The Trump Blog

When you ask most people how much they are willing to pay for a property, they usually say something like, Well,the asking price is $275,000 . . . maybe I can bargain that down to $245,000.

That's how they decide how much they are willing to pay for a property. And that kind of thinking makes no sense. To make sure you make a profit from every deal, you have to back into the price you will offer by working the numbers.

First, Determine Your Estimated Sales Price

This is the price you will be able to sell the property for after you have improved it. Look at comparable sales in your area, determine whether the market is going up or down, and understand exactly how much your property will sell for.

Don't exaggerate this figure, based on optimism. Don't expect your property to sell for more than comparable homes, just because you think it will. It is that kind of unrealistic optimism that causes most people to lose money on real estate investments.

Second, Total Up Your Projected Expenses

These generally include:

• Closing costs – Total closing costs, both for the time when you are buying the property and the time when you are selling it too.
• Costs of renovations – Cosmetics, mechanicals, masonry, painting – everything.
• Taxes – And don't forget that the longer you hold the property, the more taxes you will pay.
• The cost of borrowing to buy the property – Your loan costs money, both at the inception and every month.
• Realtor commissions – Unless you can realistically expect to sell the property yourself, plan to pay realtor commissions when you sell it.
• Hidden costs – Depending on the age and condition of your property, you can expect that something unexpected will go wrong or need to be added to your list of renovations to perform. An older house can hit you with as much as 15% of its market value in unanticipated expenses.
• Insurance - Buy fire, liability as well as builder's risk insurance.
• Maintenance costs – You will have to hire companies to shovel the show, cut the grass, do post-construction cleanups and possibly protect your property from vandalism while it is vacant.

Third, Subtract Your Projected Expenses From Your Estimated Sales Price

For example, let's say that you realistically expect to sell a property for $375,000. However, your projected fix-up and other expenses total $125,000.

That means the maximum sum you should offer the seller is $250,000. Otherwise, the deal makes no sense. Actually, you should offer the seller less than that. After all, you are investing in real estate to make money. If you are not making money, what is the point of investing in real estate? So know how much you would like to make on the deal and work that into your estimates too.

Numbers never lie. Make them work for you, and never pay more than you should for any property. If you do, you have no one to blame but yourself. But if the numbers tell you that you stand to make a good profit, negotiate hard for the price that will allow that to happen. If the seller won't accept your offer, don't feel bad about walking away. There will be another deal. When it comes along, work the numbers to make sure it will earn you a handsome profit.

Jay D. Gottliebis one of the real estate experts on the Trump University faculty. In 1997, Mr. Gottlieb was recognized by Crain's NY Business as one of the "40 under 40" top business people of the year. In 1999, he won the Ernst & Young "NYC Entrepreneur of the Year" award in real estate. Currently, Mr. Gottlieb is president and CEO of Tri-State Home Sales LTD, a multifaceted real estate company that builds homes, owns land and rental properties; and specializes in the purchase, renovation, and sale of family residential properties throughout the United States.

Tolearn more about making money in any market, register today for Trump University's Real Estate Investor Training Program.