Making 4 offers this week... :O)

General Real Estate Investing
1

So I spent the weekend looking at some REOs that have been in the market for 180+ days. I will be placing 3 or 4 offers this week. :O) I am very ashamed of those offers. I calculated my maximum price using the following formula:

Selling price (I am going to flip) = ARV * 80% (I am planning to sell it for 20% below market value to get a quick sale).
Maximum offer price = Selling price - my profit (20%) - cost of repairs - closing costs (3% of purchase price) - closing costs (9% of selling price) - holding costs.

One example:
ARV = $93,316
Sale price (80% of ARV) = $74,653
Profit (20%) = -$14,930
Cost of repairs = -$28,794
Closing costs purchase (3% of purchase price) = -$630
Closing costs sale (9% of purchase price) = -$6,718
Holding costs (6 months) = -$2,622

Maximum purchase price = $21,000

It is listed for $69,500.

I am ashamed of the offer. However, I want to be conservative and make money on this flip. Overall I am feeling that I may be being too conservative with the cost of repairs. I don’t think I will need that much money, but considering that this will be my first flip and that I want to submit an offer without contingencies, I wanted to make sure I account for enough money for the rehab.

My plan is to make a cash offer and try to get a private lender to lend me the money. If I can’t get one, I will fund the transaction myself.

Any thoughts on my numbers or strategy?

Here is an overview of my estimates for repairs in case you have some insight you would like to share. I am including only the big ticket items…

Kitchen:
23’’ of cabinets = $1,380
15’’ of granite countertops = $855
Stove = $375
Dishwasher = $335
Kitchen sink = $150
Sink faucets = $75
Refrigerator = $800

Bathroom:
Vanity light = $85
Mirror = $60
Door + knobs = $82
Shower door = $150
Vanity = $150
Tub/shower remodel kit = $125
Tub w/fiberglass = $325
Toilet = $150
Sink faucets = $25

Utility room:
Sheetrock entire room = $350
Water heater (gas) = $450

Bedroom:
Sheetrock entire room = $350
Vertical blinds = $100
Closet doors = $238 each x 3

Exterior:
Replace windows = 5 x $250 each
New roof = 1000sqf x $1.40 + $200 = $1,600
Re-deck roof = 1000 sqf x $0.70 + $100 = $800
Exterior door with frame = $400
Sliding glass vinyl patio door 72’’ = $450
Termites = $400
Backyard and front year cleanup = $1,000

Electrical
Miscellaneous = $500
Completely rewire house = $3,000 (electrical wires were stolen - not sure about how much I will need to rewire).

Paint
Interior = 1000 sqf x $0.85 = $850
Exterior = 1000 sqf x $1,00 = $1,000
Texture walls = $300

HVAC (3 ton) = $2,900

Miscellaneous
Dumpster (40 yard) = $450
Miscellaneous hardware & building material = $1,000
Heavy clean-up = 10 loads x $145 = $1,450
Miscellaneous = $200
Miscellaneous plumbing = $250
Flooring = 1,000 sqf x $1.40 = $1,400

2

How much of this work are you doing yourself?
You could save a significant amount on the paint cost if you do it yourself. Some wide painter’s tape and one of those little trim rollers help make quick work of a room.
Instead of a new sliding glass door, what about installing a French Door instead? When we bought a house in FL, the sliding glass door had basically fallen apart. We priced different doors and were able to get a nice steel French Door for about the same price you estimated. Once installed and painted, it looked VERY nice. Should last longer than a sliding door too.

3

Why are you changing windows? How old? Broken window panes? I like to paint the window trims which creates the illusion of new windows because here in SoFl you can not just change 1 window if needed, you have to do them all and then hurricane shutters, etc. Cost is in the $5000+ range to replace 10 windows which is crazy.

Your closing cost seems off especially if you plan to have a private investor, as they need to make money. If paying cash and no private money, your holding cost will be different. Did you factor in homeowners insurance at all.

4

Not sure where you are looking, but I’ve just spent the last 3 mos making offers on REO properties. The banks around here aren’t willing to deal very much, even when listed for very long periods of time. Their basic strategy around here is to drop the price some predetermined amount every month or two (say 10-25K). When the price finally gets really, really good, then they have multiple offers and you better have cash plus good luck to get the deal. We finally think we have one under contract, but the agent made a lot of mistakes (wrong code on the MLS so other agents couldn’t access house easily and lowered the price 25K per predetermined schedule even though house was pending and therefore not on the market during the schedule), plus we acted very, very quickly (wrote the offer within one hour of appearance on MLS). This is in Florida.

On the other hand, about 6 mos ago we bought a very nice foreclosure, great deal in Georgia. House had been sitting on the MLS for more than 6 mos, we made a pretty significantly low ball offer and the bank finally accepted after we held firm.

But the banks aren’t just giving these things away. It’s hard to find a good deal, at least on the MLS, and when you finally find one, it’s hard to be the one of many offers they accept. We’ve lost at least 4 in multiple offer scenarios. And had many other low ball offers rejected on properties listed for a long time. Hopefully eventually the banks will start being ready to sell these things . . .

5

If the banks all decide to hold firm and not let properties go for under 65%ARV then we will see the market level and increase. Part of the reason many markets havent bottomed out is because the banks are still willng to give the property away to clear off the liability.
Florida is becoming tough. I was just trying to close a condo where they are all selling for about 100K, and in 2006 were going for 350-375K. But Bank of AMerica, the 2nd lien holder would not budge really. They wanted $35K on a 54K note is the response given after trying to close this deal for 2 months.

6

Justin - we are planning to hire out most of the work and the estimates we calculated above should reflect that. Our objective is to do the work as quickly as possible and put the house back in the market within 4 to 6 weeks. I may be able to do some of the work on the weekends, but not much.

Thank you for the tip about the door. It would look very nice. If we do change the sliding glass door we will definitively consider that. :O)

yrush - the windows are aluminum. The ones I am planning to change are the ones with broken glass. There were few windows missing - they boarded up the holes.

yrush - thank you. I did not consider the private lender’s origination (1.5%) and other fees (appraisal @ $350, processing @ $267, title company closing fee @ $130, recording fees @ $155, title policy & endorsements @ $275, flood & tax certificates @ $40, and termite inspection @ $43). The new total is approximately $2,000 when I purchase the property.

In regards to holding costs - I was quoted 9.5% for a private lender. I decided to use 10% to account for the additional holding costs.

I am looking in Arizona. These will be my first offers. Not sure if they will accept. But I am not going to offer more than I think I should. My strategy is to send them the offer, the list of repairs, the comps and show them my calculation for maximum purchase price. Based on my analysis this is a fair price for the house. Maybe an owner-occupied would be able to offer more considering that he wouldn’t be looking to make a profit on the deal.

The only thing that is bugging me is that my gut tells me my estimates for repairs are too high. I will make these offers and see what happens. Eventually I may ask a general contractor to come see some of these houses with me and give me estimates for the work.

Thank you all for the feedback/comments. I really appreciate you taking the time to share some of your thoughts/expertise. Talk soon!

7

jdias, How can make an all cash offer with no contingencies if you don’t know for sure if have funds? What will happen if you can’t get the money?

8

phlemboy - I do have the funds to close without a lender. I would rather use a pvt lender than my own funds though. In my area there is a pvt lender that lends with good terms (1.5% origination + 9.5%).

9

So I want to give you an update on my offers…

I finally prepared the offer for one of the four properties I thought was a good deal. I called the listing agent this morning and she told me that the bank has already accepted another offer… :O(

I am disappointed because I thought I could take my time and do it right - considering that the property has been in the market for more than 1 year now. What were the chances of someone getting it before I did.

My timeline:

1 - I search for the properties online on Friday evening.
2 - I went to see it Saturday afternoon and created a list of the repairs.
3 - I estimated the cost of repairs, ran the comparables to calculate ARV, etc on Sunday.
4 - Ran my numbers on Monday and created the offer on Tuesday.
5 - On Tuesday I met with my broker to review the offer and numbers - my first deal I thought about getting his feedback (he has done some flips).
6 - Met with my wife Tuesday evening to discuss. She liked and we decided to go see the property one more time on Wednesday early evening.
7 - On Wednesday we went to see the property and decided to move forward.
8 - This morning when I called the listing agent she told me that the property is already under contract…

The good thing is that now I have done it once. For my next property I will be able to act much quicker… :O)

The bummer is that now I have an offer package ready to go sitting at my desk… :O)

For the other 3 potential properties, I will go back to visit them again tomorrow late afternoon to adjust my estimate for repairs. After that I will create the offers and submit them ASAP.

Thought about sharing my experience with my first deal.

By the way I will keep that property in mind - the deal may not go through and I may be able to eventually buy it… :O)

Have a great evening!

10

You should get to the point where you know a good deal as soon as you read the listing or advertisement or whatever led you to the property. Then you take a quick swing by the property to verify your initial impression and go home to write the offer within hours of reading the info.

The last two houses on which we’ve made offers were that quick. If you wait—someone else will be you to the really good offers. The house that had been on the market for a year . . . maybe the bank had recently lowered the price? Typically, the banks have been lowering the price about 10-25K (or more if higher priced home) every month or two. Once the deal gets really, really hot, about 5-10 investors and a few regular buyers send offers immediately (often the very same day).

There was one property that we really wanted–5 acres on lakefront (!), 3000 square feet, very nice neighborhood, high end features in home, built in 2004 . . . 185K, which is UNBELIEVABLE for that much property in great location good condition on a LAKE. I knew the deal was phenomenal INSTANTLY (as soon as I read the listing). I called my husband and said “I found a home that we have to buy, now.” We went to see the home that night and wrote an offer as soon as we returned. The next day, the listing agent called to tell me they have multiple offers over the list price. The house was pending less than 24 hours after the listing appeared. Unfortunately, we lost the deal to a cash buyer even though we offer 15K over list price (after feeling out listing agent and figuring out the number it would take to be the highest number).

We found another awesome deal a few weeks later. Again I knew when I read the listing, called my husband, viewed the house, and wrote the offer within one hour of reading the listing.

You have to get a feel and make offers almost immediately in some cases. It also helps if you know how to write the offers yourself b/c no real estate agent is going to want to spend their day writing offer after offer.

One idea is to look for foreclosures that have been listed for a long time but haven’t yet reduced the price. Your lowball offer may get you the deal before they reduce (note: there is NO CHANCE of this happening unless the house has been listed a LONG time . . . banks get BPOs for a reason . . . and they have standing policies in most cases not to consider offers below a certain percentage). So good deals on foreclosures are actually hard to find right now (and even harder to get under contract once you find them).

Banks are mostly holding firm on price. This may change because there are so many short sales right now . . . looks like the foreclosure inventory is going to keep rising . . . but then if no one can get financing I don’t know what they are going to do.

I think if you really want a good deal you have to look somewhere besides the MLS. I really do. You can ocassionally find some really good deals (even good deals are rare), but almost never at the percentages you (and most investors) want to see.

I’m curious as to where investors find these great deals they keep mentioning. I’ve heard scouring the obituaries (which I find in really bad taste), getting preforeclosure lists and using signs “will buy house for cash,” etc), but I can’t believe any home owner would be so crazy as to sell a home with lots of equity for an obscenely low price. That’s where I’ve always scratched my head with REI.

11

Sellers are motivated for lots of reasons. But the basically sellers are motivated because they can’t afford the property or don’t want it. In either case, they don’t care about the equity as much as investors do. They’ll sell for 30% - 50% below MV rather than deal with the “hassle”. If they can’t afford it, it won’t matter how they feel about the equity.

12

See this is what just boggles my mind. How do you find them? With signs/ads? I just can’t believe that they don’t understand . . . hmmm, if I have equity, then I can pick up the phone, list my house, or list it myself if I have a problem with realtors, sell the property, pay the fees, and pocket the difference!!??! I can’t believe anyone with any serious equity in a home would not understand that concept. If they really “can’t afford” the next payment, heck, it doesn’t matter, sell low, you will sell before the foreclosure ever happens. The whole thing really baffles me. Sometimes I wonder if it’s regional. I’ve never met any homeowner in Central Florida with that little brain power. What am I missing? Please educate me as I would give anything to be purchasing at 50% of ARV. :slight_smile:

13
You should get to the point where you know a good deal as soon as you read the listing or advertisement or whatever led you to the property.

Since I started I have seen around 40 properties. This was the first one I really felt was a good deal. I am feeling much more knowleadgeable now. The first few houses I went to I had to spend around 30-40 minutes to list all the repairs and after I left I would feel I missed something. The last house I saw I was able to estimate repairs within 15 minutes… :O)

The challenge is that I haven’t done any deal yet - so I am not that confident that my repair estimates are accurate. For example, the house I mentioned above, my first estimate for repairs ended up around $29k. When I went back to the property with my wife I reviewed it and it went down almost $10k. But I still felt it was higher than it should have been… However I don’t want to lose money in my first deal, so I want to be very conservative.

You have to get a feel and make offers almost immediately in some cases. It also helps if you know how to write the offers yourself b/c no real estate agent is going to want to spend their day writing offer after offer.

I am an agent… :O) This was my first offer for an investment property. I went to talk with my broker to ask for some tips - not on how to write the offer, but if he felt my numbers were solid (he is also an investor).

One good think - now that I have gone through the whole process up to the point of writing an offer, I am feeling more confident that I can do it quicker next time. :O)

I think if you really want a good deal you have to look somewhere besides the MLS. I really do. You can ocassionally find some really good deals (even good deals are rare), but almost never at the percentages you (and most investors) want to see.

Started last night - I was up until 2AM in the morning identifying properties in my target area that have out of state owners. I identified 21 and I wrote a short letter with my business card magnet to them. I am posting them at lunch time today… :O)

I'm curious as to where investors find these great deals they keep mentioning. I've heard scouring the obituaries (which I find in really bad taste), getting preforeclosure lists and using signs "will buy house for cash," etc), but I can't believe any home owner would be so crazy as to sell a home with lots of equity for an obscenely low price. That's where I've always scratched my head with REI.

Funny you mention obituaries - I tried to do it last night. I started searching the tax records and recorders office records to see if they had any property. I did it for 3 people. And as I was doing it, I couldn’t help myself from thinking about them and their families and loved ones. After 20 or 30 minutes I lost interest in finding deals and became interested on those people lives. You know how they sometimes write a little summary of the person’s life in the newspaper like so and so went to this high school, where she found her partner for life, had 4 beautiful children… etc… etc… It was so touching. I ended up saying a prayer for each one of them and closing the newspaper. Maybe one day I will feel comfortable about marketing to them - but only when I feel I can really help them… :O)

Anyway - thank you so much for sharing your experience and advice… have a great weekend!

14

Tina - I had the same questions. The way I get my mind around it now is to think that there are people that simply don’t want to deal with the hassle. They simply want out. They will be very happy if an investor comes along and offers them a cash offer, tomorrow, no need to clean anything, no need to get your house ready for showing, no need to deal with a number of buyers coming and going, no need to get rid of old stuff you don’t want (just leave it in the house)… You are offering them convenience that they are willing to pay for (through the equity on their houses). I can see people taking that.

Another reason is that some people may be going through so much stuff in their lives that they simply don’t want to deal with the hassle of selling their homes - divorce, moving, etc.

I hope this makes sense.

15

Thanks, it makes sense. And, since you said it so confidently, I actually believe that it must be happening. !! :slight_smile: It just really baffles me b/c of course we all know that you could list your house w/o doing ANYTHING and still sell and make money, if you have enough equity. But they must just NOT have a good grasp of the market or something. Anyway, I believe you . . . would you mind sharing how you find these people??

:):slight_smile:

16

I see. It sounds like we are in similar boats. I can tell you that, I swear, I’ve been writing offers now for MONTHS and finally found ONE that I think we are going to get (waiting for investor signature but deal has been “accepted”–supposedly they will not consider other offers at this point). The good deals really do get snapped up. That was my only point. We’ve lost several. I just listed a couple of examples. But if you have the time and inclination . . . you probably will eventually find something. And you will start to just look at square footage, location, and price (and maybe year built as this will tell you the amount of “fixin” that is likely necessary).

We have a brother in law who is a contrator, sister in law who is a real estate and mortgage broker, husband who is a commercial a/c contractor, sister in law who sells pools, brother who is an attorney . . . so just about every question can be answer quickly with a phone call. I don’t get so detailed on the repair numbers. We have rough estimates for “total kitchen overall” “total bath overall” etc. (I don’t think you can estimate down to the penny anyway . . . why spend the time?? Just a suggestion to help you save time). But we are small, small investors (hesitate to even call ourselves investors) We just own several (5) rentals. We never flipped properties, as you are trying to do, and we have never found anything for 50% of ARV! Our brother in law (contractor) has flipped plenty, though, so he’s a useful resource.

At the moment we just need a place to LIVE (long story, we moved out of state, all of our houses are rented, then we moved back, living in family rental) . . . so we found a great fixer that we intend to move into, rehab, then “flip” into another rental in a year or so. But I’ve developed more and more of an interest in flipping for profit–missed the boat on that one–should have done that years ago but we thought everyone was crazy with the higher and higher prices, so we laid low.

Anyway, good luck to you . . . and have a great weekend, too, I think you will find a good property soon! :slight_smile:

17

Ops! Not meant to sound that confident… I probably don’t have a clue about what I am talking about… Please realize that I am a very new investor. I haven’t completed a deal yet. I am going through my learning curve. Sorry if I sounded liked someone that knew from experience… :O)

This is where I am trying to find the right balance. I don’t want to estimate to the penny, but I also don’t feel comfortable with rough estimates like ‘total kitchen rehab’. For example, the house I just lost - my first estimate was that we would need to replace the cabinets, countertops and sink. Because I wanted it to look really nice (I am influenced by fdjake’s recent post on a rehab he did). However the second time I went to the property I realized that the cabinets are in good shape (all I would need was some paint); the sink looks better than the sink I have at home; and the countertop is formica (but it is in very good shape). So my original estimate was much higher than the second estimate… I guess I will need to go through few rehabs myself to really learn and feel comfortable with a rough estimate… :O)

I hope you do realize that if you stretch it and stay in the home for 2 years then you don’t pay any tax on the capital gains (up to $500k)… :O) I thought about doing it every 2 years and living tax free for the rest of my life… :O)

Good luck!

18

So tonight I went to the MLS to check on the above property - the one the listing agent told me the bank had already accepted another offer. Surprise! Surprise! The listing expired! I thought if she had an offer accepted, she would be able to keep the listing… Not sure what is going on.

Now I have two options: (1) try to contact the bank directly and tell them that I want to submit an offer; (2) wait until the property shows up again in the MLS - probably for a lower asking price - and submit an offer then.

Which option would you choose?

The lender name is Baroreo Lloyd. Have you ever heard about them? I will probably send them a letter.

19

I’d contact the bank before it came back on the market again. I’ve seen some listings in my area expire, be off for about a week, and then they’re put back up again for the same price.
If you deal with the bank while it’s not listed, does that mean their agreement with that Realtor is over and they may have some more wiggle room in the price?