Real Estate Reference Real Estate, How Much Should I Pay For This House?
Tuesday 21 August
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  by Lou Castillo

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  We probably answer this question for someone a couple times every week. The problem is that they don’t have a good formula for determining the most they can pay and still make a profit – so they’re scared to make any offer. Here’s what we use for single family homes:

The (MAO) Maximum Allowable Offer is calculated by first determining what the house will be worth after renovation - the ARV (After Repaired Value); less the rehab dollars required; less the Buy/Sell/Hold (B/S/H) costs; less profit margins.

MAO = ARV – Rehab – B/S/H – Profit

So let’s break that down a little further. To determine the ARV, study comparable sales data. Comparable sales are those properties which sold in the last 6 months to 1 year, and within ½ to 1 mile from the subject house. But other factors must be considered as well. The more characteristics between the properties that are similar, the more valid the data. Make sure that the house itself is similar in square footage, bedrooms and baths, age, style, and architecture. Don’t worry about condition except as it will affect the amount of rehab dollars required. Next, look at the neighborhood and the individual street. Do they look the same? Or is the comparable property on a beautiful street while the subject property is on a street riddled with empty littered lots and boarded up houses? The point is to view the potential investment as your end homeowner occupant will. If they could buy your completed investment on the bad street, or a house on the beautiful street – either for $150,000 – which would they choose? The other house of course. Which means your house is not worth the same – it must sell for less to attract a buyer.
 
     
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