There are two types of people in this world…those that pull into a parking space and ones that back into it. I’ve never understood the need to back into a parking place, but I always back into my offer prices when it comes to real estate investing. I’m often asked how I come up with my offer prices. Well, let me tell you how I do it.
Many investors simply pull a number out of the air when they are making an offer on an investment property. That method will leave you broke in no time. If you want to take a long journey and you want to plan on a route to get to your destination, you have to know two things…where you are and where you want to be. The key for investors is backing into the “where you want to be” part of that statement.
For flips, start by understanding the “As Repaired Value” of the property…or the ARV for short. By looking at renovated properties of a similar size, age, and style in the neighborhood, you can get a good idea of what your ARV would be on the property. Next, you’ll need to know what the costs to renovate the property will be. Don’t do it on the back of a fast food napkin. Get an actual scope of work from a good contractor that you trust. Make sure it includes permitting fees and demolition costs. You don’t want any surprises.
Speaking of surprises, unexpected things always pop up. Always be sure to add a “contingency reserve” for those unexpected things that always seem to pop up. You never know when you crack a wall and find something you didn’t expect. It happens…and that’s normal, so plan for it.
Finally, you have to know what you want to make in terms of profit. Be realistic. You are in this for the money, but being insanely greedy means that you will dramatically trim your purchase opportunities and/or the customers that might purchase the finished product.
Don’t just guess. Back into the parking place. Start with the end game and then work your way backward to come up with your “Strike Price”. That’s how the pros do it.