Dropmodel Release: An Inside Look at Our Max Offer ROI Calculator
One of the most common questions a real estate investor might ask is: what is the maximum I can realistically, and safely, offer to purchase a project?
The key strategy here is to look at your return on investment (ROI) hurdle.
Return on investment (ROI) is one of the most important and widely adopted performance metrics of single-family real estate developers and rehabbers. These investors typically have a minimum hurdle (aka minimum ROI requirement), which helps them assess prospective projects.
If a project meets their investment criteria and the expected ROI is equal to or higher than their hurdle, they proceed with further analysis and a possible acquisition. If a project analysis results in returns lower than their hurdle, they either lower their return hurdle, make adjustments to the assumptions or plan with the project until it works, or they pass.
A specific variant of ROI–annualized all-cash ROI—is both effective and commonplace for analyzing opportunities and determining a maximum offer price. In short, annualized figures help make comparing alternative investments with different project timelines easy, and all-cash analyses provide an objective look at the opportunity without having to rely on the terms a third party lender may or may not be able to provide.
The annualized all-cash ROI is easy to determine, thorough, and effective when comparing investment alternatives with different hold periods, costs, and levels of risk and return. It’s a key variable powering our Max Offer ROI Calculator.
Introducing: The Dropmodel Max Offer ROI Calculator
Designed for both investors and wholesalers, the Max Offer ROI Calculator uses your annualized, all-cash ROI hurdle as the ultimate determinant of the maximum offer or purchase price.
The annualized, all-cash ROI hurdle is converted to a project-level all-cash ROI based on the projected hold period. The project-level ROI is then applied to all out-of-pocket costs (excluding the purchase price) to generate a maximum offer or purchase price.
A minimum dollar profit hurdle can be specified, but it will only impact the maximum offer if it is not satisfied. For this calc, dollar profit is secondary since it is not a time-based metric—meaning, it doesn’t contain information about the impact of varying hold periods.
In the results section, you’ll see a group of interactive sliders that can be used to adjust key assumptions. As you make adjustments, you’ll see the impact on maximum offer, as well as on other relevant performance metrics.
When using these interactive sliders, pay attention to performance metrics other than ROI or profit, like purchase price as a percent of ARV less repairs, profit margin, as these can provide additional guidance on the offer amount.
Quick Tips for Wholesalers
Try to collect as much information as you can about your buyers—not only the types of projects they will take on and the locations, but details around their ROI goals and what they’ll settle for in certain cases.
Once you know what investors will accept, you can adjust offer pricing to increase your chances of maximizing profit and achieving a quick sale to the end-buyer.
As a general rule, higher risk at the project level means higher return hurdles for most investors. Lower debt costs for an investor or investors with excess cash holdings or high motivation have lower all-cash return hurdles.
How to Use the Maximum Offer ROI Calculator with other Models and Tools
The quality and usefulness of any real estate analysis is dependent on a well-rounded understanding of the context outside of the investment itself, including market conditions, competing opportunities, your investment history, and more. Here are some ways to build on the insights of the Maximum Offer ROI Calculator:
Once you’ve run the Maximum Offer ROI Calculator, use the Sales Comparables Tool to compare your potential offer price with recent sales or on-market deals that share similar locations, physical, and other characteristics.
If an opportunity results in an offer that you believe could be accepted, use the Flip Profitability Model to get a more detailed project overview, including the impact of financing and additional cost details.
To refine your figure for annualized all-cash ROI, enter previously completed projects into the Flip Profitability Model and view the investment performance section of the results section. You can then determine if the returns on those projects were adequate or if you want to adjust your return hurdle higher or lower.
We’re constantly adding new models, quick calcs and tools, enhancing existing ones, and adding helpful articles and tips from other professionals that are using Dropmodel to make better, faster real estate decisions. Sign up below to be included on future updates.