How Much can You make When You Buy a Property?

How Much can You make When You Buy a Property?

Do you know how to buy? Do you know how much you should pay for a property?

There is a formula known as the  “cost to sell” guidelines. Filled out, this chart tells exactly what your costs to buy will be and what you can offer in order to be able to later make a profit.

  1. Begin with your comps to determine the market value of the property.
  2. Subtract from that number the seller discount because most offers come in 3%-5% below asking price.
  3. Next, subtract your other costs: realtor commission, closing costs, holding costs, repairs, insurance, loan payoff, etc.
  4. Go over these numbers with the seller so they can understand the costs they will incur to sell their property and that these will be your costs, as well.

Most people don’t realize when they list their property that it will cost them about 20% to sell because of all the associated fees. So, if you list a home for $100,000 you will actually realize about $80,000 at your closing.

I want to share with you the importance of following these guidelines when making offers.

We made an offer on a home by using these valuations and using the cost to sell analysis. In this instance, we used the lowest comps we could find because this property was selling above the median price point for that area. (You don’t want to get stuck with a home that is too expensive for the area, even if it has all the bells and whistles to justify the price.) This home was in great shape, needed carpet and paint.

  • Retail market value on this home could be as high as $312K.
  • Tax value was $272K.
  • We offered $175K cash.

It was accepted immediately.

Here’s the deal: It was owned by a corporation that was trying to re-capitalize and had to get this property off the books to do so. When we got the HUD-1, we saw that they had to bring $47,084.07 in certified funds to closing! This reconfirms our standard line: “don’t think for the Seller”. If we had, we would have “assumed” our offer wouldn’t work.

Once you know your price, make your offer. If it’s not accepted, that’s ok. You don’t want to get burned later. Sometimes, if it’s not accepted right away, the seller will test the market for a time and end up coming back to you months later and asking if your deal is still available. We have had sellers call years later to ask if we would still honor our original offer! And, maybe we can.

Bottom line is – do the math and make offers that fit your criteria. Numbers DON’T lie!

Don’t get caught up in the excitement of a purchase. Make a rational decision based on facts and make offers that work for both you and the seller.

Questions? Comments? Care to share your experience?

This post has 6 Comments | Would you like to leave a comment?

6 Comments

  1. Zen – As you pointed out, you make your money when you buy. Buy right and buy it as an investment. This is a logical move, not an emotional one.

    Thanks for your comment!

  2. Great point! Especially when concerning buying real estate for investment purposes.

    Don’t fall in love with real estate – it won’t love you back.

    Make sure your ahead of the game going into the purchase.

  3. Percentage off asking price is part of our calculation. Nationwide buyers expect a 5%-7% discount. We deduct 6% real estate commission they would pay if it was listed or we would pay if we later list it to sell. We deduct 3% closing cost expenses. Also things like home shield warranty, appliance allowances, inspection costs, estimated repairs, holding costs.

    We don’t deal with tax value or cost per square foot at this point. Those things would be considered before this when determining market value. Our cost to sell evaluations start with market value already determined.

  4. Are guidelines like cost per square foot, percentage off asking price, or percentage off tax value part of your valuation calculations? If so, then could you elaborate on their use?

  5. Laura:

    You’re so right! You have to use instincts in the beginning. I’ve never thought of it that way or pointed that out!

    Thanks for your insight.

  6. I like your approach of keeping the emotion out of the business. You have to let them in enough in the beginning to let your instincts warn you of a really awful home, but once you decide the home is the kind you are interested in investing in, keep the numbers and the emotions separate.

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