Deal Analysis Overview
- Weed Through With Rough Numbers
- Comparables (aka Comps)
- Rough Repair Estimate
- Rough Operating Expenses
- Rough Profit Margin
Who This Is For
If you are sifting through several deals and want a quick way of finding which ones you should focus on so you can dig deeper and prove it is a good deal. This is for you.
If you are wanting more of an in depth analysis see my page In Depth Analysis.
This is the most crucial part. Nothing, and I repeat, nothing trumps doing the math. Most people think theres some kind of secret magic to getting deals and being successful. Everyone is always trying to get the guru to themselves so they can ask what the secret is. Well my friends the answer is probably not what you were hoping for. It's math!
It's not enough to just skim through it. If you want to make good deals and not do someone wrong you will really learn the formulas. Take note and have a study partner ask you what some formulas are. Do this recursively till you know it like the back of your hand. This will ensure success and keep you from getting duped in the process.
Investing is not a normal transaction. You don't make money after your sell the property as most think. You make money when you buy it! Thats right!!! You make money on the front end of the deal. There is going to be houses you think are horrible that could have made you money and there is going to be houses that look exceptional that couldn't work no matter which way you try. The key is to not get emotionally attached and let the numbers speak for themselves.
We do not have time to do a deep analysis on every property in our list. But we can weed them out by doing some rough figures. If the rough figures look good then dig deeper.
Roughly speaking we are going to look at the comps (comparables). What are other comparable houses going for? Try to compare to as close to exact as you can get. The shortest distance from our target house. Sometimes it will be hard to get comps if it is an unusual house for the area. This happens when someone over builds for the area. When this is the case you may have to go far out to get your comps. Just know that anytime you have to go way out the accuracy of the comp falls.
You can get rough comps off Zillow.com, Trulia.com, Realtor.com, Redfin.com. When you lookup a house scroll down till you see "Recently Sold Homes". You can also get real estate agents to aggregate this data into a CMA (Comparative Market Analysis) for you.
Now you should find comps that are as close as you can get. Try to match:
- Year Built
- Square Footage
- Number of Bedrooms
- Other Rooms (dining, den, etc)
- Number of Baths
- Garage Size
- Features: Granite countertops, hot tub, hardwood floors, fireplace, fence, outside pool, gazebo, guest house, workshop, etc.
- Lot Size
- Location: Dead end, riverfront, mountain view, etc
You may not be able to match all of the features and thats fine, but everything else should be a match or real close. This will ensure the accuracy of our analysis later on. Once you have your comps look at the price per square foot and compare. Is your property less or more? This will tell you whether your property is valued less or more than the others.
Comps also tell you what the ARV (After Repair Value) is capable of.
Rough Repair Estimate
Most generally we are going to be making assumptions off of pictures online or by driving by. When doing this it helps to have some knowledge of what things cost but it is not absolutely necessary. Use an analytical eye to look at the outside roof, foundation, siding, windows, doors. Also when looking inside at corners, walls, ceiling, floors, doors, cabinets, vanity, bathtub, sink, toilet, kitchen appliances, countertops, etc.
Then ask yourself does the repair seem small, medium, or large? I usually call this the 10k,20k,30k rule. If its small it will be 10k or less, if it is medium 20k, and if it's large 30k+. If it needs a large amount of repair then you need to over estimate what your gut is telling you by 10k. You can do this with the small and medium repairs as well to ensure your not under estimating. If the numbers work out in your favor either way thats even better. Remember we are just getting a guess-timate here.
This is the tricky one. You can plug in the proforma numbers (the numbers the real estate agent has) or you can do some digging yourself. Either way we are going to need to know:
- Insurance (fire and liability)
- Miscellaneous (e.g. HOA)
- Property Management
- Repairs and Maintenance
- Resident Superintendent
- Real Estate
- Personal Property
- Trash Removal
- Fuel Oil
- Sewer and Water
- TOTAL EXPENSES
Try to think of anything and everything that you may have to pay for upfront and put it into this list. This will be your Total Operating Expense. It's best to plan on holding this property no less than 6 months and no more than one year. Properties do not always sell right away and if you are going to rehab the property its best to over estimate and deliver sooner. I have heard people have been told they can flip a house in 30 days or less. Not saying it cannot be done, but you would have to have all the moving parts streamlined and that takes time. After a few years experience it is possible.
Rough Profit Margin
Now that we have Comps, Repair/Rehab Cost, and our Total Operating Expenses its time to crunch some rough numbers.
- Take the difference of your Comps and Repair/Rehab Cost
Comps - Repair/Rehab = Total Equity
- Take the difference of your Total Equity and Total Operating Expenses
Total Equity - Total Operating Expenses = Total Profit Margin
Bare in mind what I am showing you here is how to quickly sift through the stack of deals on your desk to find the few that seem profitable. Once your Proforma Numbers seem profitable its time to prove it and investigate more accurately.
- A large rehab project profit should be 20k-30k
- A minor rehab should profit no less than $10,000
- A contract of assignment should profit 5k-10k
Next lesson is In Depth Analysis
References and Citations
- Gallinelli, Frank. What Every Real Estate Investor Needs To Know About Cash Flow. McGraw-Hill Education publishing, 2016.
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