Editor’s Note: Happy New Year! This is the final part of my 3-part series on Setting Your Offer Price in a Soft Market. In last month’s article “Update: What Does it Really Cost?” we estimated your costs to buy, hold and sell for profit in a soft market. In November’s article “Update: What’s it Worth? (Part 1) Setting Your Offer Price in a Soft Market” we started at the top. That is, before you buy a foreclosure to fix and sell for profit, you must first solve for your estimated RESALE price. In this final part we will pull “my buying offer formula” all together, so you guarantee your profit when you BUY your house! Enjoy!
There has been a big shift in the real estate and foreclosure markets. Investors who have made “easy money” by paying market value and letting their profits come with instant appreciation – are now washed out of the market. Those smart investors who have done as I’ve taught them are making great money.
So what did these smart investors do, that the rest did not? They BOUGHT RIGHT with at least a 30% discount from current market value, so they locked in their profit at their purchase. Now, more than ever, you must BUY RIGHT and either quickly sell to bank your profits, or hold for positive cash flow to leverage your profits. Either way, you have to take action to make profits!
To wait and hope for prices to go up to make profits on an otherwise unprofitable deal, will prove to be financial suicide. Many investors who didn’t understand this lesson lost a lot of money in the last real estate downturn in the 1990’s. I know this because I saw it happen to many wannabe investors.
This didn’t happen to me or those who followed my advice. The market got easier to buy (we were flooded with a 13 month supply of unsold homes and record high foreclosures). So we got stronger at buying houses cheaper, while our competition ran.
But most investors (and Realtors) really don’t know how to price a “good deal” when buying properties. I see it everyday in my emails. Clients who think a distressed owner who is offering $40,000 off a $400,000 house is a good deal. Do the math – that’s only a 10% discount! You can find that now on the MLS. And when you go to fix it up and sell it, you will have the privilege of taking a loss on that property! You do not need losses! You need gains!
Just because a house is in foreclosure, does not make it a deal. Yes, you want to say yes to a seller, so they can get what they need. But you also must structure the deal so you have your minimum 15% profit, while covering your costs. The goal is to find win-win deals, so the seller says YES to your offer. The more yesses you get, the more folks you can help, the more neighborhoods you improve and the more profits you can make! That’s what being a successful foreclosure investor is all about.
Now at this point you should have:
- Searched Foreclosures.com Lists in Your Area.
- Weeded Your Leads to work those with the most potential equity.
- Determined your top resale value in “What is it Worth?“
- Determined your soft costs (buying, holding, selling and profit) in “What Does it Really Cost?“
- Factored in a Minimum 15% Profit off the Quick Resale Value of your home today (or $30,000 whichever is higher) on every deal. That 15% factor is very important. If your costs exceed your budget, your hold time was longer than expected, or your resale value was lower than budgeted – your 15% profit should cover you. Do not make this margin too thin! You have a risk, and you must be rewarded for it!
Now you must decide what repairs will get you the most “bang for your buck” and how much it will cost you (versus what will you gain in quick sale value) and deduct those costs. They vary greatly based on the age and condition of the home and how well it will compete with other homes on the market when it is time to sell.
Here is my top list of “must haves” for my typical fixer house:
- Pest Report: Section One – get clearance; Section Two – work is negotiable
- Roof: Repair for 3 year roof certificate; or Add another layer of Composition (check your local rules on how many layers you may have); or Replace with a new 30 year Composition roof.
- Landscape: Clean up all, spruce up front yard, and fix any broken sprinklers or fencing
- Paint: Inside and Outside
- Flooring: New carpet, padding and linoleum
- Kitchen: New appliances; New (or reglazed) counters; Clean up cabinets
- Bathroom: Reglazed tub/shower; New (or reglazed) sink/vanity; New toilet (or seat)
- Air Conditioning/Heating: Repair or Replace
There are many resources to help you with repair cost estimating. I personally like this Home Sale Maximizer tool. Their free web-based tool will help you improve your home’s appeal, increase the selling price and even shortens the days-on-market, all by helping you choose the right touch-ups and repairs.
You will then create a budget and calculate the potential return-on-investment, for every house when you evaluate and plan your pre-sale effort. You START HERE by entering your zip code and answer a series of yes/no questions about your property. The results are displayed below, using an example report for my zip code area 95628:
| Area of Home | Recommended Action |
Average Cost |
Increase in Selling Price |
Average Return on Investment |
% of Agents Recommended |
| Clean / de-clutter |
Remove clutter by storing items in basement, attic or friend’s home. Rent a storage space or sell excess items, if needed. Keep every room very clean during open homes. Do pre-open house cleanliness inspections. |
$ 186 |
$1,522 – $1,955 |
837% |
96% |
| Lighten and brighten | Replace any burnt-out bulbs and use higher wattage bulbs, if possible. Have defective electrical components repaired or replaced. Make sure skylights are clear and keep drapes open during the day. |
$ 224 |
$1,116 – $1,505 |
486% |
95% |
| Yard | Store away personal effects from front yard. Hire gardener or landscaper to trim back the overgrowth and maintain yard. Make sure that your lawn has a healthy green appearance. |
$ 611 |
$1,970 – $2,463 |
263% |
95% |
| Update kitchen and bath | Update kitchen and baths by resurfacing cabinets or painting with neutral color. Replace toilet seats, dated fixtures and drawer/cabinet handles. Freshly caulk and redo grout in countertops, sinks, tubs and showers. |
$ 1,468 |
$3,277 – $4,000 |
148% |
81% |
| Paint interior | Repair any damaged interior walls by patching all chips, holes and cracks; then touch up or repaint interior walls with neutral color. |
$ 897 |
$1,864 – $2,337 |
134% |
93% |
| Flooring | Repair and refinish damaged floors, or cover with neutral-colored wall to wall carpet and note damage in your disclosure. |
$ 816 |
$1,693 – $2,129 |
134% |
89% |
| Carpeting | If carpets are only lightly soiled, shampooing and/or spot removal should suffice. If there are rips, fading, heavy wear, smells or deep stains, replace with neutral color. |
$ 802 |
$1,609 – $2,047 |
128% |
96% |
| Paint exterior | Repaint or resurface the outside walls of house, as needed. Patch and repair any damaged areas. |
$ 957 |
$1,876 – $2,356 |
121% |
94% |
In my 3-day “Mastering Lab” program on Day Two, eighteen of my clients go out in my “Limo Bus” to tour local fixer/foreclosure deals. We actually go inside a house and estimate what repairs we should do and how much they will cost you. We then give each student a copy of my working Excel file, including all my soft and repair cost formulas built in. This allows those clients to have a working budget in place, on every offer they make, with the confidence that the deal will be profitable. This has been a huge jump-start for my clients when they return home from the program.
Let’s pull out our calculator and see how this all pencils out:
- Determine Quick Resale Value (after repairs value)
- Deduct: Soft Costs (Soft Market: Estimate 20% of your Quick Sale Value)
- Deduct: Profit (15% of your Quick Sale Value)
- Deduct: Repairs (Actual dollar for dollar estimate – NOT a % guess)
- What is left = Your Offer Price to the Seller
- Calculate Your Offer Financing:
a) Deduct: Subject to Loans
b) Deduct Liens and cash to stop the foreclosure (bring all current)
c) What is Left = Cash to Seller at closing for their Equity
Now you know the basics of “Doing the Math” so your offer makes you a handsome profit and provides cash to the seller at closing. The key is finding a motivated seller who wants your cash and services more than they want to keep their property. Too many investors try to copy from those who haven’t mastered it themselves. Be wary about whom you’ve selected as “your mentor.”
Here’s to making 2008 YOUR Best Year Ever!
