How to compute for the projected costs for acquiring, carrying, and selling a property

In my recent post on How to compute for the Maximum Allowable Offer or MAO for foreclosed properties, I mentioned that instead of multiplying the After Repair Value (ARV) with the Cost Factor (CF), you can just subtract the projected costs for acquisition, carrying costs, and marketing costs, from the ARV less Profits and Repair costs, to get the MAO. This eliminates the need to have an estimated CF and takes away the guess work.

In relation to this, I received a very good question from gwapito with regard to the actual breakdown of costs as it seems the projected cost of  10% used in my previous example might be unrealistic. Let me try to answer his question through this post.

Before I answer gwapito’s question (in bold below), let me first post his comment in its entirety:

I’m following your blog since April 2010 & I’ve learned a lot from you without any books, without any DVD’s on how to and without any mentor. I really appreciate the way in which you helped others learning real estate investment which is one of the subjects I always dreaded.

I have queries about Cost Factor (CF) which I am confused, it seems like the cost factor will be more than 10% or approx. 30% something considering that the roundtrip transaction cost/acquiring cost will be shouldered by buyer (i.e CGT,CWT,DST,TT,REGISTRATION FEE,DEED OF SALE,VAT, MARKETING COST). Let say you have a deal worth 5 Million of House & lot:

1.What CF will you be using, lets say you will be shouldering all the above roundtrip transaction costs? Can you give me the exact figure of CF breakdowing into details?

*2.As a seller, what is the provision that I could be exempted in paying Creditable Witholding Tax (CWT)?

*3.What is the comparison between DEPRECIATION COST AND REPAIR COST? Are you using repair cost as a depreciation cost?

I thank you again for all the wonderful work you have done and wish you all the best for your future endeavors.

*I already answered questions 2 and 3 in the comments section of my previous post.

Thank you gwapito for the excellent questions and for the encouraging feedback. Let me try to answer your first question to the best of my knowledge below.

Let me first list down the common major expenses that are usually for the account of the buyer when buying a foreclosed property from a bank. Using gwapito’s data in his question, I’ll assume the property is a house  and lot worth Php5 Million. For simplicity’s sake, let’s also assume that the selling price is also Php5 Million and the zonal value is less than the Selling Price, which means we shall use Selling Price instead of Zonal value for all the computations below.

Expenses for acquiring a property

Let me enumerate the common expenses you will have to pay as the buyer of a property

DST = 1.5% of Selling Price or about Php75,000
Transfer Tax = 0.75% of Selling Price or about Php37,500
Registration Fee = Php4,398 + Php45 for every Php20,000 in excess of Pph1,700,000 or about Php11,823
Notarial expenses would be approximately Php200
The projected total cost for you as the buyer in acquiring the property in this example would be Php124,523.00

Expenses for selling a property

When you as the buyer turns around and sells the property, the following are the related expenses:

Capital Gains Tax = 6% of the Selling Price or about Php300,000
VAT is not applicable in this example assuming you are not YET habitually engaged in real estate, which is also why Capital Gains Tax was included instead of Creditable Withholding Tax.
Marketing – lets assume you will do all the marketing yourself through online marketing because this is supposedly a hot property which is so easy to sell, hence the marketing cost is zero.
Total projected cost for selling the property in this example would be Php300,000

Therefore, total cost for acquiring and selling this property would be Php124,523 + Php300,000=Php424,523 which is about 8.49% of the Selling Price of Php5 Million

Carrying or Holding Costs

Assuming you got this at 20% downpayment, balance payable in 10 years at 12% interest, your monthly amortization would be Php57,388.37 (I just used the mortgage calculator of this site)

The monthly amortization of Php57,388.37 is about 1.14% of the Selling Price of Php5 Million

Putting it all together

Assuming that the property can be sold in less than 1 month, the total cost for acquiring, carrying, and selling the property would only be 8.49% of the selling price, since no monthly amortization needs to be paid. For every month the property is not sold, a monthly amortization will have to be paid, which means an additional cost of 1.14% per month.

If the projected time to sell the property is 3 months, the total estimated cost for acquiring, carrying, and selling the property would be 8.49% + (1.14%/month x 3months) = 11.91%

As you can see, an estimated CF of 90% which means 10% of the selling price is the total cost cost for acquiring, carrying, and selling a property like the one in our example above, appears to be realistic as the 10% cost falls between 8.9%(projected cost if property is sold in less than a month) and 11.91%(projected cost if property is sold in 3 months).

Thank you gwapito for your questions and let me know if you need any clarifications.

~~~

TRQ 2.0 Reminders: Early bird rates ends today!

Today is your last chance to avail early bird rates for the Think Rich Quick 2.0 seminar. Early bird rates ends today, October 7, 2010. Before today ends, you should have already secured your seats or else you will have to pay an additional Php 2,000 to get your tickets next week.

The “two-gives” option where you pay Php3,000 now and pay Php3,000 at the venue is still available -but you need to pay today, October 7, 2010. Get your TRQ 2.0 tickets here. To get the latest updates and see a preview of my bonus for you, check this out: Early bird rates about to end! Plus other important updates about TRQ 2.0!

To our success and financial freedom!

Jay Castillo
Real Estate Investor
Real Estate Broker License #: 20056
Blog: http://www.foreclosurephilippines.com
Follow me in Twitter:http://twitter.com/jay_castillo
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Text by Jay Castillo and Cherry Castillo. Copyright © 2010 All rights reserved.

SM to Build More Hotels for REIT

By JAMES A. LOYOLA

September 26, 2010, 2:26pm

SM Hotels and Conventions Corporation, a wholly owned unit of SM Investments Corporation (SMIC), is planning to build at least four more hotels and centers to be able to have large enough asset pool for a real estate investment trust.

SMIC chief finance officer Jose Sio said they need to have at least seven properties to qualify for a REIT. The firm current has five assets including the Taal Vista Hotel, the SMX Convention Center and the Radisson Blu Hotel which is set for a soft opening today (September 27).

“That is a future proposition for the hotel business,” Sio said adding that, “for SM to decide to enter into hotel business, we will follow the same principle that we have followed in SM and that is to look at business in a long-term view.”

Sio said they will eventually pool all their hotel and convention centers into a holding company in preparation for its listing as a REIT. This will take a few more years since a REIT must have a track record of at least three years of profitability.

SMHCC president Elizabeth Sy said they are currently revisiting plans to put up a hotel in the Mall of Asia complex in Pasay City where they had initially planned to put up a Radisson and Regency hotel in one building.

She said they are still planning to put up a hotel with 400 to 500 rooms and may stick with just the Radisson brand although nothing is definite yet.

The firm is also set to open Pico Sands, a 150-room boutique hotel for members of the Pico de Loro Beach & Country Club in SMIC's Hamilo Coast project in Batangas.

Sy said SM is also currently reviewing its planned venture into budget hotels. “We are revisiting that concept and we want to make it more in line with SM, how SM does things and the market of SM,” she said.

SMIC had earlier laid out plans to put up 14 boutique hotels with 50 to 150 rooms near locations of its SM malls nationwide. The company is considering building one in Fort Bonifacio if it wins the bid for the 33.1-hectare military lot.

Published in Manila Bulletin Sept. 27, 2010.