This formula is what it’s all about! There are an unlimited number of ways you can approach setting this number.
** Rule #1 – When in doubt, err on the side of caution! **
What To Include In Your Formula:
• Potential ARV (ARV)
ARV (After Repair Value) You’ll need to run local comps and get good at crafting this number accurately. Remember to be conservative on this number.
• Estimated Rehab Cost (ER)
– SF = Total sq footage of the property
– RP = Percentage of the property that needs rehab
– RC = Cost to repair 1 sq ft of the property
I calculate this as a percentage of the total sq footage that needs to be rehabbed multiplied by the average cost per square foot to complete repairs. If you are unsure what the cost per square foot is, use these numbers: $75 for rentals/wholesales, $150 for flips and $300 for high end flips.
Here’s how you calculate this – (SF * RP) RC = Estimated Rehab Cost
• Estimated Immediate Holding Costs (HC)
Sometimes the silliest things can sneak up on you as a holding cost. It’s important to know what they all are so you can calculate your costs correctly. This could be anything from HOA fees to utilities and taxes. Pro-Tip: Always try to negotiate! We ended up paying only $268 after a simple phone call got the late fees removed!
• Liens That Won’t Fall Off (L)
Remember that there are some encumbrances that remain on a property after a tax sale. You assume responsibility for these after the sale so don’t forget to include them in your calculations.
• Profit Margin (PM)
Nobody really likes to work for free. Especially when you’re assuming this much risk. Don’t forget to add your minimum profit margin into the purchasing equation! Once you get to know your market, you’ll have a better idea about where to leave this number. I use 20% as my profit margin floor. Below 20% would make me think twice about bidding on the property.
For flips and rentals, your profit margin is calculated off ARV. For wholesale deals, you’ll need to take 30% off the top first. Your formula would look like this: (ARV * .70) PM = Profit
• Gamble (G)
I like to add a gamble into my formula. This is a planned amount that you will allow yourself to go above and beyond your true max bid. The gamble is calculated as no more than 50% of the profit margin or a portion of the estimated rehab that you’re certain is an overestimate. This is where exit strategies show up again. If I’m going to hold a property, I’ll be far more willing to eat into my profit margins than I would on a wholesale deal or a flip.
For a flip or hold – ARV – (ER + HC + L + PM + G) = Max Bid
For a wholesale – (ARV * .70) – (ER + HC + L + PM + G) = Max Bid
Hope this information helps and when you are ready to get started, text “AUCTION” to (909) 344-5272 and we will be right there to assist you!