Learn Max Offer Formula
Max Offer Formula
When you find a property that you think has some potential, it's important to make sure that you've done the research necessary to make sure that you'll make money on the deal. One of the ways you can accomplish this is with the Max Offer Formula. We created this formula as a "back of the napkin" way of determining the maximum amount that you can offer for a property and still be profitable.
Traditional Max Offer Formula
There are two versions of the Max Offer Formula. The first is more common and includes just the basic information you need in order to properly come up with your max offer.
The Traditional Max Offer formula starts with the After Repair Value. This is the amount that you reasonably believe you could sell the house for after you've made all repairs to the property. Generally, you will get this number by looking up comparable sales.
The Discount is 10-15% of the ARV and is used to compensate for closing costs such as Realtor commissions and attorney fees.
The Sale Price is the ARV minus the Discount. This is the amount you will net from the sale of the property if it were in good condition.
There are two ways to calculate Repairs: take 30% of the sale price, or create a list of repairs and the estimated cost of those repairs.
The Profit Margin should be 20% of the ARV. This is the amount you expect to receive net of all other expenses.
The Max Allowable Offer is the amount that you should initially offer to the seller of the property as a purchase price.
The last two rows are used to determine the amount you will need to borrow for this project. You'll put this in the Total Investment field when posting a deal.
Detailed Max Offer Formula
There is a second version of the Max Offer Formula that adds some more detail to the calculation.
The Purchase Cost is 1% of the Sale Price
The Holding Cost is 3% of the Sale Price and is comprised of the expenses you will pay while the property is being renovated.
The Closing Costs are generally 3% of the Sale Price and include any fees involved in the transaction including attorney or title company fees and filing fees.
The Fudge Factor is generally 3% of the Sale Price and is used as a buffer for unexpected costs.
If you will be wholesaling this property, you can add an Assignment Fee to line 11. This fee will vary depending on a variety of factors.
Quick & Dirty Max Offer Formula
For those circumstances where you need to come up with a number very quickly. There's a third version of the Max Offer Formula that you can do in your head. Simply take 70% of the After Repair Value and that's your max offer. This method isn't recommended as it can be quite inaccurate but if you're in a situation where you need to make a split second decision, at least you'll be armed with this tool.
Real estate is a negotiation and you may need to move your numbers a bit in order to come to an agreement with the seller. The first number that you can lower is your profit margin and the next would be the discount. Once you've come to an agreement with the seller, you're ready to move forward with your deal.
We generally recommend being transparent with your seller. There are a lot of investors who will present "low ball" offers to try to get a property at a very low price. Sometimes just showing the seller how you came up with your offer will help them understand that you aren't just giving them a random number. By going into a negotiation with data, you'll present yourself to the seller as a fair and informed real estate investor.