I want you to begin your deal at the end – yes, do it all backwards!
Why? Because how can you know how much to pay for a property, if you don’t know how much it’s worth at the end?
An investor sent me a deal the other day, and said he was purchasing a property for 80K, putting 30K into it in rehab, and planned to resell for 240K. Sounds pretty good, doesn’t it? Even with carry and acquisition costs, there was still room in the deal for profit.
The first thing I did was pull sold comparable properties that had closed within a few months and were within a small radius of the property. Nothing had sold in that area for over $140K for months. Whoa! Those numbers don’t support a selling price of $240K.
So I asked the investor why he thought it could sell for 240K if the comps were selling for 140K. They hadn’t thought to look at sold comps. Ouch! That could have cost them a bundle.
So, the first place you start when looking at a deal is the end value! It all starts from Z and works backward to A.
Here are some of the costs of acquiring and holding a deal that you may not have thought of:
- Closing Costs (buy & sell – this means some of them you will pay twice!)
– Transfer tax / points / attorney fees / recording fees/ title search/ title insurance / deed prep / environmental assessment / appraisal if conventional deal / inspector / etc
- Carry Cost
– Taxes / insurance / mortgage interest & principal / electricity / heat / water & sewer / snow / lawn / leaf cleanup/ association fees / accounting / inspection fees if a construction draw / etc.
There are lots more, but you get the idea. If you download the Deal Analyzer, it will help remind you what the carry and closing and selling costs are in the deal, with options to change the values to suit your situation.