Pay What?


We’re often asked how to figure out what to offer for a property, and it’s one of the earliest things that
we teach in our Blueprint Series and are constantly reinforcing in our coaching program. Many people
think that the approach real estate investors use is just to “low-ball” the price and see what happens.
Besides being deceptive and an unfair business practice, “low-balling” rarely works, and it creates a poor
reputation for ethical and honest real estate investors. Let’s take the high road and show you exactly
how to arrive at a fair offer price, then stand behind that price and how you calculated it.
The very first thing to do is to determine what the house would be worth completely fixed up and in a
move-in- ready state. The most accurate way to do this is to use the Multiple Listing Service (MLS) to
look at what similar houses have sold for nearby and recently.
The catch there is that only real estate licensees like a REALTOR or a real estate broker is granted access
to the MLS, and only through a real estate brokerage. So, if you’re not a licensee, your best bet is to
hook up with one who is willing to work with you and perhaps be paid by selling your finished property.
The process of finding these comparable properties is often called “getting comps”, and it is part science
and a lot of art. The art is in having a good working knowledge of neighborhoods and having a sense of
where the market is heading. In other words, being good at reading tarot cards might be a useful skill.
Let’s say that you arrived at good comps of $225,000 for a property. We call this the “After Repair
Value” or ARV for short. The seller needs to get out, and the house is in rough condition; no REALTOR
would list the house as it is; it may not be financeable by a bank for many reasons (that’s another post).
You visit the house with your handy-dandy Rehab Repair Estimate Worksheet (oh, you need one of
those? Then CLICK HERE) and you get to work. Yes, using this worksheet is also part science and some
art as well, but with a little practice, you get good at it.
When you run through the worksheet, we’ll say that you came up with $53,000 in repairs. Not an
unusual number for a house in rough shape; this stuff adds up fast. Now the (simple) magic begins. To
figure out what to offer, you multiply the ARV by 70% and subtract the repair costs. Done.
In this case, 70% of $225,000 is $157,500, less repairs of $53,000 yields $104,500. That’s what we call
your Maximum Allowable Offer, or MAO. We use 70% because the difference, 30%, is what we need for
things like holding costs (utilities, insurance, etc.), closing costs, and your profit. It’s a solid number.
There are other schools of thought that have you doing extremely elaborate calculations, including
things like the actual cost of utilities and insurance, closing costs, etc., but in the end, they all tend to
average out to 30%. You could say that’s one weird little trick, but we won’t. It just works.
It’s important to stress the VALUE of your service to the seller. They can be DONE with this problem in
as quickly as a week, and they will pay no commissions, have no repair or even clean-up costs, and walk
away with a check. Fixing it up and using a REALTOR can be costly both in time and money.
So the key to being an effective, ethical real estate investor is to have a process and a plan for
calculating your offer prices, stick to that plan, and show your seller what he is up against and why you
are a great solution to his problem in the long run.

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