Value Purchase Price - MAKING AN OFFER
‘Purchase Price’ of a HUD, VA, USDA, Fannie Mae or Freddie Mac property.
In order to determine ‘Purchase Price’ of the house to be acquired consider:
1. Cost of necessary materials,
2. Cost of hours to fix,
3. ‘Future Market Value’ after improvements, and if an
4. 80% loan on ‘Future Market Value’ recovers materials and hours cost.
By estimating ‘Future Market Value’ one can in advance:
• Predict gain or loss and,
• Refinancing potential.
The
future sale price is a reflection of the hours worked and the cost of
materials. What is the highest selling price after the necessary
repairs: VITAL to determining ‘Purchase Price’.
Asking Price at
Auction for H.U.D. (Housing and Urban Development), V.A. (Veterans
Administration), USDA (Department of Agriculture), Fannie Mae and / or
Freddie Mac properties, may or may not, reflect value (all expenses
directly and indirectly related to the property purchase).
Important
to have a clear idea of all expenses directly and indirectly related to
the property and what ‘Future Market Value’ the property will reflect
after improvements. Sources for the possible sale price after
improvements are real estate brokers and companies that rent property.
These can provide recent sales and rental home data; all comparable to
the house (property) you’re planning to purchase.
Appraisers practice three main methods of estimating the value of something namely:
1. The Comparison Approach,
2. The Income Approach, and
3. The Cost Approach.
·
Comparison Approach compares one property to comparables or other
recently sold properties in the area with similar characteristics.
· The Income Approach allows investors to estimate the value of a property based on the income the property generates.
· The Cost Approach value is equal to the cost of land, plus total costs of construction, less depreciation
None of these approaches is suitable to value a dilapidated property
Estimating
the VALUE of a Bank R.E.O (Real Estate Own) or an abandoned property
using the: Comparison Approach, Income Approach and Cost Approach, the
three main methods of estimating the value of something, used by
Appraisers is difficult in part; after all, the property is more often
than not in disrepair. If the property does needs no repairs or small
repairs, estimating value based on the income the property could
generate its possible.
Three (3) approaches To Purchase Price Value
1. Advertised Price= Value
Value= 1year gross income (property needs no improvements)
% CAPITALIZATION RATE (CAP RATE).
2. Offer to Purchase Price = Value X 80%
Value = Future Market Value
% CAPITALIZATION RATE (CAP RATE)
3. ‘Offer to Purchase Price’ = ‘Future Market Value’-minus-COST
Future Market Value =1 year gross income
% CAPITALIZATION RATE (CAP RATE)
First Approach to Purchase Price Value
1. Advertised Price = Value
[Value = 1year gross income (property needs no improvements) divided by % CAP RATE].
How to know if the 'Asking Price' for a property reflects Value? For a home that does not need repairs or repairs needed are minimum estimate how long to recover the purchase price by dividing 12 months of net income by 'The ASKING PRICE' and determine if the property would generate an average capitalization rate of 8% to 10%.
CAP RATE = NOI (net operating income) / Value (Purchase Price).
The higher the Cap Rate, the faster one recovers the Purchase Price.To calculate the capitalization rate, you need the property's disposable net operating income. You must first calculate the net income from the property, subtracting all expenses directly related to the property (excluding mortgage interest, depreciation and amortization) from the property income.
1. Property asking price $ 100,000.00
2. The property will generate gross income of $ 12,000.00 per year
3. The property will have expenses of $ 3,600.00 per year, and
4. Property does not need repairs or repairs needed are minimum
Conclusion:
1. NOI (Net Income) is $ 8,400.00 per year ($12,000 minus $3600 in expenses).
2. Capitalization rate is 8.4% ($ 8,400.00 Net Income / $100,000 Asking Price = 8.4%)
The 'Asking Price,' of $100,000.00 (with a cap rate of 8.4%) is 'Value' and it is right at, in this situation, as Sale Price.
Now Suppose you are trying to purchase a property that has an advertised price of $115,000 and you’ve established similar homes rent for $900.00 per month. The home doesn’t need repairs to be rented it out and you wish to recover one tenth of the purchase price per year. Is it or is it not worth buying at $115.000 'Advertised Price'.
1st figure the Cap Rate.
Cap Rate = $ 10,800.00 (12months Rent Revenue) / $115,000 Asking Price = .09 Or 9% CAP
2nd figure VALUE.
Value = $ 10,800.00 (12months Rent) / 9% Cap Rate = $120,000
An offer to purchase at or below $120,000.00 is acceptable.
H.U.D. (Housing and Urban Development), V.A. (Veteran's Administration), U.S.D.A. (Department of Agriculture), Fannie Mae and / or Freddie Mac believe they price their properties reflecting the cost of repairs, but that price certainly does not take into account:
• If ‘Profit’ after improvements or losses on future sale or,
• If after improvements one can refinance 80% of value.
Second Approach To Purchase Price Value
[Value = 1year gross income (property needs improvements) divided by % CAP RATE].
By estimating and multiplying Future Market Value and multiplying by 80% one can estimate if the property can be refinanced to at least recover the cost of necessary repairs and purchase.
Suppose you are trying to purchase an R.E.O. (Real Estate Owned) home and you’ve established:
Similar homes in good condition rent for $1,200 per month with a 10% CAP RATE. And you figured
$20,000 total cost of Repairs.
Value = $14,400 (1year gross rent; $1200/month) / divided by 10% CAP RATE = $144,000.
Offer to Purchase Price = $144,000 x 80% (minus) $20,000 repairs = $95,200
*Refinancing at 80% of $144,000 recovers $95,200 Purchase Price and $20,000 in Repairs.
Third Approach To Purchase Price Value
3. ‘Offer to Purchase Price’ = ‘Future Market Value’-minus-COST[Future Market Value =1year gross income x % CAP RATE]
Auction houses from H.U.D., V.A., U.S.D.A., Fannie Mae and / or Freddie Mac are properties that need a lot of improvements and the ‘Price Value After Improvements’ of these discounted houses depends on:
1. Necessary repairs,2. The hours it takes to fix it,
3. How much it can be sold after improvements and
4. If one can refinance for 80% after improvements.
Suppose you are trying to purchase an R.E.O.’ (Real Estate owned) home and you’ve established:
- Similar homes in good condition rent for $1,200 per month
- The R.E.O. home needs $20,000.00 in minimum repairs to rent for $1,200.00 per month, and
- It will take 1,000 hours of intense labor to bring it to par with other similar homes.
‘Offer to Purchase Price’ = ‘Future Market Value’-minus-COST
Future Market Value =1 year gross income
% CAPITALIZATION RATE (CAP RATE)
Where:
· $1,200 per month are future rents
· 10% % CAPITALIZATION RATE (CAP RATE)
· $20,000 are total ‘Repairs COST’
· 1,000 total hours at $20/hr- ‘Hourly COST’=$20,000
‘Future Market Value’ = $14,400 year = $144,000
10% (CAP RATE)
‘Offer to Purchase Price” = $144,000- minus-$40,000 (repair cost)
‘Offer to Purchase Price” = $104,000
