One of the most important factors in making an offer is being confident in the offer you are making.
Knowing how much leeway you have, how much profit you can anticipate to make and knowing if this is even a property worth making an offer on will give you the confidence you need.
Remember, the more offers you make, the more offers you get accepted. So you need to have confidence in your offers so that you feel comfortable making more.
I’ve been investing for well over 25 years now, and before I make any offer, I always use the same “magic formula” to make sure I don’t ever over pay for a ‘junker’ property. That formula is, pay seventy cents on the dollar minus repairs.
So let’s start with an example. We have a property that has an after repair value of $200,000. Now, property values could be more or less depending on where you live, but that doesn’t change this formula. For the sake of example, let’s stick with property that has an after repair value $200,000 and needs $30,000 in repairs.
Remember, the formula is seventy cents on the dollar. That’s $140,000. Now subtract the repairs, which is $30,000. That means you need to buy the property for $110,000 or less. You’re probably asking yourself how anyone would be able to purchase a $200,000 house for $110,000. Well, if a property needs $30,000 in repairs, it’s ugly! As wholesale investors, we get deep discounts for ugly houses.
Ugly houses are difficult to sell, nearly impossible to rent, and the home owners in most cases are desperate to get rid of them. They pay taxes, upkeep, deal with vandals, deal with squatters, have to pay utilities, etc. In almost all cases, they have come to the realization that they are going to have to sell at a deep discount in order to sell at all. If they haven’t come to that realization yet, they will, so make sure you continue to follow-up with them.
In this example, we are dealing with a private seller who happens to be a burned out landlord, which is a pretty common scenario. Because we plan to wholesale this property, we are going to purchase it and ‘flip’ it to another investor without making any repairs what-so-ever. All we need to do is tie up the property with a purchase and sale agreement at, or maybe even below $110,000. Then we are going to sell it for $110k, $115k, $125k or more to another investor and make $10, $15, $20,000 in profit and simply move on to the next deal.
When we wholesale or ‘flip’ properties like this, we don’t even need to take the title. We won’t even need financing or banks at all. There will be no contractors to deal with either. So basically, we find a good deal, pass it along to another investor, take a small piece of the profit and carry on to the next property.
You may be thinking, if we buy the property for $100k and the end buyer purchases for $120k, we make $10k. But then the end buyer can fix up the property and re-sell for $200k. That gives them a profit of $50k! How is that fair? Well, the end buyer you sold that property too assumes all risk and deals with contractors, repairs, financing, lenders, etc. They technically do all of the work, so they deserve to make the bulk of the profit.
For this business to work, you must be 100% comfortable with the fact that whoever you sell the property to is going to make more money on the deal than you. That’s ok too. You’re putting a matter of hours into the deal to make $10k. You should be very happy with that.
Imagine if you could comfortably make offers on every good deal you find. That means more offers, more deals, more $10k paychecks. I know my magic formula works because I use it daily.
But if you’re like me, you don’t want to have to crunch numbers on the or worry about math equations and calculations. That’s why I designed a tool that you can use that will not only crunch the numbers for you, but it will tell you if this is even a good deal or not! Click here to test out my REI Offer Generator so that you can start placing more offers and doing more deals today!