I am curious about something. You always hear about buying properties at a discount which is logical because you make money when you buy. In light of the recent market conditions, I have seen quite a few properties reducing their prices a few times already this year.
My question is this,
When buying at a discount, are you buying at the discount relative to the Fair Market Value of the neighborhood, or the assessed price (determined by the tax collector) or the asking price (determined by the seller)?
Good question. Actually the answer is neither…you buy based on the after-repaired market value of the particular property you want to buy. This won’t be your buying price, but it is the value on which you base your offer.
Fair market value of the neighborhood means very little. You could have a 150k house in a 200k neighborhood. You need the value of the actual property based on comps in that neighborhood.
Assessed price is absolutely, completely meaningless as it relates to what we do. All that is is what the municipality is basing property taxes on. Ignore it completely.
Asking price is important to know, but like you said in your first post, sometimes a seller will ask for less than it’s worth. Or they could even ask for more than it’s worth.
Every house is worth what every other house just like it in the same neighborhood has sold for in the last 2 months. When you buy at a discount you need to know what the houses in the neighborhood have been selling for. You need to take into consideration how long these houses have been on the market before they sold, but the price of what they are worth is defined by what they sell for.
Any house will sell in a day at the right price. That price you pay for a house has no bearing on what that sell in a day price is. If you buy a house and get it ready for $150k and have to sell it for $160k to make your desired $10k but the houses in the neighborhood sell in 60 days at $160k then you will probably get your $160k but it will take you 60 days to get it. You also won’t get $10k because the buyer will make you take concessions because they don’t like your wallpaper and the sales commission and fees will mean you will lose money on the deal.
If you are trying to flip that house you need to be able to buy it get it ready and on the market and priced at a price that will enable it to sell immediately. That means sold inside of 1 month. If a house does not sell in one month then the price you are asking for is too high.
Bluemoon makes the most sense to me here. You have to take into consideration both what has sold, AND how long it took before the actual sale. But I think everyone is saying the same thing. If repairs are required, obviously pricing will be different. I tell every seller on the phone what I’m prepared to offer, and that it is based on the condition of the house being exactly as they said. If even a picture nail hasn’t been accounted for, then my pricing is different. Good to keep that in mind.
I have a simple and effective method to come up with an offer price.
Calculate ARV(After Repair Value), this must be a realistic sales price so be conservative.
Estimate rehab, again be conservative.
50-70% X ARV - rehab = Value range
So if your ARV or realistic price you can sell for after rehab is 100K and a conservative rehab estimate is 20K then your offer range is 30-50K. Never go over 70% LTV.
Finally, it is extremely wise to do this in areas that also have great cash flow. That way you have backup plans and multiple exits which really mitigates risk. Hope this helps.