For the Buy, Renovate and Sell real estate investor, one of the greatest apprehensions that occupy their mind is not making the right offer in order to make a future profit as there is no exact formula to determine the maximum they can pay to acquire a certain property and still make a profit.
(there is a free ebook: 101 Tips For Selling Your House,for you to download, from a link at the bottom of this page).
For the sake of simplicity, let us use the following pricing model:
Maximum Price Offer = Present Value - (Renovation/Repair Cost + Incidental Costs + Profit Margin).
To determine the property's present value, make a study of comparable sales data in the neighborhood within the last 6 to 12 months.
Make sure that the comparative variables are the same or almost equal like land area, floor area, number of bedrooms and baths, age, garage, and architectural style.
When you have matched these variables as close as you can, evaluate the neighborhood, location and important considerations like parks, security, stores, schools.
Are the comparable variables the same or almost equal? If they are, then the acquisition cost factors of your comparable data are valid. The key is to take an objective look at the potential investment in the same manner as the future homeowner will.
Renovation and repair costs depend on whatever is required to make the property look like as much as other comparable houses in the neighborhood. Do not attempt to obtain several contractor bids as by them time you have evaluated all of them, the property would have been sold! T
The best way to go about this is to have your own contractor accompany you when making the evaluation. This way, you already have a figure to work on while you are still in the area and in a better position to make a quick offer.
Incidental costs include expenses like appraisals, lawyer fees, title search and title insurance, loan origination fees, debt servicing, utilities, insurance, taxes, real estate commissions and closing fees. Normally, the overall average of incidental costs range from 15% to 18% of the property's present value.
How much do you want to make on your investment?
This is your profit margin. This depends on whether you are planning to sell as quickly as possible or hold on until the perfect buyer comes along.
As soon as you have determined your profit spread (which is subjective) then you have arrived at the maximum price offer for the property you are considering to Buy, Renovate and Sell.
Keep in mind however that the MPO is the maximum you will pay for the property; it does not mean that is what you should pay! Always make your offer lower than the calculated maximum price offer and commit yourself to the fact that you will not pay over the maximum.
In your price negotiations with the owner, you should negotiate for a price as far below the maximum price offer as possible to increase and protect your profit margin because the maximum price offer is also the maximum that you can sell the property for after all the renovations and repairs are completed.
