offer for this property.
Start lower to leave “wiggle” room. If your first offer does not imbarrace you, you did’t go low enough.
Remember, this is a cash offer. Cash gets you a DEEP discount. If they want more of market value, they need to agree to terms (subject 2, etc.) But with the above formula you are guaranteed to make a profit.

I know this sounds “ballsy” but You will have no problem flipping this off to another investor for $71,700. Your profit, in this case: $16,668!
If you don’t feel that ambitious, offer $60,700 MAX, and you will still make a profit ($11,000).

I hope this helps.

Re: newbie ratio question - Posted by DSmith

Posted by DSmith on April 10, 2006 at 09:26:07:

I?d work in more profit. If you?re spending 20K on just fix up, that?s a lot to risk for just 8K in profit. I wouldn?t do a 20K rehab for less than about a 20K profit, and that?s pushing it. I?ve only done a couple rehabs so far, but I?ve realized that with the time and work you have to put into them, you need to get some serious profit at the end.

And, there?s no need to discount 20% for the quick resale. If you?re putting 20K into the rehab, it should be the nicest house in the neighborhood when you?re done and it will sell itself quickly. Offer good terms and it will sell even faster. If you?re willing to discount 20%, then how about offering a 20% owner carry second. It?s easy to do and will be attractive to a lot of buyers who need a little help getting a loan.

Re: newbie ratio question - Posted by dutch

Posted by dutch on April 10, 2006 at 07:27:06:

Patrick has a good idea but it is more a negotiating technique than how to run the numbers.

You’re making it harder than it has to be. The accepted rule of thumb: 70% of ARV, minus repairs. I personally add that on a light rehab (carpet/paint), I want to make a minimum of 10K after ALL costs to buy hold rehab and sell. On a heavier rehab, I shoot for 15-20K minimum.