Current deal - need advice

Rehabbing, Fix and Flip, Rental Properties
1

I have a question about my offer price, it seems ridiculously low. Am I subtracting too much from the ARV? I mean I would love to get it for the price I am calculating, but I just don’t think that is realistic.

Can you guys give me some insight?

Here is the current deal I am looking at and considering making an offer looks like this:

Foreclosure
Arv: 225-230k
Asking: 140k. (was listed Apr 19 @ 190k, they have been slowly dropping it)

Arv: 225 x .7 = 158k

158k
-25/30k repairs
-5,700 carrying costs (6mo. carry)
-300 utilities
-1500 taxes
-1500 ins.
-13,000 realtor selling fees
-5,000 purchase closing costs (estimate)

This gives a max purchase price 105k???
This seems ridiculously low.

I was planning on putting an offer in at 120k… I am just trying to get financing lined up currently.

As always I appreciate all help.

Thanks
-Terry

2

I was once told that if your are not embarrassed by your offer, your offer is too high! I believe that your realtor fees may be too high (plan on marketing at 90% of market value for a quick sale), your utilities are too low, your repair costs may be too high, your carrying costs may be too high (if you actually buy fix and sell within 6 mos in this market), but overall, I think your calculated price is within the ballpark. I’d recommend that you make the offer for 105k and see what happens. Whatever you do, do not get stuck on this property. If they do not want to take your offer, there will be another one tomorrow. Do not go back and offer a higher amount if they turn down your offer. The bank will mark you as a non-professional and you will lose credibility in their eyes. The only exception to this is if they make a counter offer, at which time I would either make a slight adjustment ($1k) if they made a significant reduction in their asking price. If it needs as much repair as you have figured, they should be happy to just get it off their books.

Wilson

3

Thanks for this thread, guys. I’m currently looking at my first REO as well (have a meeting scheduled with a realtor and a contractor on Tuesday to do a walkthrough) and it’s nice to see other people working the same figures as me. I’m looking at a house in Chicago that sold in 2006 for $395k and the bank is asking $270k, but I may come in with an offer below 200k. Sounds embarrassing, but the worst they can do is say no, right?

4

Only offer what you feel you can profit with. You need to be comfortable with your offer that allows you to fully execute your exit strategy.

The market has tightened and it takes longer to sell properties than I have seen in a very long time. So don’t forget to allow for that. You can make your offer, if they reject it, just keep in touch with the seller’s that you are still around every few weeks. Who knows how low they might come.

GIGO - where in Chicago is the property you are looking at? Lining up financing in Chicago - I might be able to point you in the right direct.

5

Terry - the 70% “normally” includes all of the soft costs (and profit) which you then deducted in your calculation. Those that follow the 70% formula take the (ARV * 70%) - repairs = MAO. Figure in extra holding costs depending on where you are. You may also consider (ARV * 60%) - repairs = MAO. Another “rule of thumb” is if you can get a property at 50% FMV you will be profitable.

Make SURE you are SURE of your ARV!

Don’t let your offer price scare you. If you are targeting the right sellers, they will be happy to sell it to you at whatever price you’ll pay.

“Investors who make offers, get deals!”

Chris

6

Thanks for all the replies.

I am very sure of the ARV. The bank has already dropped 50k. Original asking price was 190k in April. I am hearing back from my HML tomorrow.

I’ve heard the theory you guys mentioned “If you aren’t embarassed by your offer it’s too high” but don’t you think that sometimes you miss out on a good deal ? I’m not saying to offer more than you are comfortable, but I don’t want to make stupid offers just to get luck on one.

7

REI - with acquiring the property at 50% of ARV you should be profitable are you deducting repair costs, or just a general rule of thumb that if you get the prop. at that price you will be profitable.

8

The property is an REO. The loss mitigation department is obligated to mitigate as much of their loss on the property as they can. The current strategy is to list at the BPO, then reduce the price by a few $K at regular intervals until the property is sold.

In my experience, any offer that is less than 95% of the current list price is rejected if you are using financing. Since your offer is about 85% of list, expect a counteroffer at around $133K.

Depending upon how long the property has been available, you have a better chance of having your $120K offer accepted if you are offering all cash, no contingencies, no closing cost assistance, and a quick closing (10 days or sooner). If the property has not been on the market that long, even this strategy may not work.

As far as the “rules” go, it depends upon your exit strategy. If you are planning to wholesale flip to a rehabber, then you need to give your rehabber plenty of equity in the property to be interested in the deal, so the 70% rule seems valid enough especially if you have your buyer lined up before you purchase. Holding costs are usually insignificant since wholesale flips tend to be done quickly. In this case your offer price rule might be MAO = ARV*70% - Rehab Cost - Desired Profit.

If you are planning to retail flip, then your rehab and holding costs eat into your potential profit, so your offer might need to be lower. Using MAO = ARV*70% - Rehab Cost - Holding Cost, you should have plenty of room to make a decent profit even if your rehab costs come in a little over budget.

If you are planning to hold for rental income, then your market rents and your desired cash flow dictate your MAO. If the asking price is already low enough, and the market rent is high enough, you might be able to cash flow nicely at full asking price.

If you want to use fdjake’s business model, buy at 50% FMV and sell at 85% FMV. Notice that FMV is not always the same as ARV. If you are flipping property, you nearly always make money buying at 50% FMV. If you are buying to hold for rental use, there is a price point for your market where even 50% of FMV will be a breakeven or negative cash flow.

I think the rule you use depends upon your exit strategy, and your desired profit.

Just how I see it.