267 – Flipping 101- Knowing What to Offer

Today we’re going to continue the Flipping 101 series that we started yesterday, and we’re going to talk about knowing what to offer on a property.

What’s difficult for some people is that they don’t want to look ridiculous. They don’t want to feel bad about giving a low offer. You have to get past that mindset and understand that this business is a numbers game. You can’t be concerned about what your offer will look like because often, your offer has to be low.

So how do you know what to offer? You can use a few basic rules to get started and as you get more experienced and start understanding your business and your costs you an modify that and adapt.

A common rule is called the seventy percent rule. It goes like this:

  • figure out the After Repair Value–let’s say it’s $100,000
  • multiply the ARV by 70%
  • subtract the cost of renovation–let’s say it’s $20,000

In this example, you can offer up to $50,000 on that property in order to make a profit after doing the renovation. This rule is very generic and will keep you out of trouble in terms of not bidding too high. But in some markets, you’ll never get a deal because it’s far too aggressive.

If you want to go one step further, you can can follow this formula:

  • figure out the After Repair Value–let’s say it’s $100,000
  • multiply the ARV by 90% (that’s 3% for the buying realtor, 3% for the selling realtor, 4% for the closing costs)
  • subtract the profit you want to make–let’s say you want to make 20%
  • subtract the cost of renovation–let’s say it’s $20,000

In this case, your offer again comes out to $50,000, but this formula allows for you to decide what kind of profit you want to make. I suggest that you also subtract any holding costs that you anticipate or any financing costs (such as interest payments for a private lender).

You can use any method you want; just make sure that, whatever you offer, you’ve accounted for everything.

 

About the author, Mike

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