| Learning how to profit from rehabbing and renovating | | | | needs approximately 20,000 in repairs, has a |
| distressed, abandoned or neglected properties can | | | | projected future market value/after repair value of |
| expose the novice and experienced real estate | | | | 100,000, you want to gross 10% of the purchase |
| investor alike to either big profits or big problems. | | | | price and you estimate approximately 20,000 in |
| Buying at the wrong price is the number one problem | | | | various closing, lender, realtor fees. |
| that I hear in my business practice and it often rears | | | | Based upon the example above, your offer should |
| its ugly head with a number of different faces: | | | | not exceed 52,000---here’s why… |
| - Not budgeting enough for rehab costs | | | | Best Possible Offer equals 100,000 – 20,000 |
| - Not budgeting enough for operating expenses (if it | | | | – 20,000 – 8,000 |
| is your intent to hold and rent after rehab) | | | | BPO = 58,000 |
| - Bad Eyes (structural/costly problems not identified | | | | Once you have computed the BPO, you need to |
| until after purchase) | | | | validate your math with the market realities in your |
| As in residential real estate investing (click on this link | | | | particular marketplace. A real estate investor can |
| to read my article about calculating the best offer for | | | | confirm the “as is” value and ARV/FMV |
| residential investment real estate), purchasing a rehab | | | | in a number of different ways, here are just a few: |
| property at the right price is critical to the real estate | | | | - Purchase a subject to appraisal (to determine as-is |
| investors’ bottom line profits and ROI (return | | | | value and cost to cure/rehab/renovate) |
| on investment). | | | | - Have several general contractors provide you |
| By using my BPO or Best Possible Offer Rule I | | | | estimates on total repairs required (to determine as-is |
| developed for real estate investors, your future | | | | value) |
| rehab projects should be free of the problems | | | | - Have a realtor provide you with a CMA |
| I’ve listed above. | | | | (Competitive Market Analysis) or pay an appraiser to |
| Use this formula when calculating the best possible | | | | provide you with a subject to appraisal (to determine |
| offer: | | | | after repair value/future market value) |
| BPO = ARV – BHS Fees – Profit | | | | - Purchase a AVM (it’s an electronic appraisal |
| Acronym Definitions | | | | that costs 1/20th of a physical appraisal with identical |
| BPO = Best Possible Offer | | | | info you would receive from a traditional |
| ARV: After repair/rehab value (also known as FMV or | | | | appraisal---do this to determine future market value). |
| future market value---the future value of the real | | | | The true wealth in real estate investing is made in |
| estate investment after all repairs and renovations | | | | every stage of property ownership---turning a profit |
| have been completed) | | | | when you purchase, hold and finally sell the property. |
| BHS Fees: Buying/Holding/Selling Fees | | | | By ensuring that you turn a profit on the buy side, |
| Profit: What you want to net after expenses/before | | | | you successfully reduce your risk and increase your |
| capital gains | | | | chances of greater profits. |
| Let’s use an example to better illustrate the | | | | Do the math (and profit) or don’t (and run the |
| formula---let’s assume that you would like to | | | | risk of needing to rehab your bank account after |
| purchase a property that has a as-is value of 40,000 | | | | your next deal). |
| (this is how much it will cost to buy the property), | | | | |