Increasing Cash On Cash Return For Rental Investments


Lately I’ve been dabbling the numbers to maximize the cash on cash return for rental properties. I’m interested in helping others, as well as myself, acquire properties in the Houston area to build wealth, and maximize investment.

I’ve put together a sample deal to explain how to maximize your returns when financing real estate. The goal of this post is to educate buyers on how to increase their returns on their money. I’m also going to prove why real estate is a better investment than the stock market.

Since 2011, the stock market has returned on average a return of 8.3%. Since 1990, the stock market has returned on average a return of 9.4%. Inflation is sitting around 2% annually right now, so realistically you’re getting around 6%, on average, in the stock market.

Here is my sample real estate deal. This is one I’ve found in the Houston area:

Purchase Price: $47,000
Repairs: $5,000
All in: $52,000

Rental rate: $900 / mo – $10,800 / yr
Cash flow: $450 / mo – $5,400 / yr (financed)

CONVENTIONAL – 25% DOWN
Down payment: $11,750
Repairs: $5,000
Closing Cost: $750
Inspection: $300
Total Expenses: $17,800

Cash on cash return: $5,400 / $17,800 = 30%

CASH PURCHASE
Purchase: $47,000
Repairs: $5,000
Closing Cost: $750
Inspection: $300
Total Expenses: $53,050

Cash on cash return: $8,640 / $53,050 = 16.28%

HARD MONEY > REFI 30 YR
Origination: $1,560
Appraisal: $500
Inspection: $300
Closing Cost A-B: $750
Closing Cost B-C: $0
Total Expenses: $3,110

Cash on cash return: $5,400 / $3,110 = 173%

If you notice my last analysis, the hard money to 30 year conventional, I paid 3% for loan origination, and closing cost twice. This is due to having to refinance into a conventional 30 yr mortgage. Note: this can only be done on specific deals that have substantial amounts of equity. Typical HML lenders require 70% LTV.

Also, I did not include closing cost from the B-C closing due to you should be able to negotiate a $0 closing cost if you refinance and let your HML hold the 30 yr note. They are making thousands off the note, they should waive the fees up front. If not, adjust for that in your numbers as well.

Great returns here in the Houston area.. As you can see, leverage is critical in real estate investing. This is how you maximize your investment.

Happy investing

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The Rules of Thumb for Landlording


This is going to be a short post today for a short concept, The 1% Rule of Thumb.

The 1% Rule of Thumb was invented by real estate investors to sift through piles of houses. This rule of thumb will quickly determine if the deal is good enough to make you some money (cash flow) or at least break even.

Keep this in mind: all markets are different. In my market, 1% of the appraisal value for Houston is good for rent. Some markets can get up to 2% of appraisal value in rent. You won’t see that happening in Houston.. because its cheaper to own than rent in Houston!

Do not confuse appraisal value with purchase price/repairs!

 Lets break this deal down real fast:

  • Purchase Price: $65,000
  • Repairs: $32,000
  • Total all in: $94,000

The 1% rule of thumb on the “total all in” cost would be $940 per month in rent. I could get that easily. I would probably have too many applications to even review for that house. I wouldn’t cash flow much at all, but I could get that in rent.

Now I bought the house for $65,000 and put $32,000 in. We’ve found that were $94,000 all in. But here is the kicker..

The house appraised for $137,000.

1% of appraisal value – $137,000 = $1,370 per month in rent.

So now we know the difference between the 1% rule of thumb on appraisal value / purchase price.. but what about a rule of thumb for PITI?

Estimate 50% of your collected rents will go towards PITI, vacancy, property management, and maintenance. So really, you should profit 50% of what you collect in rent per month.

So a quick snapshot on landlord rules of thumb:

Appraisal value: $137,000 x 1% = $1,370 per month

50% rule = $685 cash flow per month.

Although it’s not going to be like that every month, I’d say it’s within $15 of what is actually performing on that property for me.

If you can learn these basic rules of thumb, your life as a real estate investor will be much easier.

Merry Christmas!

How to Analyze & Purchase a Multi-Family Complex


I am working with more and more investors lately, and it seems that they are all interested in a very hot item right now: multi-family complexes.

If you ask any seasoned real state investor, they will tell you that they would rather own a complex of 4 units, rather than 4 single family homes. It makes logical sense, due to the fact it is easier to manage, you have 1/4th the maintenance, and you have one location.

I’ve worked with investors who buy multi-family properties and have great innovative strategies, such as maximizing by renting “per room”, instead of renting “per unit”. This works best in areas where students are living near by, and want to rent rooms on a “per room” basis.

Below is the break down I use to analyze a multi-family deal:

I’m not going to go over cost estimation, appraisal value, after repair value, or LTV value. I have gone over this in previous post. This information is calculated by due diligence, and finding out what repairs the place needs. You also need comparable sales / appraisals for the true value of the complex.

Take note of the cap rate. The cap rate is a tool many investors uses to look at what percent they capture the first year on the deal. Some investors will take cap rates of 6.45% – others want high cap rates, of 20%+.

You can calculate the cap rate by dividing the net operating income by the sales price. So in my case, 14,724 / 215,000 = 0.0685, or 6.85%.

Maximize your cap rate by finding cheap properties that need repairs, and get the repair work done at a good cost. You can also adjsut your cap rate by increasing rent. Just think the higher cap rate, the higher your first year return.

Look at my buying cost column on the bottom left hand side of the deal. Some of those are fixed costs, and some are variable cost. As you might know, fixed cost stay the same, variable cost are based on variables in the deal. Majority of the variable costs you’ll run into are based off your loan amount / purchase price. These are your out-of-pocket expenses, around $9,000-10,000.

On the top right hand column, you see the “Rent Roll”, which is where you will find what each unit is renting for. So each 3 bed, 2 bath apartment is renting for $900 total, or $300 per room. So that’s $3,600 a month gross rent, or $43,200 annual gross monthly rent.

Below that is your expenses, broken down in both annual and monthly expenses. You subtract those from your gross rent, and you have your monthly / annual cash flow.

I like to divide my monthly cash flow by my out-of-pocket expenses, which will give me a break even point in months. So after 7.95 months (lets call it 8), I will break even on my investment. That’s not too shabby…

How about we look at this deal now, on what that “creative” savvy investor did, renting each room for $500..

You will notice some numbers stayed the same (fixed costs), and some changed (variable costs). Your monthly note stays the same. Your taxes stay the same. Your property management fees increase (budget 10% of monthly rent for property management fees – even if you’re managing yourself, you can write it off).

Most importantly, you might notice that he increased his cash flow to $2,955 per month, from an original $1,227 per month – that’s a gain of $1,728 per month, or $20,736 per year!

He broke even on his initial investment in 3 1/2 months with a cap rate of 16.49%.

Obviously, more tenants will result in more stress, more occupancy, and more maintenance.  You will need to adjust your numbers accordingly.

Multi-family investing is a tried and true way to gain passive income from the real estate market. I am a firm believer that having control over your money, and investing right, will lead you further than any stock market, mutual fund, or index fund.

With a little knowledge, and the right real estate agent, you can go far in real estate investing.

Common Real Estate Questions: Buying a home in the “Perfect Storm”


There are a new type of home buyers on the horizon for years to come – Generation Y, also known as Echo Boomers. This generation is known as the generation with their own identity, who is very familiar with digital technology. Echo Boomers are also known to manage their money very well, unlike other generations before, most likely due to the assistance of technology (online banking, eChecks, ePayments, etc).

I could go into socioeconomics (which I enjoy very much), but my blog is dedicated to real estate and how this relates to real estate.

So there is a LOT of people about to buy their first home. If you’re one of those people, most likely you’re either a GenX or GenY person. I am going to explain the most common questions, and answers, when buying a home – as well as the process involved in purchasing a home in today’s market.

Let me first say that the real estate industry is rapidly changing each year with the incorporation of technology, iPhones, iPads, GPS, and other tools of the business. Other ways the industry has changed in the past 10-20 years in the incorporation of the internet with real estate transactions. I’m sure you’ve already been apart of this, with such sites as REALTOR.com, HOMES.com, ZILLOW.com, TRULIA.com, etc.

It can be overwhelming. I know. I was there once. I completed my first real estate transaction when I was 23 years old. I will say it is a learning process, and I’ve done multiple transactions since then. Sometimes I have to remind myself of that, and how complicated of a transaction transferring real estate can be.

Not to worry – as I am going to first explain the entire process of buying a home in today’s market, and explain why we’re in a “buyers market”.

First, you must understand if it is a good time for you buy right now. This is a question you will have to ask yourself. I can’t give you this answer, but I can offer some suggestions.

Take a look at the Trulia Rent vs. Buy Index for 2011, and see if it is better for you to own than rent – this is all variable based on where you live, as you will see below.

So as you can see, if you live in Houston, it is more beneficial to you to own rather than rent. At the same time, if you lived in New York, it would be more beneficial to you to rent than own. This information is based on the average price to rent, and the average price to buy.

Always keep in mind that if you are renting, you are paying for someone else to own. This is how many people create wealth in real estate. Keep in mind, that when you become a homeowner – you are the “landlord”. There is not a property management company to call to fix repairs, or replace broken items on your house. It is your duty to maintain your home, and there is a cost associated with that.

So why does everyone keep saying its a “buyers market”?

 You must first understand the real estate cycle and interest rates – to understand why its a buyers market.

This is what the real estate cycle looks like. Theory, and years of recorded values, suggest that peak real estate values (good for sellers, bad for buyers = sellers market) is related to excitement, and euphoria. This is considered a high risk, low opportunity time to buy real estate, due to values most likely on the way to decreasing.

Vice versa, the low-end of the cycle presents low risk to buy, with high opportunity. This is associated with times of a depression, recession, fear, and panic. This is a good time to buy, because values are low, and will significantly increase over time.

Now that you understand the real estate market cycle, what part of the cycle do you think we are currently in – for 2011?

We now know that it is cheaper to buy than rent in Houston, that the values are currently low (due to the real estate boom/bust cycle), but what about lending? You’re going to need to finance this home, and get a mortgage – so how about interest rates?

Here is what historical interest rates looks like from 1972 to 2011. You will notice that if you bought a home in the early 1980’s, you could be paying 15-18% interest on your loan. Today, you will pay from 4-5.5% on your house note.

The data suggests that there is currently a “perfect storm” for buyers right now in specific real estate markets. Houston is one of them. This is why investors are flocking to the Houston area to buy up undervalued homes, because the goal is to buy low and sell high – so they buy at the bust, and sell at the boom.

So what are the costs associated with purchasing a home? Here is a break down of what you can expect to purchase a home. Some of these are variable, and can be negotiated with the offer on the home you wish to purchase:

Out of pocket fees:

  • Inspection fee  – $300-400 – This is a must for any first time home owner. You will pay a licensed home inspector to check the entire home out, and they will give you a detailed report of what works, and what doesn’t – before you purchase the home. This is great, because as a buyer, you have the ability to request for repairs to be completed before you buy.
  • Option fee – $100-500 – This is a required deposit that you must put down to have the “option” to walk away from the deal, in the first X number of days of the contract. This is a protection for the buyer – you want this. When the deal closes, this will be credited back towards the sale price of the house.
  • Earnest money deposit – $500-2,000 – Typically this is $1,000, and this will reserve the home for you after the 11th day of the contract. This puts your skin in the game, and lets the seller know you are serious about purchasing their home. When the deal closes, this will be credited back towards the sale price of the house.
  • Down payment – 3-20% of purchase price – Depending on your loan, you will need at least 3% to 20% minimum down payment for the house. If you have a VA loan, you will qualify for no money down. FHA is 3% down. Conventional loans are 20% down.

Fees rolled into your note:

  • Lender fees – $800-2,000 – This is the cost associated with originating your loan, underwriting your loan, and other fees your lender might charge you. Most likely, these will be paid at closing and will not require you to pay them out-of-pocket. They can be financed into your mortgage. Check with a few lenders and find out their rates, and fees – then compare to see who has the best deal.
  • Survey – $400-800 – Your lender will require a survey on the property ou are wanting to purchase. Hopefully the seller will have a survey, and you can use that. If not, the contract has a spot for the seller to provide a new one (and pay for it) – or you have too. This is another fee that will be rolled into your note, and you do not pay out-of-pocket.
  • Title company fees / closing fees – $500-$1,500 – These are fees that the title company will charge you to close on the house. These fees include recording fees, document preparation fees, and other miscellaneous charges that you might incur when closing on a house.

So now you know the fees associated with purchasing a home.

Did you notice that you did not pay a REALTOR commission? That is because buyers do not pay REALTORs’ commissions, only sellers do! This is why it is important to work with a buyers agent – and not the listing agent of the house you want. Your agent must legally have your best interest in mind, during the entire transaction. If you work with the listing agent, whose job it is to sell the house, whose interest do they have before yours? Essentially, it cost you $0 to work with a buyers agent, and it will (if you have a good agent) save you thousands.

So after you have decided you want to buy a house, you know the costs associated with buying a house, you know it’s better for you to own than rent – whats the next step?

You need to get pre-qualified through a loan officer to originate your home loan. The pre-qualification process is fairly simple. The person I use needs to speak with you 10-15 minutes over the phone, and you’re done. He will run the numbers, and find out how much of a home you can afford. They will prepare a “pre-qualification letter”, and email it to you. This letter will give you the dollar amount you can spend on your new home. This process should take less than 30 minutes of your time.

Once you have been pre-qualified, you will need to find a realtor to work with. Most likely you know someone, or you know someone who knows someone. I would recommend going this route. You can also search your local MLS for an agent, such as Houston’s public MLS access is HAR.com. Let your agent know that you have been pre-qualified, and the specifics you are looking for.

Spend time looking at houses, and once you find the one you want, ask your agent to run a CMA (comparative market analysis) on the house want. This will give you data that is very helpful in the offer you want to submit on the house. It will show you active, pending, and sold listings within 60 to 90 days, with comparable houses. That way you’ll know if you’re getting a good deal, or need to negotiate the price down..

After you decide on the price you want to pay, you will submit your offer to the seller. This can include the purchase price of the house, as well as funding needed at closing from the seller to help you out with out-of-pocket expenses.

Negotiations occur, and once all parties have agreed on the price then the contract is signed and executed (all parties sign). Your agent will send you a copy of the contract, and send the contract to your loan officer. Your loan officer will begin the process of underwriting your loan, and might need more information from you.

Things will be happening fast here. Your agent will be working. Your loan officer will be working. The listing agent will be working. They will all need cooperation from you.

You will submit the option fee of $100 to the buyer, and send the earnest money deposit of $1,000 to the title company.

The first 10 days of the day after the contract is executed (depending on how the contract is written, I always do 10 days $100 for option periods) you will be in the option period. This gives you the unrestricted right to terminate the contract and risk losing $100 – for no reason.

During the option period, it is critical that you get your inspections done. If something comes up, and the seller will not agree to fix, you still have the option to back out in the first 10 days. After inspections are complete, you will most likely do some minor negotiations on repairs.

The 11th day of the contract you go into whats considered the earnest money period. If you back out of the deal, you will lose $1,000. It ensures that you will not tie up the sellers house with no “skin in the game”.

From here on out, everything is simple. If you are financing the house, your lending will order an appraisal on the subject home. Keep in mind the house must appraise for the price you agreed upon (or more!), or you will have to renegotiate again on price.

Typically deals close in about 30 days. The closing process is fairly simple, and you should be in and out within an hour. Your loan officer will tell you how much money you will need to bring to closing for your down payment.

After the deal closes and funds, you are now a homeowner! Enjoy the American dream.

Wholesaling 101, Option Periods, and Easy Money


I’ve been getting a lot of feedback on the subject of wholesaling. Right now it seems like each day more people are interested in investing their time and money into real estate, but the problem most people face is that they have time, but not the money.

Wholesaling is an alternative form of real estate investing, that requires little to no money to begin working and making some extra money. I’ve heard many gurus charge for this type of information, and like I’ve said before… don’t pay when you can get it free.

I must disclose that I am a licensed real estate agent, and I have never wholesaled a property before. I have bought a property from a wholesaler, but have never done this on my own. There really is no point for me since I am licensed, I can sell retail real estate and make more money. If the right situation came along, I might consider wholesaling a house, but I do not actively go out to find motivated sellers for wholesale purposes.

In earlier posts, I said that you’ve either got time or money. The money guys don’t have time, and the guys with time don’t have money. Step back and find out where you’re at in that equation, and if you’ve got money, wholesaling might not be for you. If you’ve got time, then this is right up your alley.

Wholesaling essentially is finding a good deal, doing the legwork, running the numbers, finding a buyer, presenting the numbers, and getting paid for your work. You are connecting both a motivated buyer and seller to benefit from a real estate transaction. Some states have laws against this, such as “brokering without a license”, which is why you actually have to “own” the house to do this. We’ll go over how this takes place…

First and foremost, you must understand what an option period is. If you’ve been reading up on the subject, you’ll notice everyone is talking about “option deals”, etc. The option period reads like this in a real estate contract:

If you read carefully, this is the part of the 1-4 residential contract that grants the buyer the option to back out of the real estate deal for X number of days, for X number of dollars. Real estate law says (I am not a lawyer) that you must have consideration to have an option period, which means that you must put more than $1 down for the option period. Most common is $100 for 10 days, in retail transactions.

How does this apply to wholesaling?

Sample wholesale break down:

Lets say I am wanting to wholesale a house I found in my neighborhood, and have spoken with the home owner. They can’t sell the home because of the repairs needed, banks won’t lend on a conventional sale. They don’t have the money to fix the house themselves, so they are in a lose-lose position – can’t sell and can’t fix. That’s where Mr. Wholesaler steps in.

You run the numbers, and find that the After Repair Value (ARV) of the house is $155,000. You walk through the house, and ask questions, and estimate repairs – you’ve estimated the repairs are $35,000. The seller owes $40,000 on their note. You make them an offer of $45,000 and include to pay for all their closing cost. They get to walk away from their note, make $5,000, and close fast – 7 days fast. The seller thinks about it for a while, and takes you up on your offer. You write a contract to purchase the home (either under your name or an LLC, S Corp, DBA, etc) and put an option date of 30 days with an option fee of $100. This gives you the option to back out of the purchase for 30 days and risk $100 for doing so.

In your contract, you include verbiage that will allow you to assign your contract to a 3rd party, for no fee.

After you sign the contract, you call your buyer and tell them you’ve got a great deal for them. The After Repair Value of the house you’re selling is $155,000, the repairs are $35,000, and you’ll sell it to them for $55,000. The investor crunches the numbers, and realizes $55k (purchase price) + $35k (repairs) = $90,000, or 58% of the After Repair Value. They are paying 58 cents on the dollar! Your offer is accepted by your buyer.

Note: typical investors use this formula to determine if the deal is feasible for them. Purchase Price + Repairs = 70% or less ARV. Depending on what you will charge for your wholesale fees, you could make or break the deal.

Did you catch what happened? You “bought” the house for $45,000, and “sold” it for $55,000. Where did the $10,000 go? Your efforts! You’ve got to pay yourself…

You contact the original seller, and let them know you are going to assign the contract to a 3rd party buyer. You assign your contract to the other buyer, and they close the deal. Upon funding, you get a check for $10,000 for finding the deal.

Everyone wins. This is your ideal situation in a wholesale deal. The transaction goes from A-B and B-C, with A being the original home owner, B being you, and C being the end investor who purchases the home. There needs to be enough room for A to want to sell, and C to make enough money – this means you can’t be greedy, and mark up the deal $20-30k.

Easy money is what most people think about wholesaling. I’ve got news for you – it isnt. Most of the time you’re going to be dealing with people who have other issues in their life making them have to sell, or commonly refered to the 4 d’s of real estate: death, divorce, drugs, or drinking. When dealing with these type of situations, you must remember that selling a house comes with emotional attachment, and some of these people might not be in the most stable period of their lives. Assure them that you want to help them (which you should), and stay away from predatory marketing practices. 

So that’s the easy part, understanding the process. The hard part is finding motivated sellers and qualified buyers. I would recommend building a buyers list before you start to market to find houses. Start with craigslist classifieds in the real estate section, and post an ad saying you’re looking for investors to buy discounted properties… they will call / email you.

There are other methods to wholesaling that I did not go over, such as “Subject to” deals. You can find more information on these type of deals from the links I have provided below.

If you’re not involved in the real estate industry, you’re going to need to make friends. Title companies, and REALTORS will be very helpful to your business. REALTORS will be able to pull comps straight off the MLS, so you will have an accurate value for your deals. Reward them kindly, because REALTORS typically make little to anything off wholesale clients. Find a title company who is experienced in working with wholesalers, and ask if you could come in to meet with them. They should be more than helpful to want to help you out.

Build your business from the ground up. People on BiggerPockets have operations as large as call centers answering their phones, offering to buy houses within 24 hours. They have systematically made the wholesale process so simple and easy for the seller to understand, they are profiting big from this business.

Now you know how the “WE BUY HOUSES” people make money.. essentially this is “house flipping” on paper. Some people are good at this – REALLY good. Steph Davis is a wholesaler out of Florida, check her blog out at http://www.flipthiswholesaler.net/ for more wholesaling tips & tricks. StrugglingInvestor (http://www.strugglinginvestor.com/) also has some great articles about probate wholesaling.

This was a simple break down on how the transaction happens, and how you would make your money. For more information on the subject of wholesaling, visit the BiggerPockets wholesaling forum at http://www.biggerpockets.com/forums/93-wholesaling.

Until next time,

Danny Day
Coldwell Banker United, REALTORS
Houston, TX
713-480-0050
www.dannysoldit.com

BiggerPockets: The Best Real Estate Advice That Cost Me $0.


Have you stayed up at night flipping channels watching infomercials? I’m sure everyone has done this once in a while.

If you’re anything like me, you’ve at least tuned in to what these people have to say. They make millions from get rich quick systems that the infomercial is selling, and you can have it for the low price of 4 low payments of $49.99! Does this sound familiar?

Maybe you’ve watched public TV during the day and have seen the most “entertaining” Flip This House star, Armando Montelongo, talking about his system to make you filthy rich in real estate.

The sad truth is that every day, dozens of people fall for this hype and buy into false promises. P.T Barnum once said that there is a sucker born ever second..

This brings me to the point of my blog post today, BiggerPockets: The Best Real Estate Advice That Cost Me $0.

I am a firm believer in Napoleon Hill and his way of thought. He believes in a principal called The Mastermind, which is basically the old saying “2 Heads are better than one.” His theory on the mastermind states that if one or more people come together, with the same goal in mind, you form a 3rd mind – the mastermind, which is greater than each single mind separated.

Joshua Dorkin created the online “mastermind” of real estate, and real estate investments. Josh is the founder of BiggerPockets.com, an online resource for all real estate matters. BiggerPockets features forums that you can publicly read, sign up for free, and post on. There is also an article section on the site that has many great articles on real estate.

In my opinion, and many other real estate investors, anyone interested in real estate should take note of this resource, and try to utilize BiggerPockets before moving to their check book. Experts that sell products want you to buy those products. That’s the beauty of BiggerPockets – they are not trying to sell you, they are trying to help you.

Lets say I wanted to research short sales, and would like to read up on them. I could Google the term “short sales” and get about 63 million results. I may click on the Wikipedia article and read about them, but what if I have specific questions?

Here is the “AHA” moment – I head over to BiggerPockets.com, type “Short Sales” in the search bar, and either search the forum or articles for short sales. When I searched articles, I came up with 20 articles written by both real estate investors and agents – people who actually work in the industry. When I searched the forums, I came up with many questions people had regarding short sales.

Go do some further digging and you will find an abundance of knowledgeable professionals, investors, agents, lenders, and much more on BiggerPockets.com.

How to identify a good deal in today’s market


Lately I’ve been working with buyers. Not to say I have not been selling homes, but it is a buyers’ market – and buyers are getting great deals on homes, all over the country – as well as in Houston.

Most buyers that I come across tell me what they are looking for, and we find it. One of my goals as a real estate agent is to get my clients the best deal possible – financially. Most of the time my clients have been looking at HAR.com long before they call me, and send me houses they are interested in. This is great. I encourage this kind of behavior, because it gets them familiar with what they want, before we go look at 15-20 homes.

I am going to explain how a buyer can get the best possible deal in real estate, in today’s market. The old saying goes “In Real Estate – You Make Money On The Buy”

I am going to explain this article with a sample deal that I closed as of yesterday. My client got a great deal on his home. Here are the details:

After Repair Value: $85,000
Purchase price: $52,000
Repairs needed: $10,000
Equity Capture: $23,000

You can read dozens of real estate books (I have) and they explain how deals work, but not how to find the right deals. I have my own methods of finding undervalued properties for my clients, I cannot publish on the web because others would take my method – but here are some guidelines to go by:

1.       Find out the after repair retail value
2.       Estimate Repair Cost
3.       Find out purchase cost / closing cost
4.       Work backwards
5.       Submit offer

Step #1: Find out the after repair value
The after repair value, commonly referred to as the ARV, is what the subject house should sell for  – after repairs have been completed. Your local real estate agent will be able to get this information off of sold comparables, preferably in the past 90 days. This information is valuable, because you will begin with the end in mind. If there is a $20-40k variance in the after repair value and the list price, then you are off to a good start. If there is no variance, or a negative variance, than the house is overpriced. In my sample deal, the after repair value was $85,000 – and the list price was $55,000, this was a $30,000 variance.

Step #2: Estimate Repair Cost
Once you have determined the after repair value, you need to find out what repairs the house will need. I would recommend doing a visual inspection / walkthrough of the house with your real estate agent. Ask them what they think the repairs will be. Pay extra attention to the foundation, roof, HVAC system, and any sign of flooding or mold. These repairs are the most expensive, and can eliminate any kind of profit or put you upside down. Have a general contractor look at the house, and give you a written estimate on what the cost will be so you know for sure. On my sample deal, the repairs were $10,000.

Step #3: Find out the purchase cost / closing cost
Ask your real estate agent to find out how much the closing cost will be on your house. If you are financing, you will pay more fees in closing than you would purchasing in cash. Your real estate agent should give you an accurate estimate on what your closing cost expenses will be. You can also ask the seller to pay for some of your closing cost. On my sample deal, the closing cost expenses were $950 total.

Step #4: Work Backwards
Add up your Closing Cost, and Repair value and subtract from the After Repair Value. Now subtract your offer amount, and you will come out with how much equity you will capture on buying the property. If you have a negative number, than your offer amount is too high. The higher the number, the more money you will pocket. So for an example, on my sample deal: $10,000 (repairs) + $950 (closing cost) = $10,950. $85,000 (ARV) – $10,950 = $74,050. Then $74,050 – $52,500 (Our offer) = $21,550 profit.

Step #5: Submit Offer
You can run the numbers and see how much you’ll make based off different offers. Once you find a number you are happy with, then have your agent write up the offer and submit to the seller. Make sure you have determined your maximum offer amount, and stand by your offer. I’ve spent 2-3 months negotiating offers, and it paid off.

Now you know how to analyze a basic real estate deal. Don’t be fooled by the media – purchasing is a great way to make equity in a down market. If you can buy right, you will always be able to sell right..