I want to collect some input from other investors on the best way to handle the strategy of analysis vs. offers. Here is what I mean. Every single day I get leads sent to my email from my Realtor, Zillow, and Trulia. I open each and do a quick scan primarily looking at price and area to narrow downing the list for some to take a second look at. As you might imagine I discard a bulk of these.
After sifting it down to a small handful I go in and look at them, look at photos, area of town, rental rates, etc. This is part education for me and part deal hunting. If I find some that look promising I start doing some quick analysis (1% rule, potential rehab costs, etc.) if I get particularly interested in something I might dump the details into BP calculators. The idea behind this entire exercise is based on @David Greene book on BRRRR trying to get good at deal analysis by doing A LOT of them. I try to do a full analysis of a deal every day.
I reach out to my Realtor and go physically looks at a super small number of these. Now here is where the question comes in...
Most of these I don't make offers on because after looking at them in person I see the rehab is going to be higher than I thought relative to ARV and current asking price. For example, I just went and looked at one on Friday priced at 50K. ARV is approximately 80K. Estimated Rehab after crunching the numbers is $30K. So to BRRRR this deal, I would need to get it for around 25K (80K x.75 = 60K - rehab (30K) = 30K - other costs (financing, closing costs, etc.) = 25K max price.
As you can see that is 50% discount from where it is currently listed, which is highly unlikely I would get it. So question, should I just offer on it anyways or wait until stuff like this comes down into striking distance of what I need or sells before?
As you can imagine waiting until it gets down to those levels has been a spectacular failure so far. Nothing EVER comes down to that level or even gets close before somebody buys it. I generally save them to my list and check every couple of days to see if there is a price change.
I am really struggling with this because all the Realtors I am talking to keep telling me making offers like that "isn't a realistic approach" and the unsaid part of that is "its a waste of our time to work with you if you keep doing this because nobody is taking you seriously". I actually had a Realtor tell me that once in a nice way, but the meaning was clear. At the same time I know if I don't make offers I am getting nothing, nada, zilch. Ala Wayne Gretzky "You miss 100% of the shots you don't take".
In addition, I listen to the BP podcast and other investors that keep saying things like they are making 20-30 offers PER MONTH! I have to wonder if their offers look like my example offer above and they are just putting it out there to see what happens. Knowing 99% of them will be rejected.
I would love to hear how others are doing this. Are you doing 20-30 Offers per month knowing almost all of them will fail and possibly irritating your Realtors to keep writing all of these up or are you being more selective and do a lot more analysis vs. offers?
Hi @Michael Temple -
I can't speak to the thought process of any of these people making 20 or 30 offers a month, but, here are some things that come to mind for me:
1) these properties that are listed for $50k, are they worth $50k? Will they appraise for that? Will they realistically get an offer in that range from anyone not trying to BRRRR? If they will, as an agent, I am 100% wasting my time - your time - the listing agent's time - and the seller's time by writing a formal offer up at half the value. If your agent is smart, the most they'll do is make a verbal offer at your price ... then, if the listing agent indicates a deal might be reached, then you formalize into a written offer.
2) I'd take a closer look at the rehab costs to try and find ways to shave it down. If you're planning on doing this multiple times, can you buy some items in bulk to reduce the cost? Is there a different type of product you could use (ie, wood floors vs LVT)? Can you work with a different contractor who's willing to take a little less on each job since they know you'll be a repeat customer? Get creative to get this cost down. And understand, from the appraisal standpoint when this rehab is done, you will not get a higher valuation because you used more expensive products. The $10k Viking range is viewed no differently than the $500 GE range - to the bank, an updated kitchen is an updated kitchen.
3) There's no rule that you have to pull 100% of your cash out of this deal after the refi - which is what your equation is currently doing. Would it be the end of the world if you left $5k or $10k in the property?
Here's an idea for your example property ... take the $30k rehab and find a way to get that down to $25k ... get rid of the $5k closing costs by using a lender credit (ie, take a higher interest rate) ... leave $5k in the deal ... now, your equation becomes: $80k * .75 = $60k - $25k rehab = $35k + $5k (willing to leave in deal) = $40k offer price. You're still below the ask, but at least now you're in the ballpark.
@Brian Sparr Great thoughts! Thanks! to answer number 1 I am not sure. I just don't have enough experience to know for sure what it will appraise at. It looks like it *could* have some serious issues with water coming in the basement, but Realtor seems to think if I just leveled the porch up and slant it away from the house that would solve the issue. I suspect this won't go for their current asking price as it was only offered to potential homeowners first called a "first look" period. They got no offers and dropped the price 5K and offered it to everyone.
Answering number 2, yes, probably, but again, my inexperience at handling rehabs is coming through here. I always seem totally shocked at how much work costs to do when I review this with contractors. With that assumption, I am always afraid I will estimate low and get killed if I try and play it more aggressive. Maybe after I do a couple of these I will have a better feel.
Number 3, no, it wouldn't be an issue to leave some money behind. I probably wouldn't want to leave much more than 10K behind at the top end because I don't have a giant investment stake I am working with so to keep momentum I need to retain as much of that as possible for use on new deals.
Last point is a question actually. I love how you re-did my math, but I can't say I fully understand what you did there to get back to 40K. What is the "lender credit" you mention to get rid of closing costs? I have never heard of this before.
I actually made an all-cash offer this morning on this for 25K. It will probably be rejected, but I definitely won't get it if I don't at least make offers.
It is interesting to me how small periods of time can create monumental changes in thinking just by hearing the right stuff. So after I posted this I was listening to a podcast from @Chad Carson on one particular year where he bought 33 properties in one year! He walked through what happened step by step and how he did it.
What amazed me about his case study is the sheer amount of leads, appointments, and offers he had to make to get to this number. He uses the sales funnel analogy which I am very familiar with. At the top of the funnel is leads (possible properties), appointments are meetings with sellers/viewing houses, but not necessarily offers. Offers are self-explanatory.
He was saying that until you are really experienced at this a safe working number is 20 offers to get one accepted deal! Now working backward how many leads and appointments do you need to have to get to the point of 20 offers. When you look at this using his example I can clearly see I am not generating nearly enough leads, appointments, and offers. I am nowhere near that number. I am lucky if I am making one offer a month right now. Using his examples and numbers would take me FOREVER to secure an accepted offer that will work.
So the short answer I took away from this incredible podcast episode is even to get the lower number of properties that is my goal I have to do A LOT more lead generation, appointments, and offers.
One day and one podcast brought me to this realization...amazing.
If any of you have not heard or read Chad Carson's materials you absolutely should. He has written a book for BP "How to Retire Early Using Real Estate" and his website is https://www.coachcarson.com/
Hey @Michael Temple ... as I was writing that up, I forgot that you were doing a cash purchase - so, a lender credit wouldn't be an option. If you were getting a loan for the purchase, though, lenders will offer a credit in exchange for taking a higher interest rate. Since the BRRRR model would have you doing a refi shortly after, taking a higher rate in the beginning doesn't really matter - if you can keep more cash in your pocket, all the better.
Another issue is seller motivation. Let's say the house is listed for $50K and needs extensive work; big dollar problems like masonry, roof, electrical, HVAC, all having issues. If they deny that fact you won't get a good deal. End of story. I really like that you're challenging the real estate agent. I had an agent act like that last year (looking for distressed properties) so I ended the relationship.
Sometimes people need proof in the form other LOWER BALL OFFERS. When you're lucky they come back to reality and decide to call you.
@Brian Sparr I had never heard of that before. I will keep this in my back pocket for future reference. Thanks!
@Jaron Walling I agree that seller motivation is a key factor. My guess is that is why @Chad Carson says he has appointments without offers. He might get there and discover a price too high for what needs to be done and a totally unmotivated seller or one in complete denial about what needs to be done and its cost.
One thing I am running into with these bank-owned properties is not that they aren't discounting the property they do. I suspect they have someone tell them roughly what needs to be done and discount it down to get just that stuff completed. That is where the problem occurs. I need them to discount it by more to make BRRRR work. I have to get at least a 25% reduction in the price on top of rehab cost at a minimum and that still means you will be putting a chunk of your own cash in the deal or leaving cash behind when you refinance.
The banks are looking at it differently. They see the market value is X and if you need Y for repairs they just discount the property by Y and assume the buyer will be happy to have a fully working house at market value when the repairs are completed. That doesn't work for BRRRR investing and quite frankly it doesn't work for just about any real estate investor. If that is all I was going to get why not just buy any house off the MLS at market value and is already fixed up and ready to go and save myself the headache of running a rehab.
@Michael Temple What you described is exactly why I'm focusing on off market deals. You can have a meeting without any pressure. It's the face time and understanding of motivation to sell which lands those 50% discounted deals you're searching for.
I negotiated for a REO property last year. The house was a wreck and didn't even have kitchen. They wanted $99K, they stalled at $92k, so I walked. I wasn't paying a dime over $80k.
@Jaron Walling that is exactly my experience as well. I had an offer in on a house in a neighborhood where I own another rental about 2 streets up. I know that neighborhood values and rents cold. To make BRRRR work I needed to get it at 90K, but they stalled out at 110K and wouldn't come down. I ended up walking as well. I see it shows pending on the listing now. My Realtor suspects that it is a homeowner that is willing to do the rehab and have the house at market value instead of the 75% of ARV I would need for BRRRR. He is probably right as it is a really competitive area with houses tough to get in there even fixed up and ready to go.
I am beginning to see that MLS might produce a deal here and there, but most likely it is going to have to be those off-market deals with a motivated seller as you said.