What is this House Worth?

I probably answer this question for investors a couple
times every week. The problem is that they don't have
a good formula for determining the most they can pay
and still make a profit - so they're scared to make any
offer. Here's the formula I use for single family homes:

The Maximum Offer (MO) is calculated by first determining
what the house will be worth after renovation which is
referred to as the After Repaired Value (ARV); less the
rehab dollars required; less the Buy/Sell/Hold (B/S/H) costs;
less profit amount desired.

MO = ARV - Rehab - B/S/H - Profit

Let's break that down a little further. To determine the ARV,
study comparable sales data. Comparable sales are those
properties which sold in the last 6 months to 1 year, and
within ½ to 1 mile from the subject house. But other factors
must be considered as well. The more characteristics between
the properties that are similar, the more valid the data. Make
sure that the house itself is similar in square footage, bedrooms
and baths, age, style, and architecture.

Don't worry about condition except as it will affect the amount
of rehab dollars required. Next, look at the neighborhood and
the individual street. Do they look the same? Or is the comparable
property on a beautiful street while the subject property is on
a street riddled with empty littered lots and boarded up houses?
The point is to view the potential investment as your end homeowner
occupant will.

If they could buy your completed investment on the bad street, or
a house on the beautiful street - either for $150,000 - which would
they choose? The other house of course. Which means your house
is not worth the same - it must sell for less to attract a buyer.

Rehab dollars differ from renovator to renovator depending whether
they do the work themselves, use less expensive sub-contractors,
or use an expensive general contractor. The scope of the work
should be the same - it is whatever is required to make the investment
look like the comparable houses (unless the plan is to sell well under
market value). I do not attempt to obtain all of the various contractor
bids when I am making offers. All the real deals would be sold before
I could ever have an offer together! Instead I have developed ranges
of rehab dollars based on the overall condition of the home.

Is it an exact science? No, but neither are the bids - there will always
be something missed. So why not work with a guide that is probably
90% accurate and allows for quick offers?

Buy/Sell/Hold costs include expenses such as appraisals, attorney fees,
title search & title insurance, loan origination fees, debt service, utilities,
insurance, taxes, real estate commissions, and closing fees paid on behalf
of the end buyer. Again, these costs vary depending on each investor's
individual situation. In the Atlanta area, 15% of the ARV seems to be a
good average allocation for B/S/H costs. If you are the renovator, calculate your specific B/S/H costs, then utilize that percentage for future offers.

Profit margins are the fun part of the equation. How much do you want to
make? If you're wholesaling the property, you also want to consider how
much you should leave in the deal for the investor buyer to make the deal
attractive.

That's it. That's how you calculate the most you'll pay for a property. But
that's not what you SHOULD pay. It is the maximum you'll pay. It is the
deal-breaker. You will not pay one penny over the MO. Your negotiations
should lead you as far below the MO as possible. The difference in amounts
is additional profit in your pocket. What you SHOULD pay is the minimum
price below the MO that the seller will accept.

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