What is your formula?

Question

What is your formula for making an offer?
Do you have a specific minimum for ROI?
What factors do you consider to determine your offer?

As a newbie, I expect that I would attempt to buy a property below market value, how much is your norm?

I would expect that I would attemp to calculate my expenses in a property and rent it for a certain percentage above those costs(maybe different returns based on my initial investment) involved in the purchase and preparation for renting.

What is the most profitable price range to buy for hold and rent in a low COLA?

Feel free to answer all or one of these questions. I am looking for some input on making a sound first deal. My thought is to find a price range that gets more desirable rentors, make an offer at least 20% below market value,  and figure a minimum ROI of 12%.

Your thoughts?

Account Closed · Answer

It really depends on your investment strategy...Are you a buy and hold kind of guy? Sell in 5-10 years? Flip within a year?

If you want to rent and hold for 5-10 I would suggest not so much focusing on the FMV. It matters, yes, when you are pulling comparables in the neighborhood but if you plan to sell in 5-10 years than why lose sleep at night? So do your comparable sales analysis before you go into it but once you've purchased the property forget about FMV. Focus more on income and expense as Will said. How are you going to maximize rents while minimizing expenses? How are you going to fill up vacant units/houses? Is it in a good location? What is the unemployment rate in that area? Were there a lot of sub-prime mortgage in your city? What are the going rates for rent in your area? Is there a demand for renters?

Then consider the integrity of the property itself. How much work does the property need? Is it an A, B, C, or D property? It's rare that you find A & B properties fully occupied spinning off good cash flow that you get an extremely good deal on.

Then once you've figured all of that out you are ready to make an offer. Generally speaking in terms of ROI, anything better than 8% is good enough for me. Because I can't get that in a CD or bond right now and stocks are too risky of a game for me to play. I would purchase a B, C, or D for 60-70% of ARV or after-repair value. You won't find too many B's at that price. Here are some rules of thumb I try to go by:

1. Put an offer on a property faster than the other guy. It's not hard to pull comps. Find a realtor. They are hurting for business and will gladly pull comps. That's why you put an option clause in your contract so you can inspect the property for 8-14 days. If you don't like the property then the owner keeps the $50 option fee and you get your earnest money back. So you've lost $50. Not too shabby.

2. Have a good relationship with a bank. You never know what foreclosures they might have. Some banks do not like people to know how much they in Other Real Estate Owned or OREO. Go to this link https://cdr.ffiec.gov/public/ManageFacsimiles.aspx and select UBPR. Type in any institution you want. Go to the balance sheet and look at how much OREO the bank has. generally anything over $1MM and the bank has lots of OREO. Unless it just one piece that's booked at $1MM. Lots of deals to be had in foreclosures but be careful when investing in these things.

3. Network. Send out mailers to brokers and realtors. Take them out to lunch every now and then. Don't just have one realtor that you've been buddy buddies with since 2nd grade. You need to know at least 20 realtors and they need to know you.

4. Drive around and find distressed properties in good neighborhoods. Sometimes just putting a friendly note saying I will buy your house please contact me can do a lot of damage.

5. Don't over analyze the numbers, then post up here to see what we think. That wastes time. Find someone on here to share the info of the deal on here or elsewhere. Then make a decision. If the numbers work they work, if they don't then move on. Time is money in this game. Escpecially in a down economy.

6. Stay emotionally unattached. Never make a decision based on emotions. For example, if your wife thinks the property is pretty or it belonged to one of your relatives and he/she is selling it. If you have a friend that is trying to talk you into buying his/her property. Treat each property the same. It's only your hard earned money at risk.

7. Already mentioned this one but I would like to get in a property at 60-70% of ARV. Your equity is already worked in the property so if you get a hard money loan you generally do not have to put any down or much down for that matter.

8. Negotiation skills are critical. Learn how to negotiate. Be nice. Be respectful. LISTEN TO THE SELLER. He may be sitting on a gold mine and he doesn't realize it. Determine what you would offer and don't budge. You are looking for the kind of seller that is getting old and cannot manage/maintain the property, a seller that is in a divorce, had a death in the family, loss of employment, or someone that is getting sued. It sounds horrible, I know, but these people may need cash/liquidity for these very reasons. And as investors that is what we can provide.

Just remember regardless of anyones perception of what I stated in rule #8, the definition of Fair Market Value is you need a motivated seller and a motivated buyer. You aren't screwing anyone. You are just trying to protect your cash and at the same time find a darn good deal. Hope this helps.

Bill Gulley · Answer

Mine is buy low, sell higher, rent it low and rent it higher, buy it low, let someone else pay for it and pay me for the headache of putting up with them. Lastly, borrow low and lend higher. You can do any combination of these things as well.

Just to clarify.

For those of you who stay up at night wondering why homes owned by banks are called ORE or REO. The name or references come from the accounts on the banks books.

Under assets there is bank owned property. The first sub accounts are bank properties, the main bank, all of the branch banks. These are the banking properties used for bank operations. Then you might have a wharehouse where the bank stores records, furniture, whatever. Banks can also own affiliate buinsesses, an insurance agency, travel agency or a Trust Company for example. The premises used for these operations are also owned by the bank and show upon the books as assets.

Then there are properties that are taken in connection with foreclosures. The headings on the books are under the same asset category as assets but are referred to as "Other Real Estate" or Real Estate Other" meaning that it other real estate owned held, but not used for banking operations. The designation is then REO or ORE, either is as correct as the other, but REO is more common.

Now you can sleep at night....LOL

Mark Betche · Answer

Thanks guys, these are all very helpful tips.

Raymond B. · Answer

Mark,
Here is a link to the 50% rule to use as a guide for rental's.

http://www.biggerpockets.com/forums/52/topics/18371-help-me-understand-this-deal-and-5-2-rule

Here is a link to the Rental Property Questions & Landlording Issues

http://www.biggerpockets.com/forums/52-rental-property-questions-landlording-issues

Raymond

Will Barnard · Answer

A 12% return is a not bad for buy and hold. As far as below market value, the lower the better. The key elements for buy and hold are as follows: Gross market rents, expenses, debt service, and cash flow. In order to make a sound investment decision for buy and hold, assumming cash flow is your goal, with appreciation being only gravy if it comes, you must know all the costs associated with a rental home.

I recommend you research about the 50% rule for starting out as it is a good guideline for all expenses excluding debt service which include (vacancy, loss to rent, operating expenses, and capital expenses).
The rule assumes over time that you will inherit 50% of your gross rents as costs, the balance 50% is left for cash flow and debt service. In lower income areas, you can bet that your expense ratio will be around that figure or possibly slightly higher so using it is wise. I have seen higher income units do better with lower expense ratios, but when I say lower, not more than 10% lower.