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Is this a Deal? Samples

real estate deal
Is this a Deal?

Below are examples of real life scenarios that came up in our Apprentice classes and the computations used to figure out if the property was a deal or not?

Make sure you understand the calculations or work them out yourself first and see if the property is something you would invest in.

EXAMPLE 1:

House with extra lot. $300,000

There are two things to consider here: The value of the house and the value of the lot and any expenses to make the lot buildable so it can be sold separately.

House was worth $250,000 based on comps. Lot was worth $135,000 based on comps. (Figuring in the size of lot, etc) So the house and property total should be worth $385,000 ($250,000 + $135,000)

I figured costs to complete a lot line adjustment would be around $5,000 and transactional costs to finance, hold, and sell would be around $20,000 total. So the total costs would be approximately $25,000.

The value of the house and lot should be approximately $360,000. ($385,000 minus $25,000). They are asking only $300,000 for the property so there could be a potential profit of $60,000. ($385,000 minus $300,000)

This was a deal with a potential profit of $60,000!

FOLLOW UP:

I pre-sold the lot for $127,500 via contract for sale before I bought the house with lot. I completed the lot-line adjustment for $5,000. I listed the house and have a sale pending at $235,000. Net profit should be around $40,000 plus. Bought in August 2005 and closing end of 2005.

EXAMPLE 2:

REO, 3bdr, 1bath, 1300 sq ft. Lot size 9,000 sq ft. Asking $139,900. Market values according to comps show between $141,800 and $146,100. Average= $143,950

Already there is only a potential profit of $4,950 and that doesn’t include fix up costs or repair costs or holding fees,etc.

Upon further evaluation the house would need all new carpet and new paint. It would also need new kitchen cabinets and tiling in the bathroom.

Assuming market value of $143,000,

$143,000 – $30,000 for fix up costs = $111,000

$111,000 – $4,000 in closing costs = $107,000

FOLLOW UP:

Could make an offer for $100,000, but with all repairs, and a very small profit, we decided that this was NOT a deal. Using our suggested formula, your offer would be $111,000 x .70 = $77,700 (about half the current asking price).

EXAMPLE 3:

Joint Venture with Land owner for 5 home development on 10 acre plots with common area

$150,000 land

$60,000 common area development

$15,000 Other development costs

$280,000 Building costs ($100per SF x 2800sf per home)

$5,000 Closing costs $25,000 RE Broker fee

$45,000 Financing costs (pts + 12 months development)

————–

$580,000 cost to build one home

$20,000 contingency (legal, environmental, 15 month development, etc)

$600,000 was estimated total cost per home.

Current homes comp value = $650,000

Profit = $50,000 per home with funds being tied up for 12 months or more.

This could be a deal but it is a risk in the term of length of time involved (12 months or more) and any unforeseen delays or problems with developing.

FOLLOW UP: This was not a deal we acted upon because of the time commitment involved. We can deploy our capital much more profitably.

EXAMPLE 4:

Five-plex being offered at $450,000 for possible condo conversion

I was trying to be conservative — but let’s say they sell for $145,000 each plus $195,000

for the “owner unit”.

That’s $580,000 ($145,000 X 4) + $195,000 = $775,000.

I think you will need $20,000 per door to upgrade a 1975 apartment to a retail condo.

($20,000 X 5 = $100,000)

So that leaves $675,000 ($775,000 – $100,000) less the $450,000 purchase price =

$225,000 potential profit.

Then we figured in other costs:

A realtor at 5% of $775,000 = $38,750;

Condo docs cost $15,000,

Insurance and other fudge factor is $50,000,

Transaction costs of 2% is $15,500;

Holding costs on $600,000 at 10% for one year = $60,000;

Total costs = ($38,750 + $15,000 + $50,000 + $15,500 + $60,000)= $178,750 This leaves one with $225,000 minus $178,750 = $46,250 profit.

FOLLOW UP: The profit would be good if this were a median-priced single-family

residence, but with the time required for conversions and the scale of the project and risks, we think there are better fish to fry.

EXAMPLE 5:

Build a large home on vacant lot 3500 sq ft homes were being built on average. The Comps on houses in the neighborhood were averaging $500,000

Costs:

$315,000 construction cost ($90 per square foot for higher end materials X 3500)

$50,000 lot improvements

$50,000 lot cost

$50,000 financing (15 for 3 pts and 35 for 7 months)

$20,000 sales charge (just under 4%)

$5,000 misc closing costs

$5,000 legal/design

Add a contingency fee of $5,000 and there is nothing left for profit. ($315,000 + $50,000 + $50,000 + $50,000 + $20,000 + $5,000 + $5,000 + $5,000 = $500,000)

Homes on average sold for $500,000 but our costs to build the house would be around $500,000.

FOLLOW UP: This was NOT a deal. Could try to speed up construction to be done in 5 months and not do as many lot improvements to shave $10,000 but we would still not consider this a deal.

EXAMPLE 6

30,000 sq.ft lot with one tear-down house on it. Asking $475,000

When divided, this will be flag lots. There is an 1800′ distance to sewer hook-up for the two houses not yet built.

Comps in area are around $500,000 but could go up to $600,000.

Costs:

Tear down….$20,000 (at most)

Use average of $550,000

$550,000 /4 = $137,500 each to builder when finished.

$137,500 x 3 lots = $412,000.

Subtract holding, tear-down, partition, infrastructure, road. (Figure $55,000).

$412,000 – $55,000 = $357,000.

Less your profit of $?? = your offer.

FOLLOW UP: This was NOT a deal. This was a retail price at best.


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