Value Purchase Price

MAKING AN OFFER ON A HUD, VA, USDA, Fannie Mae or Freddie Mac property.

In order to determine ‘Value Purchase Price’of the house to be acquired, one must 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)
% CAPITALIZATION RATE (CAP RATE).

This formula is for a home that does NOT need repairs or repairs needed are minimum with standard value of comparable homes straightforward to discern. it uses a CAPITALIZATION RATE (CAP RATE) and property gross income versus traditional net income.

Many investors use the CAPITALIZATION RATE (CAP RATE). The capitalization rate is used to estimate how long to recover the purchase price of a house that will be rented; estimating value based on the income the property could generate.

CAP RATE = NOI (net operating income) / Value (Sale 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.

Example: you (as an investor):

1. Buying a property for $ 100,000.00,

2. The property will have gross income of $ 12,000.00 per year and

3. The property will have expenses of $ 3,600.00 per year.

This would give you a NOI (Net Income) of $ 8,400.00 per year.

To calculate the CAPITALIZATION RATE (CAP RATE)you would divide the NOI (Net Income) of $8,400.00 by the purchase price of $100,000.00, which gives you a capitalization rate of 8.0%.

$ 8,400.00 = 8%

$100,000.00

(CAP RATE = NOI (net operating income) / Value (Sale Price)

But, suppose you are CALCULATING the ASKING PRICE VALUE of a house at auction or an abandoned one; one then has to divide gross operating income (estimated) by the capitalization rate (estimated).

If the Advertised Price is on a house that does NOT need repairs by simply dividing 12 months of net income from the property by an

average capitalization rate (Cap Rate) of 8% to 10% derives plainly if

The ASKING PRICE as reflection of VALUE.

Suppose you are trying to purchase a house that has an advertized 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.

$115,000 (Advertised Price) = Value

VALUE = $ 10,800.00 ($ 900 / month for 12 months)

.10 Or 10% capitalization (CAP RATE)

Advertised Price = $115,000

Value =$108,000.

An offer to purchase at or below $108,000.00 is acceptable; paying

‘Advertised Price’ implies paying 6% above value.

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 ant ‘Profit’ after improvements or losses on future sale or,

• If after improvements one can refinance 80% of value.

Second Approach To Purchase Price Value

2. Offer to Purchase Price = Value X 80%
Value = Future Market Value
% CAPITALIZATION RATE (CAP RATE)

By estimating and multiplying Future Market Value by 80%,one can estimate if the property can be refinanced to recover the cost of necessary repairs.

Suppose you are trying to purchase a ‘Bank R.E.O.’ (Bank Real Estate owned) home and you’ve established:

· Similar homes in good condition rent for $1,200 per month.

· 10% % CAPITALIZATION RATE (CAP RATE)

· $20,000 cost of ‘Total Repairs’

Future Market Value = $14,400 (1 year gross rent; $1200/month)

10% (CAP RATE)

Future Market Value = $144,000

Offer to Purchase Price = $144,000 X 80%

Offer to Purchase Price = $115,200

By Offering to Purchase Price at $115,200 (80% of Future Market Value of $144,000) refinancing future loan to value, recovers the $20,000 spent in ‘Total Repair COST’.

Third Approach To Purchase Price Value

3. ‘Offer to Purchase Price’ = ‘Future Market Value’-minus-COST
Future Market Value =1 year gross income
% CAPITALIZATION RATE (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 in bad condition ‘Bank R.E.O.’ (Bank Real Estate owned) home and you’ve established:

· Similar homes in good condition rent for $1,200 per month,
· the ‘Bank 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.

Example:

‘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

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