- [Seth] Hey this is Seth
from Retipster.com.
You know, one of the questions
that I get from people all the time is
how to figure out what the offer price should be
for a property that you're pursuing.
So say if you've identified a motivated seller,
you're ready to make an offer to them,
you have a pretty good idea for what that property
is actually worth today
or what you would be able to resell it for in the future.
But how do you really zero in
on what your offer price should be?
Well that's what I created this little calculator for,
which you can see at Retipster.com/offerprice.
In fact, you might even be watching this video
on that page right now.
So I'll just quickly so you how this works,
it's pretty self-explanatory,
not hard to figure out.
But to start with,
you wanna get a really good idea for what this property
is worth or what you think you're gonna be able
to sell it for at a future date.
And this is one of those things
depending on the type of property you're working with
if you're dealing with a house
or some kind of a property that's easy to quantify
in terms of comparables,
based on how much income it's producing.
It could be really easy to figure out this number
or if you're working with something like vacant land,
like what I do a lot,
it can actually be pretty challenging to figure this out.
And there are definitely some ways you can do it
and get a reasonably close ballpark figure for that.
I've got a blog post dedicated specifically
on how to do that that I'll link to beneath this video.
But assuming you've gone through all those steps,
and you have a pretty good idea
for what that property is legitimately worth,
you would put that number right up here.
In my case,
I'm actually gonna use a real life example of a property
that I just bought.
So this is a property that the sellers told me
it was worth 80,000
in reality though after looking at a lot of the data
I think it would be legitimately sell
on the high end for probably about 40,000.
So I'm gonna put that in here.
And whenever I'm pursuing vacant land properties,
typically the offer range that I make is very very low.
Usually anywhere from 10 to 30%.
A lot of house investors out there
might just laugh at that
'cause houses are a little bit different.
But again, with the types of properties I'm pursuing
that's the range I'm usually looking at.
I don't think I've ever gone higher than 30%,
not that that's never appropriate
but that's just never something I've ever done.
So in this example I'm gonna say 15%.
So my offer would be $6,000.
And then for closing costs,
so this is basically anything you have to pay for
in order to take possession of that property.
This includes title insurance,
any due diligence you might have to do,
any property inspections or surveys,
say if there's any back due property taxes
or assessments or fees you have to cover
as part of the acquisition.
All that stuff you would add up
and enter right here in this field.
Now with vacant losts,
there's not a whole lot going on.
If I was closing through a title company
and maybe the cost of getting some pictures
and an inspection on the property.
I would total all that stuff up in here
and just for the sake of an example
I'll put $1,000.
And then down here for holding and improvement costs.
So if I was working with a house that I was flipping,
I would include all of the costs that I have to pay
while I own that property.
So this includes ongoing property taxes,
all the costs of improvements, insurance,
anything that goes wrong,
all that stuff would be lumped in here.
So for a house,
if it's a serious renovation project,
I mean heck you could put $50,000 in here.
But again,
in my case I'm dealing with vacant land
and pretty much the only cost that I would have to pay,
if I had to pay it at all depending on how fast it sells,
would be the annual property tax bill.
And luckily with vacant land,
property taxes are typically very very cheap
in the first place.
So, in this case I'll put a couple hundred dollars in there.
And then for closing costs,
we're pretty much just looking at
what you're gonna have to pay to get this thing
through the title company closed and sold to the new buyer.
A lot of times when you're closing
through a title company or attorney
the buyer and seller will split those costs down the middle.
But it doesn't have to work that way.
If you wanted to word the contract in a way
that both parties would accept it,
you could have the buyer pay for all those costs
or you could set it up so that you pay all those costs.
It just kinda depends on your situation
and how you want to handle that.
And I'll also say if you're using a real estate agent
to get your property sold,
you'll also wanna include the agent's commission
as part of this line item.
So if you're just selling a normal house
the typical realtor commission on that type of property
is around 6% of the sale price.
And if you're selling vacant land
the typical commission on that type of property is 10%,
it's pretty expensive.
So if you're gonna have to pay that cost
when you're selling this property,
don't forget to factor that into this number
when you're filling out this particular field.
And I can also just say as a side note,
as a land investor it has been extremely valuable for me
to figure out how to sell land on my own
without using an agent,
especially in the vacant land niche
if you happen to be working in that industry.
A lot of the normal real estate agents out there
are pretty clueless when it comes to land.
They're always thinking in terms of houses
because that's the type of property they normally work with.
And when it comes to land,
they just don't have the network or the know how
to get your property the kind of exposure it needs,
and really to understand land pricing in the first place.
So whatever type of property you're selling,
don't forget that there is a lot of value
in you being able to sell your own property
that you own on your own behalf without using an agent.
And while that certainly takes time on your part,
I don't want to overlook that,
it can also have a big impact on your end results,
your net profit, your return on investment,
if your willing to do the work
and handle that part on your own.
So just keep that in mind.
In this case, again,
since it's a land transaction
and I know how to do this on my own,
I'm just gonna include the cost of the closing
with the title company in here.
$500 in there.
And then when it comes to the sale price,
so it's similar to the market value number you put up here,
you want to be really really honest
and make sure you understand,
as thoroughly as possible,
what this property is actually going to sell for
on the back end.
So if you were really conservative with this number
when you came up with it,
like if you actually have market data
to support the assumption that this property
is actually gonna sell for $40,000,
then you could really easily just crank this thing up
to 100% and assume I'm gonna sell it for $40,000 cash
and they you have your numbers over here.
But I know a lot of times especially with vacant land,
it's good to give yourself a little bit of wiggle room
and not assume you're gonna be able to sell it
for that full market value
or whatever you came up with.
So just to be conservative,
I might put it don't here at like 75%
or if I wanted to be really conservative
I could put it down here at 50%.
But at the end of the day,
whatever numbers I put in here,
the important thing is to look over here
and see the results of the numbers
you input over here on the front end.
So first of all,
what this is telling us is that
our total cash investment in this property
is gonna be $7,700.
And essentially this is just adding up our offer price,
plus the closing costs,
plus the holding and improvement costs,
plus the closing costs again on the sell.
It's just tallying all that together
and saying that based on these figures we put in here,
that's how much cash it's gonna take to get into this deal.
Then the next thing that we see here
is the net profit number.
And that's just taking our supposed sale price here
and subtracting our total cash investment.
And that gives us a net profit of $12,300.
If this actually pans out
that would not be a bad paycheck to get.
And then also return on investment or the ROI,
this is just telling us what the return is gonna be
as a percentage base from the investment
that we put into the property.
And I think that it's pretty important to look at
all these numbers together
and not to fixate on any one of them.
Because for example,
I know whenever I'm doing a land deal
my preference is always to see an ROI
of 100% or higher.
And obviously if it can get to 200, 300, 400 awesome,
I'll take it all day long.
But once this starts getting below 100%,
I don't necessarily automatically say no to the deal,
but I start getting a little bit less excited.
However, another important thing to look at is
what is your net profit gonna be.
It's not necessarily just about this percentage,
but also about practically how much money
are we gonna walk away from this deal
when this thing is all said and done.
If I was gonna offer, you know,
50% of the properties market value
and then sell the thing for 100% of the $40,000 number,
you can see my ROI took a beating
now it's below 100%.
But that's still a pretty nice paycheck to make
and that's something worth considering.
You also gotta consider it's gonna cost me a lot more cash,
it's gonna tie up a lot more money,
I'm gonna have to put a lot more eggs in this basket
in order to get that net profit
and that's what this is reflecting.
It's basically just saying that
I'm getting a smaller bang for my buck overall,
but that still would be a nice net profit to walk away with.
So I think whatever kind of property you're dealing with,
whatever kinds of economics are at work,
in terms of what it's worth,
how much you're willing to offer,
how much you think it's gonna sell for,
this calculator will tell you very quickly
what the results will be of the numbers you put in here.
And if you don't like what you're seeing here,
you just have to go back to this calculator
and start adjusting the numbers
until you do like what you're seeing.
This can be a really quick way to indicate,
hey you're offering too much money
offer less if you want to get a higher ROI
and net profit.
Or if your sale price is too low,
say hey, you're gonna have to sell it for more.
Everything you play with here
will have some kind of impact
on the numbers you see over here.
And obviously, as with any calculator,
the quality of your outputs
has everything to do with the quality of your inputs.
If you don't really know what your talking about
when you put a market value number in here,
say if you put a number in there
that's way way way too high and totally unrealistic,
that's gonna skew everything else
and it's gonna skew your sale price
and it's gonna obviously mess all this stuff up too.
So, you want to make sure you're doing your homework,
and you're not just shooting from the hip,
but you actually have some kind of
data driven educated basic
for the numbers your putting in here in the first place.
But if you do,
then this calculator can be really helpful
just in helping you see very quickly how great
or not so great of a deal your looking at.
If you want to use this calculator at anytime,
all you gotta do is head over to the blog post
at Retipster.com/offerprice.
Go ahead and bookmark it in browser
and you can come back and use it whenever you want
free of charge.
And I hope you find it really helpful.
Thanks a lot for watching
and I wish you all the best
on making your next offer.