Craven Academy: Real Estate

Let's use an example. We'll assume that a property has an After Repair Value (ARV) of $300,000 and needs $30,000 in repairs. Using our formula we determine that we are willing to pay $180,000.

(ARV x 70%) - Repairs = Maximum Offer ($300,000 x 70%) - $30,000 = Maximum Offer $210,000 - 30,000 = $180,000 Maximum Offer

For our example we'll assume that the foreclosure sale is about to happen and the seller would need to bring the loan current and pay the legal costs associated with the foreclosure action in order to halt the process and reinstate the loan. If the loan balance was $150,000 and the amount needed to reinstate the loan was $10,000 in payment arrears and costs, the seller would have a total indebtedness of $160,000.

If we were to agree on a price of $180,000, we would need $30,000 in cash since we are keeping the existing mortgage. We would use $10,000 to bring the loan current, leaving $20,000 to be paid to the seller. The reason a seller would agree to this is that they are about to lose their home and would most likely be left with nothing. In a case like that, $20,000 could be