Question: What formula(s) should I use to calculate maximum allowable offers? I have seen/used the percentage of profit, fixed $40,000 profit and no profit until sale methods but they produce such low offer prices that I can’t get a deal accepted.
Answer: The standard answer for how much an investor should pay for a house will depending on your strategy . . .
If you are a cash buyer then the standard answer is that your purchase price and the renovation should be 70% of the after repair value. Then you will have enough built in for profit, title company, holding costs, commissions for resale.
If you are buying using hard money, then that 70% needs to be 60 to 65% to cover for your hard money.
If you are wholesaling then you need the above numbers and then back off your needed profit.
If you are buying to hold for a rental, then you want to look at your cash flow and investment. So you can work all kinds of fancy formulas, but basically figure out what you need for cash flow and buy so that your rent less your expenses give you that cash flow.
We even learned at the wholesaling lease options class with Joe McCall last week that you can pay what ever the seller is asking on a lease option and then go out and market to sell it for a bit more and still make money, you just have to know what you are doing.
So if these tried and true numbers are not getting accepted . . should you offer more just to get the deals? I can tell you that I have been there and thought that. Making 10% profit instead of 20% profit sounds better than no deals. But then you buy that deal and struggle to make the absolutely most profit you can from the deal and spin your wheels and then don’t make hardly anything, when your time could have been better spent on a more profitable deal. So while lowering your profit standards can generate more deals. . . No it’s not a good idea because you might end up with no profit.
Just like you should not lower your rental standards and let a questionable tenant in your house, don’t lower your profit standards . . . hold out for the better deals.
By the way, going to be spending about an hour on what is a deal and how to analyze a deal at my Saturday workshop on Saturday March 15th . . What new investors need to do . . this is topic number one, learn what is a good deal. Find out more and get registered for this workshop: click here.