How do you know how much to offer on a property?
This is the big question.
Because whatever price you purchase the property for can be the difference between making money, breaking even, or losing money.
And we aren’t doing any of this to break even or lose money.
So today we’re going to talk a little bit about coming up with the offer price.
There a few tricks that real estate investors use when coming up with their offer price:
- Solid estimate of repairs
- Deal Analyzer
- Inspection Contingency period
1. Estimate of repairs is important because if you do NOT properly estimate how much it will cost you to flip the house you will ruin the entire deal, and kill your profits.
If you missed the blog post on how to estimate repairs CLICK HERE to learn how to do it.
A “comp” is short for comparable properties. What you’ll need to do to come up with your offer price, is find out how much the property will be worth after you fix in up.
The term for this is “ARV” which stands for After Repair Value.
The way you find this price is by finding comparable properties in the neighborhood that have recently sold .
For a free in depth video lesson on this check out this LESSON ON COMING UP WITH THE ARV.
3. Deal Analyzer.
This is just like it sounds. It’s a custom made spreadsheet that you can plug in some numbers (repair costs, cost of loan, purchase price, length of projectetc) and it will give you what offer price you need to come in at.
It looks something like this:
Typically you want to a 10% return MINIMUM on a flip. So if you purchase a $200,000 house and sell it at $350,000, you need to be making at least $35,000 after all expenses.
10% minimum return on the sales price….NOT on the purchase.
The deal analyzer will lay this all out for you. You can get a free copy of our deal analyzer with the book Flipping Your Thoughts On Flipping by CLICKING HERE.
4. Inspection Contingency period– ah yes. This will be your favorite.
While this one does not help you come up with your offer price, it is your safety net in case you make a mistake.
Essentially what an inspection contingency period means is that once you have your offer accepted you will have x number of days (whatever is agreed upon) to inspect the property thoroughly and decide if you want to move forward with the transaction or not.
If you decide not to move forward, you can cancel and get your deposit back. No questions asked.
Do you know what this means?
It means if you inspect the property during this time period and find something that you missed during your own walk through (like a cracked foundation) for your estimate of repairs, you can bring it to the attention of the sellers and renegotiate the price.
The inspection contingency in the CA purchase contracts look something like this:
We never go into a deal planning on renegotiating, but when new information arises that people weren’t aware of , you have to renegotiate.
It will be more money out of your pocket to flip it since you will have to fix the issue, so you need a new agreed upon price.
And because the seller is made aware of the issue, they will have to disclose it to new buyers if the deal doesn’t work out, so it is in their best interest to work it out with you.
You see how this contingency period is your safety net?
Make sure before you remove your contingencies that you have had your contractors comb the house and find everything possibly wrong with it, as well as figured out how much everything will cost to fix/upgrade.
That way you know you are ready to close at the offer price you got accepted once you remove your contingency.
IF the numbers don’t work. Cancel the transaction. PERIOD.
For more information, lessons, tricks/tips on Real Estate Investing CLICK HERE
Chris M Cordova
CFO Better Tomorrow Group
Chris is an active investor, Realtor, Broker, marketer, serial entrepreneur, and co-founder of Better Tomorrow Group. Follow Better Tomorrow Group on Instagram @bettertomorrowgroup on Twitter/Periscope @TheBTgroup and Facebook at Better Tomorrow Group. If you would like a FREE copy of Flipping Your Thoughts On Flipping Follow this LINK.