When considering how much I should pay for a property I use the following formula. This formula tells me what I should pay to realize a profit if sold in the current market and, or at any future sale prices. While this formula is based on what the current market will bear it can also be used as a guideline if purchasing long term. For the Chicago Bungalow, I am considering buying, I estimated that I would have to hold it for up to 18 months which included the time it took to rehab and sell.
I begin by researching if the property had been listed on the MLS, as not all distressed properties are. If so, what was the asking price, who owns it (private, bank, trust etc.), how many days on market etc. This information gives the clues as to why it has not sold. In the case of the Bungalow it was priced too high given its condition and the changing popularity of Albany park.
My spread sheet:
A little explanation on my spread sheet. This formula was used to decide on what to offer for the property. This indicates an estimated price to pay of $202,950. With the online auction fees, I paid $218,400, $15,450 over that price. The comps for the area back in 12/2015 indicated a sale price of $527,000. Based on indications of the future market i.e. demand vs. supply, the level of rehab intended, and the recovery of the markets from the reductions in foreclosures and short sales I chose to risk the increase on the purchase price. The costs per sq.ft are the cost to rehab per sq. ft. On next week’s blog, I will tell you about the auction process.