How Deal Architects Analyze Deals: Spread & Chop
The primary role of a Deal Architect is to structure marketing campaigns & deals with...
Optimal Risk (first and foremost) &
Maximum Profit Potential for ALL Participants Involved
That includes the members of your mastermind group and your power team (vendors). They are all members of The Wolf Pact, and we take care of our own!
Now Let's Get To The Numbers: Analyzing A Deal!
When looking at the raw numbers, the profit formula is relatively simple;
Spread - Expenses - Participant Payouts = Net Profit
STEP ONE: Calculate The Spread
The spread is the difference between the purchase price and the after-repair value (ARV), market value, or appraised value, whichever is applicable. Let's be clear, it's up to YOU as the Deal Architect to verify or confirm exactly what the spread is on every project.
Example:
Purchase Price - $100,000 After Repair Value - $150,000
After Repair Value (ARV) - Purchase Price = Spread $150,000 - $100,000 = $50,000
STEP TWO: Calculate the Expenses
The expenses include the closing costs (purchase & resale) plus the carrying costs (interim interest, taxes, utilities, insurance, etc.). It's important not to overlook expenses and always include a margin for unexpected expenses.
Example:
Repairs - $10,000 + Carrying Costs - $2,500 + Marketing - $7,500 + Total Closing Costs - $5,000 ($2,500 upon purchase and $2,500 at time of sale)
= Total Expenses - $25,000
STEP THREE: Calculate Your Participant Payout
Now it's time to determine your total participant payout; exactly what you will offer your mastermind group member(s) that you want to participate in this deal.
Example: Let's keep it simple and assume you have 3 Joint Venture (JV) partners in your mastermind group that contributed $115,000 for the deal to cover the purchase price, repairs, and closing costs to purchase.
Estimated Project Timeline: 6 months
You decided to offer the JV Partners a return on investment (ROI) of 18% annualized. You also agree to pay your Wholesaler 20% of Your Profit.
$115,000 x .18 = $20,700 / 2 (ROI is annualized so divide by 2 because the project is completed in 6 months) = $10,350
JV Partner Participant Payout - $10,350
Wholesaler Participant Payout - $2,930 (see step four for calculation)
STEP FOUR: Calculate Your Net Profit
$150,000 - After Repair Value (ARV) - $100,000 (Purchase Price) - $25,000 (Total Expenses - $10,350 (Participant Payouts) = $14,650 x .20 (Wholesaler Payout %) = $2,930 (Wholesaler Payout)
$14,650 - $2,930 = $11,720
Deal Architect NET PROFIT = $11,720
Your Job as a Deal Architect is to create consistent opportunities for the members of your mastermind group, and knowing how to analyze deals is a key component of that skill set. Keep honing your skills; your mastermind group is counting on you to calculate spreads and chop them up into payouts for the members consistently!
Good Hunting!