How to make your top offer:
When you’re looking to buy an investment property, it’s important not to get emotional while evaluating the deal. Let me warn you, failure to keep your emotions in check will cost you big time. Ask me how I know.
One of the worst deals Ashley and I ever did was a result of us leaving our excitement unchecked. When we were new investors, we wanted so badly to do a deal that when an opportunity presented itself to us, we threw ourselves at the so-called “deal”- That was a big mistake.
We bought two trailers in a package deal; one of which had significant fire damage. We immediately sold the other trailer for a modest gain, but kept the burnout thinking we could rehab it ourselves and sell it on an installment contract.
To make a long story short, we lost our tails and I literally almost lost a finger. Thankfully, we found someone willing to take on the burnout and relieve us of all our, uh, excitement.
Some of the best lessons you’ll ever learn are the ones that hurt the most. Doing a bad deal doesn’t make you a failure – not learning from it does. If you let it, the education from a bad deal will make you a better investor so that next time you won’t make a similar mistake.
We learned on that trailer deal to take emotion out of the equation. This ability turned out to be very important when we started going to the foreclosure auction to buy.
Case in point: I was at the auction recently and got into a bidding war with another investor. Did you know that when you’re buying at auction you don’t have to make bids in increments of thousands or even hundreds? You can bid just one dollar more. You’d be surprised how many properties have been bought this way.
As the bidding war drew to a close, my competitor started getting excited. The bid that won him the house was $3,000 more than my previous bid. I congratulated him, and he went off to do the paperwork with the auctioneer.
I admitted to some of the guys standing there that I’d reached my top offer, and my competitor could’ve won for $1 more than my last bid. They asked me how do you calculate your top offer. This is what I told them.
Every time you’re considering a property to purchase, you essentially have two exit strategies: you want to either keep the property or sell it. So in order to find out how much you can pay for a property, identify which exit strategy you’re going to use and work backwards.
If you’re going to sell it, the first thing you need to know is how much it’ll be worth after it’s fixed up. Knowing that, subtract all your expense like the rehab costs, holding costs (things like taxes, insurance and utilities), approximately how much interest you’ll pay and finally, your profit. The result is your top offer.
Here’s an example: you find a house that’ll be worth $100,000 fixed up. You estimate it needs $20,000 in repairs and you’d like the same in profit. You’ll need to pay your investor $5,000 for using their money, and you figure holding cost will run $5,000. (Tip: your holding cost should include an extra $2,000 as an “oops factor”. This is for all the things you’re not expecting.)
So $100,000 minus $20,000 in repairs minus $20,000 in profit minus $5,000 in interest minus $5,000 for holding costs means you can pay no more than $50,000 for this deal.
If you do this for every house, and stick to your top offer, your emotions will never delude you into agreeing to a bad deal, even in the heat of a bidding war.
Joe and Ashley English buy houses and mobile homes in Northwest Georgia. For more information or to ask a question, go to www.cashflowwithjoe.com or call Joe at 678-986-6813.