Calculating numbers to make an offer

4 Replies

Hello guys,

I am a newbie and I have a question about calculating numbers when making offers to agents. I am planning to make 2-3 offers a day to an agent in Los Angeles area, but when I calculate my offers, it seems like I have make crazy low ball offers to make 15%-20% profit from ARV.

For example, if the bank listed the REO property for $439k, and the ARV is $500k how much would you guys offer without seeing the property. Some rehabber told me that investors usually calculate 12% of the ARV for the repair cost and try to get 15%-20% profit from ARV. I know it is best to go see the property with a contractor. Do you guys go see the property with the contract for every property you guys make offer for?

This is the list of costs in Los Angeles area for $500k ARV property in Los Angeles.

Excrow Fee, seller agent fee, tax, notary, inspection, etc = $30,674.50

Private lending fees at 8% for 6 months (1% each month +2 points) = $32,800

Repairs at 12% of ARV = $60,000 (in zillow pictures, this property is in pretty bad shape)

Closing Cost 1.5% = $4,972.50


Based on this calculation, I have to offer $325k to make $48k profit (This is about 10% of ARV). I gave this offer to the agent that is helping me and she is saying that they won't look at this offer unless I can bring it up to $420k.

I went to a meetup and the rehabbers told me that they put in about 150 offers a month and get about 10 accepted. I am hoping to get to that level, but I think my offer right now will be too low for them to even look at it.

Is this how you guys make offers to an agent? Is it normal to submit many low ball offers like this and hope that few will get accepted? 

Any feedback and advise will be appreciated.

Thanks,

@Peter Hong , you're probably being trapped into playing the same "game" as Realtors. Come rain or shine, they get their "percentage" commission!

So, you've decided that you need 10 percent profit to make it worth your while?

What's wrong with say, 6%? Or, $25k instead of $48k, if you just talk numbers instead?

Get my point? [Free lesson #1: You don't have to act on Realtors' suggestions!]

Question: Why should it be easy to generate 10's of thousands of dollars out of thin air?

Haha. Here is your problem:
15-20% profit
REO need cash offers
12% repair cost — RIDICULOUS ASSUMPTION
Agent is not investor friendly
6 months rehab time for a first rehabber
CASH for skin in the game

Solve those and you should be good.

2-3 offers a day you are going to be making a lot of offers that get zero traction. You can make offers like this in hopes one sticks, or you can calculate real rehab estimates, and how much profit you want verse what someone tells you, and make more solid offers.

@Peter Hong - Couple thoughts here:

Yes that is a crazy low offer. Yes you will make a lot of offers that don't get accepted. Your Realtor is probably saying that because you're offering on an REO property and national banks have a formula for how low of an offer they'd accept based on the length of time on the market. Your number is probably a lot lower than what they'd accept right now... Which is fine. It is a numbers game.

Your repair cost should never be calculated as a percentage of an ARV. I don't know a lot about your market, but $60,000 for a $500K house seems a little on the low side if you think the property is in rough shape.

There's nothing wrong with factoring in a higher profit margin. Typically I don't see that as a percentage of the ARV either, as most investors I work with have a dollar threshold instead. Some of the folks who do this consistently want at least $40K profit per deal... whereas some of the newer investors I deal with are comfortable with $25K or less.

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