How do Investors's determine what to pay for a property?

 

 

Most investors acquire properties using the same formula. To consistently make profits we need to buy the property at a 70% discount of the after repaired value (ARV), less the cost of repairs. The ARV is essentially what a fully renovated property will sell for on the MLS. At first, this may seem like a substantial discount, but after accounting for all of investor’s costs, it leaves a 15% profit margin if all goes as planned. The 30% discount will be split, 15% profit, 15% holding costs (taxes, insurance, interest, commissions, closing cost, etc.)

 

Here is an example

Property A

ARV (market value after renovations): $200,000

Repairs: $25,000

 

Investor’s offer: ($200,000 x 70%) - $25,000 of repairs = $115,000

 

If all goes well, the investor will sell for $200,000 and will make 15% profit on the sales price - $30,000.

 

Here is the breakdown:

 

Sales Price:                            $200,000

less

Purchase Price:                       $115,000

Repairs:                                  $25,000

Closing Costs to Buy:               $2,000

Interest on Hard Money Loan:    $9000

Insurance:                                    $500

Taxes:                                       $2,500

Commission to sell:                  $12,000

Closings costs to sell:                $4,000

 

Total Costs:                            $170,000


Profit:                                      $30,000

 

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Who is putting out the "We Buy Houses" signs?

Investors, of course. Investors make their money by purchasing properties on the wholesale market which they renovate and sell on the retail market. The retail market is served by real estate agents and properties are listed on the Multiple Listing Service (MLS).

Generally, the wholesale market purchases are completed without a real estate agent and no commissions are paid. Additionally, the properties are purchased with cash or a hard money loan, which allows the purchase to be completed in a matter of days.