Before you start making offers, learn how to analyze a deal. Many Investors have multi-page spreadsheets that list the return on investment 15 years down the road. It lists every conceivable expense that could ever incur.
If you need a calculator, it’s probably not a deal. If you are running these numbers to tell if it’s a deal, it’s not a deal. If somebody says, “I have a house and the after repaired value is $100k, it needs 10k in work and you can pick it for $50k”. That’s a deal, right?
Remember most deals are made, not found. This means it wasn’t a deal until after the negotiation process. You want to hit home runs, especially on your first deals because you need to make sure there is plenty of profit in the deal. The worst thing you can do is get involved in a marginal deal and get discouraged before you get started.
Get used to analyzing and making offers before you get off the first call. The goal is to get your offer to them and start the negotiation process.
Just starting out? I still want you to see the properties before closing on them but eventually you’ll complete the transaction without looking at them just like we do. Don’t worry because I have included specific techniques to do the work for you.
Before I make an offer, I need the answers to 2-3 questions.
After Repaired Value: People tell me “the current value is $___”. This makes no difference if it needs work. We’re not basing it on “as is”; we are basing the value on after repaired value. The first thing I need to know is “what’s the after repaired value?
Amount of Repairs: What’s it going to cost to fix up? This is where you’re going to catch a little resistance from people and especially with Realtors because they don’t want to commit to a figure. One of the phrases that I use alot is “just a ball park”.
Potential Rent: If this is a rental type property I’ll need to know what kind of cashflow it’s going to have to make sure the numbers work at the total cost. I’ll need to know if it’s a For Sale by Owner, what’s their loan balance and are they current on the payments. You’re probably thinking that the seller or realtor doesn’t know this information or won’t tell you but I’ll show you in the section on negotiating exactly how to ask those questions and get your offer to them before you get off the phone. I’ll show you how to make low offers and not have them hang up on you.
In my market we have to be able to wholesale houses at 70% of appraised value. (This may be different in your market) This includes purchase, repairs and closing costs, so I have to buy the property at 60% – 65% or less.
When running numbers, you always want to use worse case scenarios. For example, if your seller says that the house is worth $80-$85k, you are going to use the $80k. If they tell you it needs $10- $15k in work, you are going to use the $15k. We always figure in the rehab closing cost, so that is the worst case scenario. If an Investor is paying cash or has their own money, they’ll actually make out better. If they also do some of the repairs themselves, they’ll make out better. Because we are basing our rehab cost on hiring someone else to do the work and we’ve already gotten 2-3 estimates on the repairs, we give those to the buyer.