Real estate investors make their money on the purchase of the property, not the sale of it. There must always be a comfortable cushion between the purchase price and the selling price of the property. This cushion price ensures that the project is profitable, even if there are cost over-runs, or a longer than anticipated time on market to flip the property. Therefore, it is crucial to establish an accurate cost of the entire project before entering into a deal. Once you have established repair costs, maximum purchase price, and available loan amount you can negotiate a profitable deal with little or no out of pocket money.

Establishing Purchase Costs

1. Establish an After Repair Value (ARV) for your property.

Use area comps of similar properties, check the listing, and sale prices, on the sold properties, check the time on market. 

2. Calculate Maximum Loan Amount (MLA)

ARV x .65 = MLA

3. Establish an itemized repair list

Include labor and material costs to complete all necessary repairs to the property.

4. Calculate Maximum Purchase Price

MLA – Repair Costs = Maximum Purchase Price

5. Calculate Closing and Points

MLA x 10% = Points & Closing

6. Calculate Optimum Purchase Price

MLA – (Repair Costs + Closing + Points) = Optimum Purchase Price

Buying Property for Little or No Money Down

Factor in the Points & Closing

Scenario:

You have successfully calculated the maximum purchase price of $48,500 and established repairs at $10,000 bringing the project cost to $58,500, which is 59% of the $100,000 ARV.  You are eligible to receive $65,000 as the MLA, giving you to $6,500 to pay the points and closing fees.