In the early days of Castle Rock, we had the grandiose idea that we would develop our own decisioning system based on models that we had created and developed over time. We bartered services with one of our investors, a data base designer for a large international consulting firm, to design a system that would help us with our pricing. We really thought this would speed up the process. There was one real fly in the ointment. That fly’s was me.
Yes, I was the problem. I am constantly learning and seeing trends, so I kept messing with the model. I tweaked it so much in fact that the programmers couldn’t keep up with the changes. This problem was solved by going back to basics. To this day, we use Excel speadsheets. When we help others to design models that fit their needs, we tend to stick to the flexible spreadsheets to allow them to constantly tweak their models in a similar as we do.
The process of developing a model to set pricing for your purchases is like backing into a parking place. The best starting point is to understand where you need to be and figure out from there what you need to do to determine your starting point. For instance, how much will your target yield be on the deal? Understanding that will set your model in motion.
We then determine our costs that we will incur. What will the foreclosure process cost? What will our real estate commissions be on the sale of the underlying collateral? Are there back taxes due? Are there code violations that need to be settled? These all need to be addressed in the process.
One thing that we do is to compile as many Settlement Statements (also known as HUDs) for properties in a particular area that we can. Using the data on those statements, we keep track of every fee that might be charged. For instance, we see what the going title insurance rates would be for a deal. We see what normal closing fees would be. Are there State taxes that are due? A well-constructed spreadsheet model will automatically include these fixed and variable costs to quickly allow you to analyze any deal.
We would love to hear the process other members use to determine the price they pay for notes or real estate. Please share your ideas in the comments section or send it to us from the contact section of the site. Other members might benefit from your knowledge…and that’s what the institute is all about.