One of the first skills you should develop as you are beginning real estate investing is analyzing a deal by looking at the numbers. Depending on the type of investing you want to do, the process can be more or less complicated. If you want to buy and sell single family houses- otherwise known as ?flipping?- There are some basic calculations you should know.
Formulating your offer should become almost second nature to you, and the only way this can happen is if you look at property? a LOT of property. Before you start looking, create a simple one page worksheet to list the repairs the property needs.
As you walk through the property, list the things that will need to be rehabbed, repaired, or replaced on your worksheet. You will need to learn what things cost to repair in your area. Either learn this yourself, or develop a relationship with a contractor you can trust. You may even want to partner with him on a deal or two while you?re learning.
Once you arrive at a total cost to repair the property, the next step is to determine it?s ?After Repair Value? ? the market value of the house after all the repairs have been made. You do this two ways? by knowing the neighborhood AND by using comparables. Comparables, or comps as they are commonly called, are similar properties in the same neighborhood, that have sold recently. By carefully examining what comparable properties have sold for recently, you can arrive at a safe after repair value (ARV)
Beginning real estate investing can be confusing, but don?t get confused on THIS point. Make sure your comps are truly comparable. If the houses are really different, or in two very different neighborhoods, they?re NOT comparable.
Once you know how much the house should be worth after all repairs are made, and you know how much the repairs will cost, you?re ready to determine how much you can safely offer. Subtract estimated repairs from estimated after repair value (ARV) to arrive at the estimated value of the house as it sits right now. I call this number the Current Market Value (CMV)
Write down your answer, but don?t offer that amount yet. There?s one more step. Subtract $30,000 from the CMV and write down that answer. Now go back and subtract 30% from the CMV and write that answer down. Of your two answers, offer the LOWER number.
Here?s an example. You have estimated repairs on a property at $20,000, and the estimated ARV is $180,000. Subtracting $20,000 from $180,000, we arrive at a Current Market Value (CMV) of $160,000. If I subtract $30,000 from $160,000 I get $130,000, and if I subtract 30% from $160,000 I get $112,000.
The lower of those two numbers, $112,000, will be my offer. I may adjust this upward slightly as the negotiations continue, but at least I have a good starting place. I may miss out on a few deals because I offer too low, but I have never overpaid for a property? a very important concern when you are beginning real estate investing.
Now, go make more offers!
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Tom Dunn is a successful real estate investor and author of the popular DealFiles Real Estate Investor Stories free newsletter. You are welcome to share this report, unedited and in it’s entirety, with anyone you like. You may not remove this text. ? 2007 by Tom Dunn.