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

This is from foreclosurephilippines. This is for my private reference only and not for public viewing.



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).