It all comes down to modeling. No, I’m not talking about walking down the runway in a ball gown…I’m talking about putting together a spreadsheet that allows you to enter a handful of variables like purchase price, renovation budget, closing costs, and other costs that we have historically encountered on our deals.
Models constantly change, but over the years, our modeling has continually gotten better and better with each passing deal. We have a rule at Castle Rock…never stray from the model. The model not only allows us to quickly determine if an opportunity is worth taking a deeper due diligence dive on, but it helps us remove emotion from the equation. Rather than falling in love with a property because of the gorgeous view or the location, we make it all about the math. Either the numbers work or they don’t. We can look at more opportunities much more quickly than we could ever do without having our modeling in place.
The first step to take in creating a model is to dig up all past settlement statements from your old closings. If you haven’t closed many deals, talk with another investor or closing agent to see if they will let you see some of theirs. This will allow you to identify normal costs that occur on both the buy and sales side of the transaction. For instance, most states have promulgated rates (rates that are set by the state) for title insurance that tie to the purchase price or loan amount. You can set up an easy formula that will calculate your title insurance costs based on the suggested purchase price of the opportunity.
You will have both variable costs, such as the title insurance example and realtor commissions. You will also have fixed costs, such as the closing agent’s closing fee. By using previous closing statements, you can not only zero in on the usual costs to handling a transaction, but it helps you avoid missing normal costs of doing business.
We built a template model for our clients to use, but you can build one using a basic Excel spreadsheet that will only become more accurate over time.