When a new real estate investor wants to make an offer on their first fix-and-flip deal, a big issue comes up:
How much should they offer? And beyond that, what’s the maximum price before the purchase no longer makes sense?
Investors can get caught up in the excitement of a property listed at a low price. But not all of these properties are good deals. So how can you take emotion out of the equation and determine your offer from a financial standpoint?
Whether it is your first flip or you’re a seasoned pro, finding your maximum allowable offer is essential to securing a deal that covers all costs and turns a profit.
Here are seven simple steps to calculate your maximum allowable offer.
1: Take a tour of the property
I purchase over 100 houses each year, and I always tour every property before I make my offer (or at least before signing the contract). It’s vital to see exactly what type of property you have, so you can compare the home to others in the area and understand how much repair work is needed.
2: Determine your after-repair value (ARV)
Use MLS, Zillow, and Geodata Plus to arrive at an exact resale price. This is an exact number, not a range. The ARV is the number you will work back from to arrive at your maximum allowable offer. Take into consideration location, school district, square footage, and lot size.
3: Subtract construction costs
Calculating construction costs was the hardest thing for me to learn. Make sure to work with quality contractors who can help educate you on the cost of different repairs, and don’t be afraid to get multiple estimates.
4: Subtract your profit
Everyone’s idea of what they want to make on a flip is different. With that said, if you attempt to make an astronomical amount of money every time, you won’t get any deals. On the flip side, you might lose money if you work on very tight margins. Speak to people in the industry and find out what an average return looks like to other investors, and start there.
5: Subtract soft costs
Subtract costs for real estate commissions, closing costs, taxes, insurance, utilities, etc. I like to budget for a six-month cycle. Find out your market’s average hold time and budget accordingly.
6: Subtract cost of capital
The best part about investing in real estate is being able to use other people’s money (OPM). You must account for interest, points, recording fees, title fees, and lender legal fees.
7: Calculate your Maximum Allowable Offer
Once you subtract the above mentioned from your after-repair value, you will be left with your maximum allowable offer.
Remember, numbers don’t lie. Don’t tell yourself a story to rationalize increasing your offer. This should not be emotional. The key is to be consistent and to make as many offers as possible.