How Much Should I Pay For This House?

We probably answer this question for someone asame - it is whatever is required to make the
couple times every week. The problem is that theyinvestment look like the comparable houses (unless
don't have a good formula for determining the mostthe plan is to sell well under market value). We do
they can pay and still make a profit - so they'renot attempt to obtain all of the various contractor
scared to make any offer. Here's what we use forbids when we are making offers. All the real deals
single family homes:would be sold before we'd ever have an offer
The (MAO) Maximum Allowable Offer is calculated bytogether! Instead we've developed ranges of rehab
first determining what the house will be worth afterdollars based on the overall condition of the home. Is
renovation - the ARV (After Repaired Value); lessit an exact science? No, but neither are the bids -
the rehab dollars required; less the Buy/Sell/Hold (B/Sthere will always be something missed. So why not
H) costs; less profit margins.work with a guide that is probably 90% accurate and
MAO = ARV - Rehab - B/S/H - Profitallows for quick offers?
So let's break that down a little further. To determineBuy/Sell/Hold costs include expenses such as
the ARV, study comparable sales data. Comparableappraisals, attorney fees, title search & title
sales are those properties which sold in the last 6insurance, loan origination fees, debt service, utilities,
months to 1 year, and within ½ to 1 mile frominsurance, taxes, real estate commissions, and closing
the subject house. But other factors must befees paid on behalf of the end buyer. Again, these
considered as well. The more characteristics betweencosts vary depending on each investor's individual
the properties that are similar, the more valid thesituation. In the Atlanta area, 15% of the ARV
data. Make sure that the house itself is similar inseems to be a good average allocation for B/S/H
square footage, bedrooms and baths, age, style, andcosts. If you are the renovator, calculate your
architecture. Don't worry about condition except as itspecific B/S/H costs, then utilize that percentage for
will affect the amount of rehab dollars required. Next,future offers.
look at the neighborhood and the individual street. DoProfit margins are the fun part of the equation. How
they look the same? Or is the comparable propertymuch do you want to make? If you're wholesaling
on a beautiful street while the subject property is onthe property, you also want to consider how much
a street riddled with empty littered lots and boardedyou should leave in the deal for the investor buyer to
up houses? The point is to view the potentialmake the deal attractive.
investment as your end homeowner occupant will. IfThat's it. That's how you calculate the most you'll pay
they could buy your completed investment on thefor a property. But that's not what you SHOULD pay.
bad street, or a house on the beautiful street - eitherIt is the maximum you'll pay. It is the deal-breaker.
for $150,000 - which would they choose? The otherYou will not pay one penny over the MAO. Your
house of course. Which means your house is notnegotiations should lead you as far below the MAO
worth the same - it must sell for less to attract aas possible. The difference in amounts is additional
buyer.profit in your pocket. What you SHOULD pay is the
Rehab dollars differ from renovator to renovatorminimum price below the MAO that the seller will
depending whether they do the work themselves, oraccept.
use cheap subs, or use an expensive generalWe call this the MIN-O.
contractor. The scope of the work should be the