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.
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