Transcript:
Welcome to the Tax Sale Podcast, where tax sale investing is made easy.
I’m Casey Denman, a tax sale veteran, expert, and trainer, author of the tax sale playbook, founder of the tax sale academy and your host here on the tax sale podcast.
Thanks for joining me on today’s podcast, and as always, at the conclusion of this podcast, if you’re looking to learn more about investing in tax defaulted real estate head to taxsaleacademy.com. That’s taxsaleacademy.com.
Today we’re talking about the thing that probably means the most to you . . . your profit margin.
Different investors use different ways to determine how much they’ll pay for a property based on their expected profits. Some have calculators, some use percentages, some go by their gut feeling, some just wing it . . . the truth is that there is no real “correct” way of determining how much you should shoot to make when investing. YOU have to go by what makes YOU comfortable.
I’ve heard some people to always buy at 70% of market value, or 60 or 40 or whatever. Or some other rule of thumb. While this is great and can be easy to apply in theory, it can’t be used as a universal statement.
Let’s use the 70% theory – you have a house worth $100,000 then you pay $70,000. You make $30,000 in gross profit; fair enough. What about that lot valued at $3,000, are you going to pay $2,100? That leaves $900 as gross profit, less any expenses, of course. Like, suit to quiet title, travel expenses, any realtor fees, etc. Obviously, this is an extreme example, but in this situation you’ll be in the hole a couple thousand bucks.
So, let’s discuss a few of the things you must consider when determining your expected profit much, which ultimately determines the amount you bid on a property. These two, your profit and bid amount go hand in hand. There are many, many things that factor into your bid amount, so don’t think this is an all inclusive list. So we’re going to go over five things you must take into consideration. If you want to preplan your profit margins, nail down these five and you’ll be well on your way.
Expenses:
This is the big one that so many people overlook. Yes, it’s big number and small number – but don’t forget about all that stuff in between. And it might even take some experience to get your expenses dialed down before you invest. But you need to get your expenses figured out. And a lot of this will involve your plans for the property. Here are some of the more obvious ones: Are you doing a suit to quiet title? Does it require any work? Will you have to travel to the property? Do you need a Realtor to sell it? Is there a recording fee or buyer’s premium when you buy it? Have you thought about perhaps the less obvious expenses: What are the yearly property taxes or percentage thereof you’ll have to pay? What about the insurance on the property? Does it need to be mowed? Will you be turning the electric on to the property? Any immediate issues that must be addressed? What about the expenses when you SELL the property?
So many people choose to overlook one or more expenses, and this might be done consciously or unconsciously. Maybe it’s $30 to replace a lock, or you have to overnight a contract and is $22 . . . regardless of the expense you must factor it in.
Unexpected Issues/Buffer
This is another one that way too many people tend to ignore. They think everything will work exactly according to the plan. But, what if it doesn’t? I always suggest providing yourself a nice sized buffer. The best case scenario is that there are no unexpected issues and you walk away with more money in your pocket. The worst case scenario is that your buffer isn’t large enough. Have you thought about some of the potential issues? Let’s say your roof leaks unexpectedly. Or maybe you have some open permits at the city you have to close out. Maybe there is a tenant living there you didn’t count on and you have to pay them to move out. Take into account unexpected issues.
Hassle
Speaking on issues, have you ever thought about the hassle of dealing with a property? Some properties are just mentally and even physically taxing. Just this morning, about 3 hours before I recorded this podcast, I was inside the attic of an old dirty house checking to insure work had been performed property Sure, I could’ve called someone to do it for me, but that would’ve been more hassle than doing it myself – tracking someone down, playing phone tag, meeting them there. Obviously, the best deal is the one that is the easiest. But there are times where certain properties will be full of hassles. And if that’s the case, be sure you are compensated accordingly. I promise that if I wasn’t going to make decent money on the property, I would’ve never crawled into that attic.
Discounted Sales Price
How about this one? Sure, you know exactly what your market will demand for a property. Except for that time when you though you did but you were wrong. The property you thought was worth $50,000 but was really worth $40,000. Maybe it’s a deal where you convince yourself it’s worth a few thousand more dollars during the auction or maybe your numbers are just off. But you need to factor in a discounted sales price. I always teach to use a low ballpark value. If the real value of a house is $100,000, then consider using $90 or $93 as the amount it’ll sell for. This is in addition to your buffer. Be conservative with your numbers.
Time
Trading your time for money is never a good idea, unless that money will compensate you above and beyond what your time is worth as an employee. Here’s what I’m saying: If you make $5000 off a property, but it requires you to invest 500 hours of your life into making that transaction work, then you’re only making $10 an hour. Likewise, if a property takes you three years to sell, that’s property not the property for you. So many people overlook the value of their time. It takes time to research the property, to attend the auction, to go to the bank, to visit the property, to coordinate and make any required repairs, to advertise and market the property, to work with buyers . . . . real estate investing takes time. Be sure your time is compensated accordingly!
Once you’ve factored those five things in, you need to ask yourself what margin would you be happy with? Determine your sales price based on your objectives, subtract out all the stuff we just discussed and more, then your desired profit based on the money and effort required and you’ll have your bid amount. Then determine if it’s realistic or not.
And don’t get into the mindset that you must buy a property. If your potential profit isn’t what you want, then don’t try to convince yourself that you’d be willing to accept less. I’ve seen far too many people trick themselves into buying something only to hate that decision a month later. Be patient, and always work backwards to determine your profit prior to bidding.
Thanks so much for joining me on today’s episode.
And if you haven’t done so yet, be sure to pickup your copy of my free book, Tax Sale Playbook, which you can get at TaxSaleAcademy.com. The book itself is free, we just ask for your help covering the nominal shipping costs.
And as always guys, if you found this episode helpful it will mean so much to us if you take a few second to leave positive feedback.
Take care guys and make it a successful day.
See ya!