Real Estate Investment Business Purchase Offer System
Updated: Feb 26, 2019
Operating a real estate investment business is a pure numbers game. In this post today, we are going to be talking about the offer system you have in place for properties that you either intend to wholesale or rehab and sell. In every aspect of your business, you will need a process in order to streamline the activity and increase production for the specific task, placing purchase offer's on properties is no different. In the real estate investment business, you will need to understand specific thresholds, quickly estimate repairs and understand all of the costs associated with a deal in order to quickly produce accurate purchase offers for your clients.
Variables Associated With Producing Offers
To be able to create and place offer's daily in an efficient manner, you will have to have a precise understanding of all of the costs and variables involved in a transaction. As we spoke about previously, this business is a pure numbers game, so the more offers you can place in a day, the more likely you will be to contract properties. However, even if you have a system in place to efficiently create and send offers, you need a process in place to produce accurate offers as well. Here are the different variables associated with a purchase offer:
After Repair Value - The after repair value of the property that you are considering is the most important variable in determining the purchase price for the subject property. The after repair value is the value of the property after strategic renovations have been made or simply the retail value of the property. This value can be derived a couple ways. The first way and the long way is to put together a comparable market analysis yourself and use the comps to determine the ARV of the property. The second way and most efficient way is to work with a qualified real estate agent (or a designated associate) to have them produce your ARV's for you. On our end, within our CRM, we have created a button, that when pressed, send's an email to our real estate agent with the property information, along with photos and he sends us a ARV back within 24 hours.
Renovation Costs - The second most important cost associated with your purchase offer are the renovation costs or the costs it will take to get the property in retail value condition. Estimating these costs usually gives real estate investors the most trouble and either causes them to lose money on flips or offer shitty product when wholesaling. When we are creating offers, we do not need to be perfect when estimating our renovation costs. We just need to make sure we have a system in place to produce repair estimates in an efficient manner. The reason for this, is because within all of our offers, we will make sure that we place a 7-14 home inspection contingency in the contract which will allow us to work through our due diligence process to further evaluate these costs. Here are the 2 ways that we estimate repair costs.
A) Detailed Estimate Tool - This is the tool that we use to put together a detailed estimate of the property, trying to capture each task associated with the scope of the project. For this tool, you will have to have a good understanding of your labor and material costs within your construction department. Estimating repair costs, using the detailed estimate tool is a longer process but will result in a more accurate renovation estimate. In order to work through this process, you will have to utilize the photos that either you or your acquisition manager have taken and work through these photos to put together a scope so that you can assign labor and material costs to each one of these tasks. Below is an example of the document we put together to simplify this process.
B) Quick Estimate Tool - This tool will allow you to create much quicker estimates of the repairs on a subject property but may not be as accurate. We suggest that you add additional contingency into these numbers when finalizing your repair costs for your offer. In order to use this specific tool, you will need to have completed at least 5 projects to have a good understanding of how much repairs cost you in your specific market. The first step of utilizing this tool, will be to create a Data Pricing Chart for all of the projects that you have completed to date. You will want to create an excel document with headers (Property, Level of Renovation, Property Sqft, Renovation Costs, Construction Costs per Sqft). Fill in each of these properties within the excel document with all of the necessary information. You will have to determine the Level of Renovation Categories for each of the properties you have completed renovations on. The Level of Renovation Categories that we use are: Cosmetics, Advanced Cosmetics, Cosmetics/ Mechanical, Advanced Cosmetics/Mechanical, Cosmetics/Mechanical/Minor Advances, Advanced Cosmetics/Mechanical/Minor Advances, Advanced Cosmetics/Advanced Mechanical/Minor Advances and Advanced Cosmetics/Advanced Mechanical & Major Advances. Below is an example of our document that may better illustrate.
Here is an example of the definitions that we put together for each of the Level of Renovations.
Once we gather this data, we will need to put together a pricing chart based on the data from our market and the renovations that we have completed. Rather than explaining, see the final product below of what we created.
Once you are done putting together the documents above, you will be able to use the Quick Estimate Tool. I know this seems a bit tedious but if you put the work in up front to capture the necessary data, it will save you and your Acquisition Manager's loads of time daily. The quick estimate tool is a simple tool, where you basically supply it with the Level of Renovation Price (based on your pricing chart) and the square footage of the property and out pops a Quick Estimate of the repairs on the property. See below for an example of the tool.
3) Holding Costs: One of the most common costs that investors tend to forget is the cost it takes to hold a property over the life of the purchase, renovation and sale. Your holding costs typically consist of: Property Taxes, Electric & Gas, Water, Insurance and any interest costs associated with the transaction. In most counties, searching for property tax information is public information and accessible on the county website. Go to your county website, search for the subject property and find the tax bills for the current year. Your electric, gas and water bills can be obtained by asking the seller of the property for current bills or by calling the companies who supply these commodities. Your insurance estimate can be obtained by calling your insurance agency/broker and having them give you an estimate on the insurance costs based on the coverage you are looking for.
4) Commissions: If your rehabbing and selling the property and you utilize a real estate agent/broker to sell your properties, you will have to pay commissions upon the sale of the property. Standard commission rates are about 6% of the sales price of the property but be sure to check these fees because they very market to market.
5) Closing Costs: When you purchase and sell a property, you will incur closing costs. Depending on how your business is arranged, costs may vary but these are some of the purchase closing costs that you can expect to pay: Prepaid Property Taxes, Abstract Updates/New, Survey Updates/New, Buyer's Attorney Fees, Seller Attorney Fees, Government Recording Fees, Inspection Costs, Transfer Taxes, Origination Fees and Daily Interest Charges From Lender. Be sure to communicate with your attorney and closing company to get a good understanding of the estimated costs for this specific process. Some of the sale costs that you may incur are: Abstract & Survey fees, Attorney Fees, Seller Concessions and Transfer Taxes.
6) Minimum Profit: The last variable that you will want to make sure you account for is the minimum profit that you would like to make on the project.
Below is an example of all of the costs discussed above, used in an analysis to determine your purchase price for the subject property analysed.
Once you have a good understanding of all of your costs, you will be able to properly analyse a deal to come up with an offer price for the subject property you are considering. There are several property analysis calculators out there available or you can create your own that coincides with your other documents. This document will incorporate all of the costs that we discussed above to calculate a purchase price that you can offer to your leads. Here is an example below as to what our Property Analysis Document looks like.
One thing that you do have to understand if you are wholesaling properties, is that all of your buyers have different set ups. What do I mean by that? Some of your buyers may be looking at your property to hold as a rental rather than rehab and sell, so they may pay more for your property. Another buyer may be purchasing in all cash with no hard/private money, so they may avoid these additional costs. Another buyer may have there own construction company so they can rehab a property at half what you can rehab a property at. Just have this in the back of your head when you are running your numbers. Even though a project may not work for you and your set up, it may very likely be a great deal for others in your market with different setups.
Also, if you are planning on wholesaling these deals, make sure to add your fee in before you determine your purchase price. You need to build your fee into your purchase price since you will be selling the product to your buyers at a higher price and making the arbitrage on the deal. If you forget any of these costs or inaccurately forecast any of these costs, your risk of losing money on a rehab or putting out a shit deal to your investors increases dramatically.
I imagine that you thought this blog post was only going to be about putting together purchase offers and sending them out. Well... now you know that you can't put together a proper purchase offer without going through the steps above. Actually assembling the purchase offer and sending it out to the seller is the easy part. As you can see the most time consuming aspect of this process is accurately determining all of the costs associated with the purchase price figure. So now that you have worked through the process above and determined an accurate figure, let's discuss the different ways to efficiently create a purchase offer and get it into the seller's hands. First, let's talk about the different ways to assemble an offer.
Initially, you need to make sure that you have a legal purchase offer document created, depending on the exit that you plan to use. Be sure to have your purchase contract looked over by your real estate attorney to ensure that you are protected.
The old way of assembling a purchase offer was to print the offer out, hand sign it and mail it to the seller. As you can tell this is not the most efficient way to produce an offer and get it into your seller's hands. Our goal in this process is to create the most efficient system to get a deal into the sellers hands, signed and returned to us. There is so much technology available to us today that streamlining this process has become quite simple.
To produce our offers, we utilize our CRM, Podio to input the variables into our contract and within Podio, we can press a button to create our offer. This allows us to speed up the creation aspect of our offers and also automatically create a PDF copy. Once we have the PDF copy created, we then utilize DocuSign to send our offers to our sellers. This way they can receive the contract and sign in electronically without having to collect a hard copy.
As always, create a process, execute that process and continue to make changes to it in order to improve the process. The more you efficient you can become as a business owner, the productive you will be thus improving the overall volume of your business, in return creating more revenue. The more revenue we produce, the faster we scale and eventually the more profit we can make.