Step #1 – Buying RIGHT!

Posted by capitalhomeslp on Jun 22, 2011 in Blog, Brandon McDonald | 0 comments

So… Jason wants me to write about all the mistakes I’ve made in my real estate career for a blog.  Embarrass myself publically forever and always on the internet, SURE!!  Why not.

The first few of these entries are all equally important.  If you do 2 of the 3 well, you’re still screwed… So do a great job learning all of the first 3!!

In the beginning was a deal, and the deal was not very good…

First mistake: I paid too much… for a house right from the start.  The issue with paying too much for a house is starting out behind the eight ball.  No matter how cheaply you get the work done, how discounted you find your tile, hardwoods, and a fancy new Ebay Vanity, you started out on the wrong foot.

Deal specs:

Purchase price $89,000

Rehab budget $10,000

Sold on the first day we had it listed for 125,000!!!

Everything worked out for the best, but I still paid about $15,000 too much for the house!! DON’T pay too much.

The reason I paid too much.

There’s a formula that real estate investors try to live by called “MAO” Maximum Allowable Offer

It’s a simple math equation (if it wasn’t I wouldn’t be able to do it, so don’t freak out)

After repaired value ($125,000) x .7     =     $87,500

$87,500.00 is not what you want to pay for the house, however.

The next step is subtracting your estimated repair budget.  In this case it was $10,000.00.

The most I should have paid for this home was $77,500.00

If I had lived by this number I would have offered less and would have retired already.  Ok, maybe not, but I’d be closer to it!!

That’s how we calculate offers today.  It gets more difficult when you get into the homes that are higher priced to use this formula.  The profit margins get so HUGE that people are willing to take a bit less for them and you are always getting outbid.

For us little fish it’s very dangerous to overpay.  One or two price drops, holding costs, Realtor fees, and closing costs can completely wipe out everything you’ve done.  That’s what I will cover next.  How to come up with the After Repaired Value!