Hello BP nation! I need help with understanding and submitting a good offer, in general. First of all, I'm in NW Atlanta OTP. I've read on BP that you should provide different options when making an offer to a homeowner. Assume the lead came via a postcard, and the owner called me. Here are the details on a house I'd like to buy and hold; I'm using round numbers for ease:
Property is 3/2 brick ranch sfr, built in early 1960's, with ARV = $100k
Updates will total $10,000
Applying the 70% of ARV formula gets me to $70k, less $10k in updates = $60k
Owner would like to get $75k - $80k; Rental rates are $1,000/mo on avg.
Option 1: Offer $55k cash
Option 2: Offer $70k owner financing, $10k d.p. to owner at closing, finance balance at 6% interest for 10 yrs, then pay off loan/refi/sell. Results in monthly pmt of $300 (int-only). However, the total paid out to seller is $10k + $36k (over 10 yr period) + $60k (balance at end of term) = $106,000.
Option 3: Offer $80k, $5k d.p. to owner at closing, balance paid back in 200 months (16.6 yrs). Results in monthly pmt of $375, but house is paid off after term. Total pd to seller over the term is $80k.
I'm trying to differentiate the options, ie, what's better for me vs the owner, etc..
Does each option make sense in it's own right?
Is there enough spread between the 3 options to persuade a seller to take one over the another?
This is a hypothetical case, remember. Any and all comments would be appreciated!
I would find out what the owner wants and why. If they need a large lump sum of cash, and need it to be at a minimum $75k, you might not be able to get the deal done. If they are wiling to do owner financing, maybe that will work. Really you need to find out their desires, needs, and motivations before you can properly craft an offer.
I also think that finding out a little more would likely save you time in the long run. It would be best to know what the seller wants to do, maybe they are just kicking tires and if you spend 2 hours on the deal customizing the options you could be frustrated. It would be nice to know if the seller would really be interested. Also this will likely make you sound more professional.
Another thought is to keep it simple. If the seller is really sophisticated they might understand your terms but if they just inherited the house and just want to know what you are going to do for them, put the offers into terms they will understand.
Like; Option A = Cash $60,000.
Option B = $5,000 cash in pocket and $600 per month payment (hypothetically).
@Russell Brazil Thanks Russell. Yes, I would need to find out their motivation for sure. I'm trying to figure out if Opt 2 or 3 is better, and if they make sense, before I actually try them out.
@Tyler Warne Thanks Tyler. That's good advice. I'll try to use it next deal.
I like to keep it simple. You offer a smorgasbord of options, you run the risk of confusing the seller. A confused mind always says no.
Furthermore, the seller is coming to you to solve a problem not create a new one. Yes, you are buying but in reality, you are selling yourself as an expert there to solve his or her problem.
Pick what you think is best for you from a business perspective and present it to the seller. If it works for the seller, you have a deal. If it doesn't, you can't please everybody.
@Account Closed Thanks, Rod. Great advice, to 'Simplify.' I will do this.
Mark, I like and use the multiple options close also. But I don't see your returns for each scenario (ie: Cash-on-cash, NOI, etc.). That would make a big difference in which option is best for you. Also is the seller an equity seller or a tired landlord? That will effect the strategy as well. Finally, I rarely negotiate the sales price. Focus on the walk away money. Does the seller have a mortgage you can service? Is the house fully paid and what are the sales costs if the seller went on to the open market (ie: Commissions, repairs, seller help, etc) all of which could be deducted from the sales price.
@Nuhan Demirkan Thank you, Nuhan. Well said. I'll put more emphasis on the 'walk away money' as you mentioned. Great advice!