Here are the simple steps to determining what to offer on a fix-and-sell or fix-and-rent property:
- Determine the After Repair Value (ARV) for the 30-day sell it now price, or the After Repositioning Value (ARV) based on the cost and structure of refinancing and the pro-forma operating data.
- Determine your required profit margin or retained equity after refinancing.
- Subtract your required profit from the ARV to determine your Investment to Value (ITV).
- Determine your closing costs to buy the property.
- Determine the repair costs from a written estimate by an experienced general contractor.
- Determine the carrying costs.
- Determine any other hard costs, like supervision fee, assignment fee, staging and marketing costs. These are your entry costs.
- Subtract all hard costs from the ITV.
- Determine the soft costs to sell the property to a retail buyer for fix-and-sell or to refinance for fix-and-rent. These are your exit costs.
- Determine your closing costs to sell or refinance the property.
- Determine any buyer incentives that you will offer to the retail buyer, such as paying their closing costs, or the cost of tenant improvements.
- Determine broker commissions to sell the property or to place tenants in the property.
- Determine deferred financing costs for your private money financing.
- Subtract all soft costs from the running subtotal.
- The bottom line is your Maximum Allowable Offer (MAO).
If you pay more than your calculated MAO, then the difference will come out of your profit margin and quite probably out of your pocket (lose money). The hard costs plus the MAO is the total cash that you need to finance the project. The soft costs are paid by your retail end buyer or through a refinancing after the repositioning is complete.
Your total cash should be less than 65% ARV when you are using a hard money lender to finance the acquisition and entry costs. If you are using a private money lender, then your total cash should be less than the maximum loan to value (LTV) allowed by that private money lender.
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