Something that stops us from getting started is analysis paralysis. If you are afraid that you won’t be able to make a competitive offer that will also make you money, this is the blog for you.
When you get started it can be difficult to know what that sweet spot is when making your offer. That is why knowing how to calculate your Max Allowable Offer is so important.
There is a great deal of free information out there that doesn’t always apply to everyone and every situation across the board. We don’t use a set percentage to calculate Max Allowable Offer because it can really change depending on your market.
In this blog we are focusing on helping you get past that first initial hurdle when you are new to flipping and really want to make some money and may have some nerves around doing your math right.
The first step is to calculate the After Repair Value.
ARV = What is the house really worth when it is all fixed up?
Next break down all the extra costs you can think of realtor fees, utilities, tax on the sale, etc.
Then subtract repair cost, then profit.
Below is an example for you based on a projected ARV of $300,000.
$300,000 x 90%
- $35,000 (Repair costs)
- $5,000 (Concessions to the new buyer)
- $5,000 (Closing Costs)
- $18,000 (Calculated Money $300,000 at 12% APR at a projected 6 month turnaround)
- $30,000 (Profit. Ask yourself, what profit makes it worth it for you to do the deal?)
$177,000 is your Max Allowable Offer
Of course the seller may take less, say $157,000 and then you have that much extra profit or if the seller wants above the MAO, say $187,000 you can always go back and dial in the offer far more closely to see if the deal is still viable.
Breaking it Down:
Repair Costs are all your rehab and this comes down to your knowledge and decisions on how you want to upgrade.
Concessions to the new buyer allows you some wiggle room to close the deal to the buyer on the other side of the flip.
Closing Costs include taxes, contract fees, realtor fees etc.
If you are new to the game calculate extra holder costs because your rehab will probably take longer (six months is fair if you are new to the game). Holding costs are interest per month on the money you borrowed to make the deal it can be as much as 12 -15% if you are getting started and depending on your loan or investor.
Then you work in your profit. What profit makes it worth it for you to do the deal? Add that in and you have your MAO.
Your budget is never what it seems and it is better to overestimate than underestimate.
Be conservative but not too conservative.
Don’t be conservative on every one of these because then you won’t be able to have a competitive offer. Do the math and then trust yourself.
Once the offer is accepted it’s about executing the flip as smoothly and efficiently as possible. And in the early days if you don’t make the profit you hoped to is it still a win? Absolutely.
When you are first getting started doing even one successful flip a year is beneficial. It is extra money and you learn a ton along the way. You just have to get started!