ADVICE NEEDED: how do i go about NEGOTIATING a price of a distressed property?

Question

Lookign at a property for my first invesmnet deal that willl take a lot of work/money to fix that has been in the market for about 3 months in the midwest. how do i go about negotiating?  Please share ANY advice you may have on this. much appreciated!

Roman Katz · Answer

not sure where in the midwest you are looking, but I suggest running through the property with at least 3 general contractors that you trust. You can get their bids and use who ever you trust the most or whoever is the most cost effective. I would also read how to estimate rehab costs I can't remember who's book it is but it breaks down all repair costs. If you are ever free to call I would love to talk and help you best I can!

Bryan Scott · Answer

Sorry!  Hit the post button too quickly:

Plugged into the above formula:

($300,000 - $75,000 - $2,700 - $13,500 - $21,000) x .80 = Offer price not to exceed $150,240.  BTW, the .80 multiplier means you need 20% gross profit before taxes.  If you need more, change the multiplier.  Less gross profit needs, lower the multiplier.

Bryan Scott · Answer

As a first time buyer noobie, use a buyer's agent who gets distressed property listings in your market.

Your offer price depends on how you intend to use the property; fix and flip, or buy hold rental, or buy live-in.  Once this is sorted out, what is your time horizon and what will your holding costs amount to?  Just make sure these dollars are reflected in your budget model.

For fix and flip, you will see formulas like, (ARV (after repair value) - rehab costs - holding costs - finance costs - projected sales expenses) x .80 = Offer Price.

Example with assumptions:  ARV = $300,000.  Rehab will be $75,000.  Holding costs (utilities, property taxes, insurance) is $300/month for 9 months, or $2,700.  Finance costs = $1,500/mo for 9 mo, or $13,500.  Sales expenses will be 7% of ARV, or $21,000.

Plugged into the above formula:

($300,000 - $75,000 - $2,700 - $13,500 - $21,000 = Offer price not to exceeed $187,800.  BTW, the .80 multiplier means you need 20% gross profit before taxes.  If you need more, change the multiplier.  Less gross profit needs, lower the multiplier.

How to negotiate the above deal?  Depending your your market and the seller's motivation, you will be highly unlikely to get this done.  Why, because in most markets, the seller will have no issues finding and contracting with a retail buyer, who intends to occupy the property and who will be happy to pay the seller alot more than your maximum, calculated offer.

Eliott Elias · Answer

Use the time on market as leverage. See what the sellers motivation is and hit that hard.

Nathan Gesner · Answer

Use a real estate agent. Their fee is paid by the Seller. A good REALTOR will know the market far better than you, understands the contract, has strong negotiating skills, can be an objective set of eyes on the property, and more.