How much to offer

Question

So I saw a house and it was nice minimal work is needed. They want $90 for it and it is worth about 89 but it does need some work so so I am stuck.

James Wise · Answer

What do you want to do with it?

Is it an investment or a personal residence? You should take emotion out of an investment but a personal residence not so much. While you do not want to make a terrible buy you have to live there so you should get what you like assuming you can afford it.

Aaron Montague · Answer

Take some time to dissect your statements from an investor's point of view:

"So I saw a house and it was nice minimal work is needed","but it does need some work so so I am stuck"

What does minimal mean to you?  To me, minimal means I'm going to clean some carpet, put less than $500 in new/replace material into it and then paint a couple rooms.

What you want to do here is turn "minimal" into a number.

1. It's good practice to know how much it will cost you to do certain rehab items in your area

2. It gives you a solid gauge of what the property is worth to you.

3. You no longer have to debate the difference between "minimal" and "some" work.  To me, there is a significantly financial commitment between those 2 words.  With a number, this is no longer a debate.

"They want $90 for it and it is worth about 89"

This could be as simple as: walk away.

Or it could mean that they looked up similar houses in the area and decided that their place only needed a "minimal" amount of work, so they put a minor discount on the property; say $97k average for similar places, so they think $90k should entice buyers.

You need to clarify what "worth" means, for us and yourself.

1. Do you think it would sell for $89k on the MLS after it is fixed up?

2. Do you mean that you'd purchase it for $89k as a personal residence, then do the work yourself and make a home?

3. Do the rents you would get make this place worth $89k as a long term buy and hold property?

4. Do you have another meaning for $89k that I didn't think of?

If you are thinking of flipping the place, you certainly can't pay more than the amount you would eventually sell it for.  The general rule you'll find on BP is the 70% ARV rule.  ARV is the "after repair(ed) value".  The 70% portion says you want to be ALL IN, including purchase, closing and repairs, for 70% of what you think you'll be able to sell it for.  The last 30% is to account for holding costs, fees (realtor specifically), price fluctuations and most importantly, PROFIT!!

Lots to think about :)

Account Closed · Answer

You want to put a dollar value on 'minimal work'.  Also, how are you getting the 89K value/ARV and why are they requesting an amount higher than the ARV on a property that does require some more work? Is the property for rental or fix and resale?

Shana Smith · Answer

Thank you for the formula David that is close to what I was thinking of offering.  I have to work on my negotiating skills, she is priced to high.

David Dachtera · Answer

Very good, Shana! Aaron makes some excellent points, as well.

Here's a formula some investors use...

Determine the ARV.

Start from 65% of the ARV.

Subtract:- your profit- closing costs- cost of repairs / fix up- holding costs and other expenses

... to arrive at your maximum offer price.

Why 65% of ARV?

To allow room to negotiate and to put the fixed-up house back on the market "priced to sell quickly" to minimize your holding costs.

Not a "hard rule", obviously, but do consider those factors when formulating your offer.

Shana Smith · Answer

It is a lot to think about. It will be for an investment not for personal use. I think that after ARV it will be worth $90k and my minimal work wording was also wrong.  They have a bathroom in the basement that definitely needs updating and the kitchen is small and also needs an update. So the price needs to come down or I walk away.

How much to offer

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