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David: All right analyzing deals.

Mike: Let's talk about it.

David: Let's talk about analyzing deals today. If you are brand-new, how would you teach this to somebody?

Mike: Yeah, let's look from that perspective.

David: Absolutely.

Mike: I guess the first thing when I'm brand-new is- the first thing that comes to mind is how much do I offer? I'm overwhelmed like I don't know what's this property even worth.

David: What's it worth? How do I know what it will be worth? or how to comp it, what does that even mean?

Mike: I don't even think that really enters my mind is what it will be worth. It's just like what is it worth to somebody else? How am I gonna sell-?

David: How do I get a-

Mike: What can I sell it for? What should I buy it for?

David: How do I profit off this?

Mike: Yeah.

David: Yup.

Mike: Okay, so the first thing- first thing first, you have to figure out, in my opinion is what the property will be worth. So, almost always-

David: You gotta start with the end in mind.

Mike: Exactly. Almost always in this business, you're going to be buying properties that are distressed in some way. I mean, I would say almost 95% of our deals Dave are distressed properties, meaning there's something that needs to be repaired, something that needs to be updated or fixed. I mean again, something is wrong with the house, could be just landscaping super super overgrown, could be there's a hole in the roof and there's been water leaking in it for 5 years and it's just destroyed inside. It could be something as simple as it's just outdated so again, those are the nice ones we call them like grandma houses, when it just looks like a time capsule from the 1960s. Everything's in good shape, but it's just really really old. So again, it's just not- it's not going to pull the top value- the top market value. So, what you need to do is envision that house in the best possible light.

David: Yeah, highest and best use basically.

Mike: So, what we do is we look at similar properties, they're called comps. So, we look at comps that are the nicest properties or not the nicest but your kind of top dollar comps, so what could the best possible outcome be for this house? What's the most I could sell for?

David: Not necessarily the highest though.

Mike: Right, right, right.

David: You know but like best, so let's say that you got-

Mike: That's very- this is very important. It's a very important distinction.

David: Yeah, cuz let’s say you got three houses on the street that have just been rehabbed and they sell for 290, 295 and 300, okay? I look at that as hey, you're pretty safe between 290 and 300, so our ARV is 295, right? It's a safe bet.

Mike: Our after repair value, correct.

David: It's not saying could I do more than these others and get it to 325? Well yes, but then what ends up happening is you spend more money to get it there and you lose profits anyway. It's usually not worth it so yeah, just keep it simple.

Mike: I would say even more complicated than that is what's going to happen in real life?

David: Right.

Mike: You'll see 290, 295, 315 and then one that's at 360.

David: Right.

Mike: And then there's a bunch around like 270, 260's, so then you're gonna say well, I think that-

David: What's the most realistic outcome?

Mike: Right, so 360 is possible but you're-

David: It is. Absolutely possible.

Mike: But you're not going to use that as your ARV because quite frankly no rehabbers' going to come in and say oh, you're right one sold for 360, I'm going to go ahead and invest $300,000 in this house. Like, investors are not gamblers so we want to be confident in our decision that yes, we can hit, like Dave said, 295. 295 is a number I know I can hit when I invest in this property, so that's kind of how you figure out what the after repair value is so you have to compare it to the comps. The other thing about comps is you want to make sure you're comparing like properties, so you've got different size square footages in the same area within a half a mile or less. You've got different floor plans, different ages of different condition etcetera, etcetera. So, you have to make sure you're comparing things that are pretty similar right? I mean, is there something else I'm kind of missing on that Dave that's just been sitting on your head?

David: Not at all man.

Mike: Yeah, so the size of the house, the lot, and the condition. I mean, those are the three things that are going to yeah, I mean that are gonna factor into the price of the property.

David: Yup.

Mike: So, where do we find similar properties? We- one, when we started, we used to have to have access to the MLS or you could ask an agent, so we do that. Another one is Zillow, now you're not going to just pull up Zillow and look at those estimates. Those are numbers that-

David: Yeah, you can see the recently solds.

Mike: That's where you're gonna go on Zillow. Recently solds in Zillow is helpful.

David: It's not going to have all the data in there though, it's limited. It's not- I'm not saying that you couldn't use it, you could however you would al- you always want to see the biggest picture, right? You want to see the most amount of comps and the most amount of data to get the most educated understanding of what it could be. It's always a guess, right? It's a guess cuz you don't know what it's going to be worth until it sells, but you can get a pretty good, educated guess. So yeah, we love using Propstream, it'll comp properties nationwide which is really cool, and it pulls the same data that our local MLS does, and your local MLS does, wherever city you're in, assuming it's US right? So, you know, if you have MLS access and you're an agent or a broker, great you already have the ability to run comps. We both have access, Mike's actually a broker, I'm neither however, we both use Propstream to run our comps because it's the same data. It's cleaner to the look at and it's easier to use and it's all in one place.

Mike: Well, it's almost embarrassing cuz I mean, I am a broker and Dave you're very good at running cops too. I like Propstream because it gives you an estimated value that is usually pretty close to-

David: Pretty close, yeah.

Mike: To the value that we come up with after we look at all the other factors.

David: They have a really good-

Mike: I don't know how they do it though.

David: Good way of determining it. Yeah, but it's very close.

Mike: Yeah, they're very very good. So, we use Propstream, check out- do we have a link on here?

David: Yeah, it's on the screen.

Mike: Okay, cool a bitly link make sure you know that it is case sensitive.

David: No, it's not.

Mike: Bitly links are.

David: Are they? I did not know that.

Mike: Oh yeah, I'm not a big fan of bitly links because of that.

David: I don't think that's the case man. You sure?

Mike: I promise you it’s the case.

David: I did not know that. Well, it's in the description anyway though.

Mike: Click on the link.

David: No big deal.

Mike: Whatever, so find that and Propstream, do we have- is there like a promo code we can offer?

David: No, it's just the link.

Mike: Just the link?

David: But the link gives them a 14- or 7-day free trial.

Mike: Awesome, so make sure you use that link and-

David: They can get a free trial for it.

Mike: Then you can try it out if you want to check it out. Cool.

David: So, that's basically where you start though. You find the ARV or determined it by running comps.

Mike: Yeah, what's the highest possible- not the highest possible, what's the best case that an investor would agree with?

David: The best case. Most agreeable by as many people as possible.

Mike: Right, so knock out your top 1 or 2, and you can throw out even your bottom low two. I mean, you just do, you just gotta.

David: Doesn't matter, you’re averaging it and yeah, but basically what is it going to be worth after we make these repairs? So, you do that by finding comps. Now, Mike said that we're going to find those comps and then we're going to use those to determine it, but we do want to take a second to talk about comps, right? When we run comps, we're looking for some very specific things, okay? We are looking for recent sales. You cannot pull comps that are 8 years old, that's worthless. You got to look at the recent sales. Also, we are searching by proximity, we don't want a property that's eight miles away. We are trying to find these comps that are close, and they are recently sold. There's a couple other things that we look for, but I don't want to drill down too deep on this because it's not necessary. The only other things essentially that we look for are similar size, similar bed and bath count, can't compare a 2-bed to an 8-bed. Come on, got to be very similar and then last but not least would be school district. So, square footage, bed and bath count which really is each of their own, but I'd cluster them and then last would be the school district.

Mike: And school district, something kinda specific here in St. Louis and again, you're gonna have to know your area just by networking and-

David: It just depends and that's the thing it's- there could be cities that are more- that are worse, right? It's just school districts matter.

Mike: It's important here.

David: Yes.

Mike: It is for us, it's very important. So, yeah you want to look over those school district lines. Alright, so we run our comps.

David: So, we find the like properties guys to then run our comps.

Mike: All right. So, what's the next step in analyzing deals?

David: Okay, so now that we have our ARV because we ran our comps and we know hey this property fixed up should be worth this amount, okay. Once we have our ARV, we need to use a simple formula to help us determine the offer this is called the MAO formula, and the MAO formula is an acronym or its initials for maximum allowable offer.

Mike: It's sorta an acronym, is it?

David: Isn't it? Yeah, I think so.

Mike: Acronym is the initials, I'm like 90%- I say it all the time so hopefully that's right.

David: Yeah, I think that's what that is.

Mike: Acronym.

David: BRRRR.

Mike: An abbreviation formed from the initial letters of other words.

David: There you go. That's an acronym baby.

Mike: Maximum allowable offer is an acronym.

David: That's right.

Mike: We got it.

David: Learning here as we go, that's right. So, we're gonna use this simple formula to determine the maximum amount that we're going to offer. Now, we're typically not going to offer that amount, we're going to offer lower because the first word in that equation is maximum and we don't really want to offer that right out the gate. We will maybe wanna offer that later or have wiggle room to get to that number but in the beginning we're going to offer less. So, what does that- what is the MAO formula look like? Well, I'm going to spell it out: MAO equals you're ARV, multiplied by your discount rate minus your repairs and minus a wholesale fee if in fact you’re wholesaling. So, MAO equals maximum allowable offer, that's equal to the ARV or the after repair value, which you get from your comps, multiplied by a discount rate which is typically going to be around 70%. Now, it varies a little bit, and we'll get into that but for sake of simplicity in conversation, we're going to call that 70%, and then we're gonna take out our repairs and then a wholesale fee if we are wholesaling. So, in order to use this MAO formula, this maximum allowable offer formula, you need a couple variables. You need to have your ARV, which hopefully you start with and you do so by- you determine that number by running comps and finding similar recent solds that are very very similar. Similar bed, similar bath, within a hundred or two hundred square foot on the street or a street over but very close and that's going to be your ARV. Next, you're going to have to have- or multiply that by a discount rate, we always default to 70 or 0.7%, 70% however, it's a sliding scale and it can go down to as low as 10% and it typically doesn't go higher than 80% though. There may be sometimes when it does but very very rarely. Typically, though we look at it like, you know, 60, 70 or 80 or even 75, somewhere in that range but 70 is a good default to start, okay. We're gonna leave it at that for simplicity, and then next you're going to subtract out your repairs and your wholesale fee. So, we're going to talk about the wholesale fee last but the repairs is a variable that we're going to need to teach you and you're gonna need to learn. So, the repairs have a lot to do with the ARV you chose. If you are looking at properties that have ARVs between 110 and 160, and you are looking more towards the 110. Well, that's probably a lot less repairs than the- also the ones on the street that are 160. It's just common sense guys.

Mike: So, and this is- it takes a little bit of time to learn this but you do, when you're running comps you want to try to pull up and look at pictures of the property how it's sold. So, a 110 to a 160 here in St. Louis, that might be an area where-

David: You could have that on the same street for sure, but you're going to have two totally different types of houses.

Mike: That's my point. So, that might be an area where you're going to see granite versus just a regular-

David: Home Depot.

Mike: -hoods, whatever countertop, the cheap laminate countertop. That might be that price point. It might be the difference between, you know, having a rehabbed house and not a rehabbed house, meaning it's in nice shape but it's got you know, some five-year old appliances. It's all black appliances and you know, the cabinets look- they're in good shape but not new, versus having someone who went and rehabbed it. So again, you have to look at some of the pictures and kind of figure out what's going on in those houses to generate that sale price or that value, so yeah.

David: Yep.

Mike: That was all I had to add on there.

David: No, that's a great point. So, the repairs can vary depending on the ARV you chose. So, in the- it's always a good idea to kind of do your ARV and your repairs at the same time, and again, when you're running your comps, look at the high-end homes and those price points, look at the mediocre, like maybe they were rehabbed recently so they're nice, but they didn't go all out and you're going to find those price points. So, when you’re determining what you think yours is going to be worth in the end, also keep in mind that the cost to fix those to those different price points is going to be different. That's it, keep it simple. So, when you are ready to determine your repairs, it's going to have to do with how nice you envision it to be and you're going to have to estimate that. Now, there's a couple ways that Mike and I like to estimate.

Mike: Just dirty rule of thumb, off the cuff, easy way to do it is based on your square foot, is what I'm going to say. So, we take for maybe a low-end rental rehab, we'd say maybe it's going to cost us $15 per square foot, right? So, if we got a thousand square foot house, say $15 per square foot to rehab but that's going to be a $15,000 repair budget. And again, that is low. That is- we've done this over a hundred times in the BRRRR method where we buy, rehab, rent, refinance, etcetera and 15,000 is pretty close to our average that we spend on properties. So, I mean that's a pretty good idea-

David: For a rent ready.

Mike: For a rent ready property.

David: For a rent ready guys, yup.

Mike: But that is a very cost-effective rehab too, we are pretty good, or we like to think we're pretty good at saving money and cutting corners, but still getting a pretty high-quality product when we're finished with it.

David: Yup.

Mike: So, that's the square foot multiplier and that's 15 for a rent ready. This can go up for a retail ready to $25 a square foot for you know kind of a mid-grade rehab, 25 to $40 a square foot. For a high-end rehab you could spend 60 to 75, 80 dollars a square foot.

David: That's right.

Mike: For gutting a property down to the studs if it needs a full rehab, you might even spend upwards of $100 a square foot. I mean, if you're gutting it to the studs, high-end.

David: High-end, high-end, gutting it down, it could be- that's high. It could be though, it could easily be that high. I mean, I basically did that on my house, that's an example.

Mike: There you go.

David: So, but yeah typically what we're looking anywhere from 15 to 50. That's a really really accurate range. Is it ever less than 15? In very rare circumstances if it needs paint and carpet maybe 10 a foot.

Mike: Yeah, but I mean even that guys.

David: There's always going to be something you're going to have to do. So, either way though, the first and easiest way I'd say not easiest but most accurate would be the square foot multiplier. So, you take the square footage of the property and you multiply it by 15, 20, 25, 30, 40, 45, 50, whatever it is, and you can determine that with experience and/or by getting somebody that knows what they're doing to come out and give you a bid, okay? So, that's the first way, the square footage. The second way is the rule of fives and it's not as accurate but it's easier, right? So, it depends on what you're going for but if you're just trying to like get a quick estimate from the hip and you're okay if it's five grand off but you want to know hey, is this property going to be 15 grand or 50? This is a great approach. So, everything in that property that needs to be fixed that's big, a big item is five grand and if it's a really big item then double it, it's 10 grand. So, a roof depending on the size of the house, is it a 1000 square foot house or a 2000 square foot house? 5 grand or 10 grand for the roof. Does it need a kitchen? minimum of 5 grand if it's very small, if it's a big house it's going to be a $10,000 kitchen. Bathroom? five grand. The whole house needs flooring? five grand. Does the whole house need paint? five grand, okay. Typically, I'll include my lighting fixtures with my paint because paint isn't going to cost you that much.

Mike: Well, and like we said so your figure may be a little high on that but guess what? You're probably a little low on 5 grand for-

David: On the kitchen or the roof.

Mike: Yeah, exactly. For a bathroom or a roof.

David: Right.

Mike: So again, it just- it works out. So, five grand, five grand, five grand, it’s an easy way when you're walking through a house, especially to come up with those numbers.

David: Love it.

Mike: No, it's great and yeah it ends up being a pretty good rule of thumb.

David: So, we call that the rule of five. Five for small items, ten for large. So again, a kitchen it could be 5, it could be 10. Is it big? is it small? That's going to be your difference in materials and labor if it's twice the size. So, the rule of fives is just a great way to walk through a house and just say hey, we need windows, it's gonna- you know, windows and a roof, that's five grand. We need a bathroom, that's five grand. We have a big kitchen, that's gonna be 10, so now we're at 20. We got to do paint and light fixtures, that's 5 and we need flooring, that's another five, so we're at 30, 35 grand, that's our estimate. Now, we're going to be more accurate doing a square footage approach but again, if I'm just trying to determine hey does this place need 15 or 50? Off the hip, to get an idea, the rule of fives is a great way cuz you could also talk to the seller on the phone or via text or whatever, you don't have to go there and- or look at photos to determine the rule of fives. How many rules- how many fives are seeing- are needed? Is there a third approach that we teach Mike? I can't remember.

Mike: I don't think so.

David: I feel like that's basically the simplest way.

Mike: I mean, we've also got cost spreadsheets available where we kinda say okay this is what this costs, this is what this and you can go through line by line.

David: That is, that's the third approach.

Mike: And that's probably the most accurate.

David: That's a repair estimate sheet that we provide in our course.

Mike: But that one again, it's just- it's very time-consuming and quite frankly for a newer wholesaler or newer investor, it's probably not quite worth the time because what we- well I guess the other third way or the fourth way would be is to get someone else's opinion, which is bring in a rehabber.

David: Yeah, get a bid, get a quote.

Mike: Exactly, get a quote.

David: Call a rehab company, a construction company that does this type of work or a handyman or whatever it is. Have them come out and give you an estimate, get a bid. Usually, they're free but if you abuse that power and you have somebody go give you 15 estimates, they're going to probably stop giving estimates for free and charge, but even if you have to pay somebody $100 to have them come out to help you with that number, that's okay, you want to get these numbers right. So, the two things that you really can't screw up is your ARV and your repairs, cuz if you do screw up either one of those, the equations off, so you want to be as close to the ARV as you possibly can get, and that's a guess, we get it, but you can get skilled at guessing very close, right? as well as the repairs. If you're ARVs off 20 grand and your repairs are off 20 grand, that could be the difference of a $50,000 offer or more 60, 70, 80 cuz you're multiplying that ARV by a percent, alright? So, to recap, MAO maximum allowable offer equals your after repair value, your ARV multiplied by 70%, your discount rate which has a little bit of a sliding scale based upon basically just the neighborhood, the part of town. Then you subtract out your repairs and then last but not least, your wholesale fee. So, the wholesale fee equation is a whole different equation, same equation just you take out the wholesale fee as well, but the reason that I want to pause for a quick second is this MAO formula is what most investors are looking to buy at without the wholesale fee. So, if you're able to go get a deal under contract and you're either at or below your maximum allowable offer assuming you're ARVs correct and you multiply it by 70% and you subtracted out your repairs, that's basically what Mike and I would be willing to pay for a rental or a flip in our area all day long but if you're wanting to wholesale it, you got to then take off even more money because you have to be able to sell it to me, right? So, ideally, you're going to take off another 10 or 15 thousand dollars, maybe less, maybe more off of that number which makes your maximum allowable offer go down even more, okay? So, investors, landlords rehabbers, we're willing to pay ARV times 70% minus repairs, but as a wholesaler you have to add that additional fee, which you're going to subtract off of it to get your MAO. And that could be 5,10 or 15 grand. So, that's the explanation, I'm going to pass it off to Mike. Mike, once we determine our ARV, we multiply it by our discount rate, we subtract our repairs and we subtract our wholesale fee, we are left with an MAO.

Mike: Perfect.

David: So now what?

Mike: So now we know the maximum-

David: That's the key word there.

Mike: -amount that we can offer the seller. So, let's just say that number comes out- so you haven't given any examples, right? Let's just say that our maximum, that number comes out to $100,000, that would be the most that we could offer and still wholesale that property for our profit, for our wholesale fee. So, we would not want to start there, we do not want to start offering $100,000. We have to come off of that number with our offer. We would probably want to go down to I would say maybe another ten thousand.

David: 85, 80, yeah.

Mike: 85 to 90 thousand dollars, you're gonna want to come back off of that number, again 5, 10, 15 thousand dollars for a couple reasons. One, this gives you some buffer room in your repair estimates, so if you're new-

David: I love that.

Mike: If you're new in this, you probably aren't to the dollar on your rehab numbers yet, so this is going to help you with that. It's going to give you a little bit of extra negotiation room when you're selling your wholesale deal, you're selling it to the buyer.

David: Yeah, let's say you estimated at 30 but it's 36 and you only have a $5,000 wholesale fee and you're going to be upside down in that. So, I love that so have a- add a wholesale fee and it gives you padding if you were to screw up the numbers elsewhere. Love it.

Mike: You also, when your underneath your maximum allowable offer, that gives you some room-

David: More padding.

Mike: To go back and negotiate with the seller.

David: Right.

Mike: Because that seller probably isn't going to like that offer either.

David: Nope.

Mike: And everyone knows- wants to negotiate, right?

David: Everybody does.

Mike: So, everybody wants to say oh you- well, you know I really wanted a hundred, you said 90, can you do 95? You know or something like that. Everybody wants to kind of meet in the middle and do stuff like that so it always makes sense to come in lower than what you really can do just so you can come up a little bit.

David: Absolutely.

Mike: And again, some-

David: Even if that coming up is only a thousand or 2,000 bucks, nobody likes dealing with people that aren't willing to budge.

Mike: Your objective here again, and we talked about this in a totally separate topic, but you're trying to make a friend to begin with and you want to be- I mean again, you just want to be a decent person too. Like, you're trying to help this person out so again, you want to be able to play ball, you know, you don't want to-

David: You're already buying at a massive discount, don't worry about a couple grand but it's good to not make your max offer and here is- from the get-go and here's why, cuz then you don't have any wiggle room to negotiate in the event that you're really close. You came in guns blazing with your best offer first, that's a terrible idea. You want to save that best offer because if you have to come up any, you now have wiggle room, right? That's it.

Mike: Yeah, that's pretty much it. So, that's maximum allowable offer. That's basically how we analyze deals. Dave, you have anything else you wanna add on the topic? Let's go ahead and wrap this one up.

David: Yeah, that's about it guys. I mean again, start with the end in mind, the after repair value. So, you're looking at this house that you're driving for dollars and it's got gutters falling off and it looks like it could be a great home again, but it needs work. Don't look at the current condition, look at what it would be worth fixed up and then work your way backwards to determine what it would be worth by running comps like near as similar as possible and most recent as possible, okay, to find your ARV and then depending on what ARV you chose, that's going to give you a level of repairs. You know level of high-grade, low-grade, or medium grade, figure out what that grade is and then multiply that grade times your cost per foot and now you have your variable. So, take your ARV multiply it by your discount rate defaulted at 70% if your new, subtract out your repairs and then add a wholesale fee in there as well if you're new, and that's your MAO and then discount that MAO a little bit. You don't have to come off that MAO 20% if it's a low number but don't offer that number. No, that is the max you can pay in 3 or 6 or 12 months from now if it takes that long for them to be willing to work with you, so start low. You don't have to go way low, but I'd say a minimum of 3 to 5 grand less, minimum. We usually come in anywhere from 5 to 15 thousand below that and it gives us more wiggle room to come up because they typically don't like your offer to begin with and that's about it.

Mike: That's analyzing deals guys, thanks.

David: Signing off.

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