Making offers as a real estate investor comes down to accurately evaluating deals. When you know how to run the numbers, you’ll never again wonder what to offer on a property.
There are two main deal types: Fix and Flip and Buy and Hold. Each deal type has an “anchor” used to calculate offer prices.
- The Anchor for Fix and Flip deals is ARV or After Repaired Value meaning the value of the property once it has been fully fixed up.
- The Anchor for Buy and Hold deals is Gross Monthly Rents meaning how much income the asset can produce for the owner on a monthly basis when tenant occupied.
Formula for Fix and Flip deals
ARV X 70% - Fix Up Costs = What The End Buyer Wants To Pay
What The End Buyer Wants To Pay – Your Wholesale Fee = Offer Price
Here’s an example for a property with an ARV of $350,000 that needs $25,000 in work and let’s say you want to make an $8,000 Wholesale Fee.
$350,000 X 70% - $25,000 = $220,000
$220,000 - $8,000 = $212,000 (OFFER PRICE)
NOTE – Using 70% in the formula is considered the “rule of thumb” for investors. That said, you’ll meet buyers who use 65% and you may meet some who use 75%. Simply swap out the percentage and you’ll be able to evaluate deals for your specific buyers as you meet them.
Formula for Buy and Hold deals
Gross Monthly Rents / .012 = End Buyers All In Price
End Buyers All In Price – Fix Up Costs – Your Wholesale Fee = Offer Price
Here’s an example for a property that rents for $950 per month, needs $10,000 in repairs and let’s say you want to make a $5,000 wholesale fee.
$950 / .012 = $79,000 (rounded down from $79,166)
$79,000 - $10,000 - $5,000 – 64,000 (OFFER PRICE)
NOTE – The factor of .012 is for a 10% annual rate of return which is the “rule of thumb” when evaluating a rental deal. Below you’ll find different factors for different annual rates of return. Feel free to plug these into the formula when working with buyers looking for a rate of return other than 10%.
8% - .0095
10% - .012
12% - .014
14% - .017
20% - .024
Remember…making effective offers is all about knowing how to evaluate deals through your buyer’s eyes. When you know what your buyer(s) want to pay for a property, you’ll always know how much to offer because you can simply subtract your desired wholesale fee from their price.