The newspaper classifieds are full of "houses for sale."

The MLS in most areas lists hundreds of houses.

Drive your neighborhood, and you will find many "for sale by owner" signs.

The inventory of available houses is ALWAYS plentiful.

Then why not buy yourself a house and make some money?

You don't buy just any available house because you want to make a profit. And every house does not represent a profit.

So, in order to know which if any house can produce a profit, you have to establish a formula. You must create a criteria for yourself in your own mind (or perhaps in written format) - a criteria which might be different from anyone else you know who also invests in houses.

And because this formula involves judgmental factors, it is personal.

Your judgment is different when you buy that first house, from the judgment you exercise after you have purchased hundreds of properties. Your judgment changes with experience.

And your personal situation as an investor is always changing. You feel differently in making an offer when you have no renovation project going at the moment, from when you have more projects in progress than workers.

While there is no universal formula that accommodates every investor because of the vague, ever-changing personal factors involved, we can establish the basic guideline for creating a profit.

The Profit Formula is to (1) buy low enough to (2) sell at the market price, (3) as determined by the cost of renovation.

Each of the three criterion in the formula must be computed in advance for maximum accuracy. Clarity and specificity is essential, rather than ambiguity. Exactness is critical. The unknowns must be eliminated.

All of us who are experienced in investing recognize that this is not ethereal postulating. This is not a futile exercise. It is not philosophical reasoning. We investors know the necessity of this process because we have all bought a property or two when we thought we had properly projected the answers but we actually lost money!

It's easy to project the figures inaccurately.

"Buying low enough" must be converted into an exact figure. And even though this factor is mentioned first, it is actually the conclusion we reach after computing the other two factors.

Even the "cost of renovation" will be determined by whether you are personally doing the work or hiring someone else. Computing cost of materials is easy, as long as it is a complete list. Combining all the essential costs is necessary for accuracy.

Some of the work may require getting bids (not estimates). Only the very experienced will be able to figure all the expenses without a pencil, paper, phone calls, material inspection and whatever else might be needed for an exhaustive tally.

Determining "the market price" might not be as easy as it appears. The novice easily overlooks this factor. It's not the place to guess. Just because the seller of a property tells you it is "worth" so much money means nothing. Even a comp search by realtors can often be misleading. I notice an occasional tendency in realtors when listing a property to embellish worth to satisfy the seller in order to get the listing. If you want to be the most exact in computing "worth" or "market price," you might consider getting a value in writing from a certified appraisal on the basis of a specific list of improvements you plan on making to the property. That appraisal can also be an asset in marketing the property when you later sell.

Finally, your formula will determine what you think should be your "profit."

What is your fair profit? Does it include your personal labor? Is hired labor marked up? Can you justify your profit, or is it simply "all I can get." If you continue making the same margin of profit, can you stay in business?

This review of the Profit Formula is very abbreviated, and deserves much more elaboration. However, perhaps it can serve as a starting point for this critical evaluation process.

Dr.Phil Speer