The Numbers Game: Our House-Buying Formula
Real estate is a numbers game! Your success in investing is understanding the market, and knowing what your house is worth and will be worth when you are done renovating it. Ever wonder how to figure out an estimated resale value of a home that you are looking to flip?
Easy answer: Ask a realtor who is experienced in the market. We love working with realtors! I know many people shy away when they see the price tag of selling their home with a realtor, but they come with market knowledge and resources that make it worth it. As an investor, you should build a relationship with a realtor so that when you are buying homes, projecting sell values, or even just need thoughts on a property, they are on your team and ready to help, even when they won’t get a commission at that time.
Do it yourself answer: The value of your home is determined by what other similar homes in your market are selling for, so you need to look for comparable homes in the area, or “comps”. To do this, go on the MLS or Zillow or whatever home site you have access to and search for homes that are currently for sale or sold within 1 mile of your prospective home, have the same number of beds and baths, and are within 500 sq ft. Once you have those filters, look through the photos of the other houses and find ones that have been updated and look similar to what your house will look like at the end. Find 3-5 homes that are very comparable to your finished home, write down the prices, and take an average of those to figure out an approximate resale value once your house is flipped.
Now that you know what the house will resale for, how do you know what to buy the house for? The MOST important thing for you to do to be successful in real estate investing is to buy the house at the right price. And in order to know what that “right price” is, you need to be able to determine home values-- so practice this method and get proficient at running comps and determining a value once your home is fixed up.
Once you find comps, you need to determine how much you could purchase a home for while still having rehab costs and making a profit. We follow a quick, 30-second math rule to narrow down the options to promising ones. It’s really simple: We need to be able to purchase and rehab a house for 70% of what we resell it for. For example, if a house can resell for $100,000, then we need to be all in in purchase and repairs at $70,000. If it needs $30,000 in repairs, we have to purchase the property at $40,000. If the house is listed at $90,000, it’s not worth our time. If it’s listed at $45,000 it’s in the right ball park and we can offer $40,000 and do more research on the house. Obviously those are low numbers and most houses cost more than $100,000, but you get the idea. The formula is (AFTER REPAIR VALUE)*.70 - (REPAIR COSTS) = Purchase Price. Now you are ready to go find a house, so start crunching numbers!
Happy house hunting 😊