The Formula
Posted on March 13, 2007 - Filed Under Business |
While navigating this last deal, I wasn’t feeling comfortable.
Was it a problem of qualifying? Let’s pretend the asking price was $500,000. My original offer was for $480,000. The difference in mortgage payment between the two is only $130 per month. Not that big of a deal. From a funding standpoint, qualifying for either $500 or $480,000 is easy.
Was it the rent? Twenty five dollars a day is no problem. I know if the property increased in value even 1%, I would more than make up the money spent.
The deciding factor: instant equity. Real Estate gains are made when a property, valued at a certain dollar amount, increases in value to a new dollar amount. My objective is to get a property, below it’s market value.
For this $500,000 property, the offer at $480,000 would produce $20,000 in instant equity. With a 10% down payment, my $50,000 just became $70,000 which is an increase of 40%. To quote Mr Kiyosaki, "You make money when the property is purchased." which I believe to be true.
What could be done with that $20,000? WonderWoman would find herself employed, rehabbing the property. Redoing the hardwood floors, installing a new kitchen, adding a snow-cone machine . . .
In retrospect, I shouldn’t have countered. From the seller’s standpoint, she can hold out indefinitely. She bought the complex for 1/3 of what it’s valued at now. Her rents more than pay the mortgage plus the insurance and expenses. If it sat on the market for six or even eight months, she probably wouldn’t yield.
Are there other properties? ZipReality.com shows 15 other four-unit properties available in the area, at the desired price range. For certain, those sellers will be more open to negotiation.
Walking into the deal, my formula resembles: Instant Equity + Closing Costs Paid = Happy Clifford
Now if you’re saying "Cliff, you can’t have your cake and eat it too!"
Oh yes I can.
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Comments
4 Responses to “The Formula”
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Are you familiar with Zillow.com and if so, what is your opinion of it? It seems to have come a little late to the national real estate party, but it is revolutionizing how information flows to buyers and sellers.
http://money.cnn.com/magazines/fortune/fortune_archive/2007/02/19/8400262/index.htm
Yes, I’m familiar with Zillow.com
The website is a decent resource; nothing more. The real estate pros don’t use it much, neither do appraisers.
Just my two cents: If you pay $480k for a property that’s listed at $500k that’s not $20k in equity. It’s just $20k below whatever the seller decided to list the property for, a value which many sellers and real estate agents pull out of their ears.
Good Luck! Chris
Chris, you’re correct. The list price is not the same as the appraised value. In my case, the list price was the appraised value. Before extending the offer, I did my homework on the property.