You can use whatever formula you want. The one you mentioned would return a profit of $20k (in holding and some other costs) on each deal. But I do not know how realistic that is on $50k houses. Using the formula, you could end up offering negative amounts!!!
As you go down market you will find that some costs become a large percentage of the total. Certain fees are fixed and are not proportional to the size of the deal.
You will also notice that many lenders will not write loans for less then 50K. Hence an area of homes all selling for 50K or less will have trouble attracting finance. Maybe a local bank but otherwise the sources are limited. If you can not finance the places then you have difficultly making the deals work (in or out).
Seller financing and land contracts become more common.
Hey,
You can use whatever formula you want. The one you mentioned would return a profit of $20k (in holding and some other costs) on each deal. But I do not know how realistic that is on $50k houses. Using the formula, you could end up offering negative amounts!!!
I would use ARV x 70% -costs=offer.
So if the house is worth $50k and needs $10k:
Yours: $50k-$20k-$10k=$20k
Mine: $50k x 70% - $10k=$25k
I did not include hold costs etc.
Thanks Bruce!
But wouldn' t your holding cost be included in the 70% formula. It looks like the 70% formula can work in any area.
Hey,
Always include ALL COSTS in the formula.
In my example, I did not include holding costs (because I did not want to confuse the issue) and I just want you to be aware of it.
Good hunting!
General comment about 50K and under.
As you go down market you will find that some costs become a large percentage of the total. Certain fees are fixed and are not proportional to the size of the deal.
You will also notice that many lenders will not write loans for less then 50K. Hence an area of homes all selling for 50K or less will have trouble attracting finance. Maybe a local bank but otherwise the sources are limited. If you can not finance the places then you have difficultly making the deals work (in or out).
Seller financing and land contracts become more common.
John
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