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How do you work out the maximum price to offer?

property investment Apr 30, 2019

There is one thing that can seriously dent the profit in any project and that’s overpaying for the property.  An essential part of your due diligence is to work out the maximum you can afford to offer on any property, while still giving you the profit margin you need.

It’s easier to work backwards when doing this.

Start with the end value that your property will be worth once you’ve completed any work that you propose to do to it.  You should be able to find comparable values of similar properties that have sold within the last few months.

The majority of properties that investors buy are flats, terraced and semi-detached houses.  They don’t tend to buy large detached properties in five acres of ground, this means that comparable values are much easier to obtain for these types of property.

If you are buying a commercial property this may not be so easy and you may need to engage a commercial surveyor to get a true current and future value.

The more common residential properties will have what is referred to as a ceiling price; estate agents often refer to the ceiling price of a street.  This would be the maximum that a particular type of property in a particular road would sell for, regardless of how much you’ve spent refurbishing it.

Having confidently established the ceiling price of the property you intend to buy you then deduct all the costs incurred in getting it to that ceiling price.  This includes:

  • Cost of refurbishing it to the ceiling value
  • Cost of buying the property
  • Cost of selling the property on – or the refinancing it
  • The cost of finance to fund your purchase
  • The profit you want to put in your bank to make the effort worthwhile.

Total up all the costs – including your profit – deduct from the ceiling price and that’s the most you can afford to offer for the property.

Do your due diligence before you make an offer, it’s hard to go back once the offer is on the table.  Once you have all the information in your hands you can decide if that’s an offer you’re prepared to make - if you pay more than this you’re eating into your profits.

 

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