the magic formula

[kimesha]

i am trying to come up with a solid formula to calculate my max purch. $$$ for a rehab. now this all hypothetical so pleeease bear with me. i 've read lots of article and a couple of books but they all give diffrent methods. it is the same concept but different %. Here goes & plese correct my mistakes or add, and take awy what is necessary.
ARV= 90000
- 10000 potential profit
- 10000 repairs
- 9000 closing cost to buy and sell
- ???? money to finance & hold for at least 6 months
how do you estimate closing cost? some gurus say about 10% which is how i came up with my figure. i took a look at my own closing cost when i bought my primary home and that was 10% alone as well was the seller. The seller automatically assumes 6% if they want to use realtor. my other my ???? is how can u figure the money to finance in advance if you haven't figured you max out yet. I'm a little confused. all help & responses r appreciated.

[investinAK]

I think most investor's formulas differ a little, but here is Ron Legrand's formula taken from his Quick Turn book.

MAO (maximum allowable offer) = ARV - 70% - repairs

that is just HIS formula though...I believe John Micheal has a closing costs calculator you can download...hope this link works :)

http://jmichaelrei.com/html/closing_costs_calculator.html

[Dan Auito]

i am trying to come up with a solid formula to calculate my max purch. $$$ for a rehab. now this all hypothetical so pleeease bear with me. i 've read lots of article and a couple of books but they all give diffrent methods. it is the same concept but different %. Here goes & plese correct my mistakes or add, and take awy what is necessary.
ARV= 90000
- 10000 potential profit
- 10000 repairs
- 9000 closing cost to buy and sell
- ???? money to finance & hold for at least 6 months
how do you estimate closing cost? some gurus say about 10% which is how i came up with my figure. i took a look at my own closing cost when i bought my primary home and that was 10% alone as well was the seller. The seller automatically assumes 6% if they want to use realtor. my other my ???? is how can u figure the money to finance in advance if you haven't figured you max out yet. I'm a little confused. all help & responses r appreciated.

Kimesha you don't make it easy do you girl? I'll take a swing on how I would initially approach this but of course I will be using my own slant, trying all the while to keep your skill level in mind.
So a reasonable estimate of value based on similar home sales in the neighborhood within the last six months indicates the after repair value (ARV) would be somewhere around $90,000 if that is in line then use a sales price of $89,900 that looks better to our prospective buyers, so we drop a $100.00 to get into the 80"s.
We'll use $90,000 for ease of use here:
$90,000 - your estimates of $10,000 profit $10,000 repairs $9,000 xfer costs
-29,000
---------
$61,000 as your offer, it helps to document as many repair items as possible, don't miss anything or it's coming out of your $10,000 profit figure.

Oops lets not forget those carrying costs, lets estimate the whole six months even though you should have a ready, willing and able buyer in the wings long before the rehab is even complete (that’s the ten day rehab and professional investors plan in the book dear)
Using $61,000 at 7% for 30years we get $405.83 principle and interest
Tax rate of .01200 ($12.00 per $1000 is $12 x 61= $732 divided by 12 Mo=$61.00 tax Mo
Insurance at $5 per $1000 of value = $5 x 61= $305 divided by12 months =$25.41 Ins. Mo

$405.83 Principle and interest
+$61.00 taxes
+$25.41 insurance
$492.24 Monthly obligation x 6 months= $2953.44 lets call your carrying costs $3,000
Sometimes you have to back into your numbers hypothecating variables, as you can see this says our offer has just been lowered down to around $58,000 if you still want that entire $10,000 as a profit.

Closing costs when buying using a traditional lender (bank) on average really amount to about 3% from the buyer so on $58,000 x.03 (3 percent) = $1,740 from the buyer. The seller pays about half the amount of the buyer so to sell would cost you an additional $870.00 total transaction costs = $2610.00 I’m again assuming you have read the book and will not be paying a real estate agent all of your profits here $90,000 x .06 (6%) =$5400.00 you will have to learn how to sell by FSBO, It’s in the book dear and you have all of us here to help you!

So now you see that your closing costs should only be $2610.00 but we must also now factor in that you are playing real estate agent and flyers, signs, advertising, attorney fee’s etc… will cost you an additional $1500.00 that brings your original $9000.00 estimate down to $9,000- $2610-$1500 = $4100.00 a difference of $4900.00 that stays in your pocket making your return $14,900.00.

You will use the higher numbers of $2610.00 + $5400 (6% R.E. fee) to justify lowering your offer by the full $8010.00 when negotiating with the sellers, knowing your true costs for your knowledge and labor will bring your actual costs down to $4100.00.

Depending on how you actually go about financing this project, you will use your calculations above to come to some conclusions on the amounts you would need to do the deal. I hope this helps you to better understand some of the basic points in figuring this deal out.

It pays to have a professional do the inspection if you’re not qualified as a new roof, boiler and a little electrical and plumbing could eat $15,000 not $10,000 be sure of market prices because if houses are really only commanding $85,000 then there goes another $5,000. Use the free inspection checklist at www.inspectamerica.com to create a repair’s needed list. (Punch list) then go to home depot and add up material costs, say it comes to $4,000 now you can take one and a half times that amount to account for the labor involved in applying and installing those materials so that’s $6,000 congratulations your repair estimate of $10,000 was right on the mark! Your going to do all right in this business Kimesha we are so proud of you!

Don't forget Uncle Sam will want his 15% of your profits too, so keep every receipt for materials costs, contractors bills, dump fee's, closing costs, marketing costs, utilities, gas and vehicle maint, mileage log, tool receipts, EVERYTHING is deductable against your basis of profit! :SM112:

It is for these reasons we pick on very motivated sellers who's properties need only cosmetic repairs and are in high demand!

$15,000 profit divided by $90,000 = 16.6% return before taxes you might want to lower that offer to achieve what many investor hold as a minimum return of at least 20% for their efforts!