How to Determine the Price to Pay for Investment Property

Copyright © 2008 Ralph Marcus Maupin, Jr. (Mark)

As an experienced investor with thousands of properties bought and sold I’ve learned the best way to determine the price to pay for investment property. I compare the price of property I’m considering buying with property that has been sold in a one-mile area within the past six months. This is referred to as “comparable sales”. For example, if you were going to buy a 1000 square foot, 3 bedroom house, brick, with attached 2 car garage, and full basement, you would want to look for similar properties in that one mile radius or closer. In many cases I do comparable sales block-by-block, or street-by-street.

If you are looking at a house that differs in size, square footage, bedrooms you will need to make adjustment in pricing to have a comparable to the target property. For example if the target property is a 3 bedroom house with a basement, and you are using a comparable 3 bedroom house with no basement, you might have put a downward adjustment factor of $10,000 to compensate for the missing basement in order to get a real value of the comparable sale. You need to look at the amount of time the house was on the market (the number of days it took to sell the house). You don’t want to be basing your buy on a house that was on the market for long periods of time. If you use comparable sales that all took 10 months to sell and you are looking to buy the house, fix it up and sell it in 3 months, you sure don’t want to use these houses as “comps” that took 10 months to sell.

I suggest that if you are getting into this business to be a landlord, you consider the finding, fixing, and reselling aspects. I say this because most landlords will be selling at some point in time. Don’t just look at buying houses based on the cash flow or tax benefits, look at it from the point of view that if you were to get sick tomorrow could you resell the property at a profit.

When determining the maximum amount of money you should pay for property there are several factors you must consider. The first question you should ask yourself is how much time you going to put into the venture and what is your time worth? How much time are you personally going to be spending on the buy, rehab and etc? Put a dollar figure to your time. You must also know how much the rehab is going to cost. Even experienced investors will tell you that their rehabilitation costs have run 1-½ more than they expected or estimated. I suggest new investors take thier estimated cost and double it to figure the cost for rehab.

You should also reserve money for breakdowns or unexpected expenses such as someone breaking in and stealing all the kitchen cabinets, the furnace, or all the siding off the house. Don’t forget you might have mortgage costs for the buy and sell. You will also have other closing cost like commissions to realtors, title insurance, title fees and recording fees. All these need to be figured in your cost on the buy. Don’t fool your self into thinking you will be able to buy fix and sell a house in 6 months. Base your buy on cost over runs! If you do bring your project in on budget then you are going to be smiling.

An example of setting a minimum buy price is budgeting $60,000.00 for a house being sold for $11,500. Why do you need an extra $49,500? You have to add on the following costs: Real estate commissions based 6% (3,600.00), closing cost seller pay 6% allowable closing, subject to appraisal (after repaired value), project profit (12,000.00), cost for buyer, (title insurance, recording fees etc) ( 4,800.00). There’s also the cost of mortgage on buy (appraisal, mortgage cost) (4,600.00), use 12 months (taxes, gas, electric, grass cutting, mortgage payments) ( 9,600.00). And of course, rehabilitation cost – est. $7,000.00 (Double cost) (14,000.00)
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This may appear as an extreme example of cost over runs. I have doubled your cost and assumed that you had a realtor sell the house. I am clear as a person who has seen a lot of people come and go in this business, you need to figure your cost high and you need to be able to do your own comps (comparable sales).

 I recommend that people get a real estate license. This is a big advantage because it will give you access to the MLS (listing service), which will enable you to sell properties listed on the MLS. More importantly, it will train you to be a knowledgeable buyer and know first hand what is required to have your real estate transactions comply with federal, state, and municipal restrictions. Plus, you will learn what is necessary to have the transaction be complete and within integrity guidelines. In addition, you will be putting your license with a broker who will be there to train you while doing your beginning deals. It requires 40 hours of classroom training on Michigan real estate, plus passing a test to get your license---even if you don’t end up getting your license. The knowledge you get in these training courses is invaluable.

I prefer to work with licensed investors, especially with challenged properties, because it assures me that the person you are working with has at least a basic level of knowledge of Real Estate. The more knowledgeable a person is, the more likely they are to achieve their goal. In fact some of the investors that have worked with me generally end up getting their license and sometimes even become licensed under the same broker I am. There are many reputable real estate schools.

If you are not a realtor and you are looking for comparables, you can go on to your Internet server and look under real estate, there will be comparable sell section you can use.

Mark Maupin has purchased over 3,500 single-family homes and many multi family properties. Mark teaches real estate investing seminars, and he leads a real estate mentoring program. Ralph Marcus Maupin, Jr. Nick Name ‘Mark’ is one of founders of National Real Estate Network LLC. He teaches real estate investing and Internet Marketing for a local Michigan College. You will find many free resources such as: Free Real Estate Forms, Terms, Articles and Real Estate Investor Clubs Locations at: http://MegaEveningEvent.com. For low cost Michigan Real Estate Investing CDs, DVDs, forms and E-books go to http://stores.ebay.com/Real-Estate-Investing-Guide

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