Determining what to offer for a property is the first and most important part of buying an investment property. You make your money when you buy a property, not when you sell it. It doesn’t matter what the asking price is, we want to put in an offer that allows us to make a profit. To determine the highest value that you are able to pay for the property and still make a reasonable profit, you can use the same process that we use. First, we pull comparisons to determine the After Rehab Value (ARV) of the property as compared to the asking price. If it is already at a discount, we will spend more time trying to get it at the price that we need. We will then estimate the repair costs either by looking at the property or sometimes just looking at the pictures and using high numbers to cover unexpected costs. We then use the equation below to determine our Maximum Allowable Offer (MAO).
(ARV)*.70 –(rehab costs) = MAO
Example: ARV for a property is $100,000. It will need about $20,000 to rehab it, so I need to get the property for less than $50,000. ($100,0000)*.70 -$20,000= $50,000.
Using this equation when deciding what to offer for properties will help you easily determine the MAO to ensure a profit for you when the property sells.