Lesson 3: Maximum Purchase Price Formula
Maximum Purchase Price Formula
The Maximum Purchase Price formula is used to calculate the Maximum Purchase Price you should offer for a property. The formula uses a detailed analysis of all of the project costs including your Repair Costs, Buying Costs, Holding Costs, Selling Costs, & Financing Costs.
The Maximum Purchase Price formula is the most accurate calculation, because it requires you to think about, consider & calculate every single project cost on the project.
Maximum Purchase Price = After Repair Value - Buying Costs - Holding Costs - Selling Costs - Financing Costs - Repair Costs - Profit
Maximum Purchase Price Example
A flipper finds a distressed property that the seller is asking $85,000 in a neighborhood with $200,000 resale values. After performing a detailed analysis of all of the project costs the flipper calculates the following costs:
Repair Costs = $65,000
Buying Costs = $2,000
Holding Costs ($750 / month * 5 months) = $3,750
Selling Costs (8% of Sales Price) = $16,000
Financing Costs = $7,500
Desired Profit (15% of ARV) = $30,000
How much should the flipper offer using the MPP Formula?
Maximum Purchase Price = After Repair Value - Repair Costs - Buying Costs - Holding Costs - Selling Costs - Financing Costs - Profit
Maximum Purchase Price = $200,000 - $65,000 - $2,000 - $3,750 - $16,000 - $7,500 - $30,000
Maximum Purchase Price = $200,000 - $94,250 - $30,000
Maximum Purchase Price = $75,750
In this scenario, the seller is asking for $85,000 which is $10,000 more than the recommended purchase price of MPP Formula.
In this Case Study, Dave will walk you through the analysis of an example house flipping deal and provide insight on how you can quickly analyze prospective deals in a matter of minutes.
When should I use the Max Purchase Price Formula vs the 70% Rule Formula?
The 70% Rule Formula should be used to initially quickly analyze the validity of a deal to see if you should spend more time to fully evaluate the property using the Maximum Purchase Price formula.
If the deal meets your 70% Rule criteria, you can perform a full Maximum Purchase Price analysis to determine the actual purchase price you should offer for the property.
Learn more about the 70% Rule
Tools to Analyze House Flipping Deals
- Notepad/Used Napkin - If you are the old fashioned pen-and-paper type, a pen and notepad or a used napkin will work just fine...
- Good 'ole Trusty Calculator - Listen, there's no crazy calculus involved in calculating your purchase price, so you don't need a fancy 'Scientific Calculator'....you should be able to use any ordinary calculator or phone app to calculate the MPP.
- Spreadsheets - Building your own analysis spreadsheet can help you get a better understanding of the numbers & costs that go into analyzing a deal, but check your formulas twice!
- House Flipping Software (shameless plug alert) - Or of course you can use our Flipper Force software which is pre-built with a step-by-step process for analyzing all of the project costs you need to determine the MPP.
Sign-Up for a Free Software Trial to Analyze Deals for Free