Don't feel like reading? Watch the video here.
If you’re wholesaling or rehabbing and retailing properties, you want the end retail price of a property to be in the sweet spot for your buyers. That means not only does the property have to appeal to the greatest amount of buyers (in terms of location, number of bedrooms and baths, amenities) but the price has to fit their means.
An old rule of thumb is people can qualify for a mortgage that is roughly two and a half times their household income. So if a couple grosses $50,000 per year, barring other outrageous monthly payments like high credit card or car payments, they can qualify for about $125,000 mortgage ($50,000 x 2.5). With a 10% down payment, the retail price of a house should be between $135,000 and $140,000. A $125,000 mortgage balance at 6% interest equals about $750 PI. Adding in taxes and insurance would put them into about the $1,100 per month range (in Florida).
There are, of course, more complex formulae used by mortgage brokers. One involves the debt to income ratio. Add up the total minimum someone has to pay each month including car payments, student loans, credit card minimums, any consumer loans, etc. then divide it by their monthly gross income. Say a couple’s monthly debt, including the PITI on their prospective property added up to $1,800 ($1,100 for the PITI plus about $700 in car payments, etc.) Keeping with the $50,000 per year example, gross monthly income is about $4,166.
$1800/$4,166 = 43.2%
Say they pay off the car and get rid of a $350 payment each month.
$1,450/$4,166 = 34.8%
Any DTI under 36% is considered workable; if it’s higher than that, it is harder to qualify for a mortgage.
How do you find the sweet spot in your target areas? Two ways. First, go to city-data.com and look up your farm area, either using the city and state or the zip code. Go through the stats until you find “Median Household Income.” Apply the 2.5x formula to that number. You can double-check that number by scrolling down the page until you come to the stats on number of home sales and median price of homes sold. If things aren’t totally out of whack in your area (for instance, you live in Miami and cash buyers are coming in from Europe, the Middle East and South America and overpaying for properties), the two numbers should match up fairly closely.
A second way to find your pricing sweet spot is to look at the stats put out by your local association of Realtors. Most compile a list each month of home sales with a breakdown of the number of houses sold in each price range. Look to see the most popular price ranges. That’s the price where people are buying.
If there aren’t a lot of sales in your area, track the stats back for several months to see any trends. (You should be doing this anyway.) Be sure to account for seasonal swings.
Shoot for the price range(s) with the most activity.
It’s important to know the after repaired value (ARV) of properties in your target areas. And it’s always good when a property comps as expected. But it’s best when the ARV – your sales price – is smack dab in the center of your buyers’ sweet spot.
It only makes sense. Find properties that the majority of people not only want, but can afford!