Am I being too conservative? Would you walk this BRRR deal?

Question

I made an offer on a home and we were just informed they have a higher offer. Below is an overview of the details. Should I raise my offer?

Listed at $100k. The home is on a sketchy street but every street around it is turning around. This makes pulling comps very difficult. Average comps in the market are between $85-90/sqft. However, in this area some houses are selling for much less as investors buy them an flip it. In an effort to be conservative and to not get blindsided by a low appraisal I used the low average of $65/sqft to calculate an estimated ARV.

OFFER #1:

Offer: $62,500

Repairs: $14k

All in: $78,600 (with closing costs)

ARV: $98,280 ($65/sqft x 1512 sqft)

Refi (80% LTV): $78,624

Below is the potential counter. $70k max offer and lowered the reno cost. The above had a cushion in case of unexpected repairs. I also raise the cost/sqft to $70 which is now a medium-low price/sqft in the area.

POTENTIAL COUNTER:

Offer: $70,000

Repairs: $10k

All in: $84,100 (with closing costs)

ARV: $105,840 ($70/sqft x 1512 sqft)

Refi (80% LTV): $84,672

Brandon Roof · Answer

Don't try moving the goalposts in order to make a deal work. Raising the $/sqft you expect to get to justify a higher offer is a slippery slope. You may also be investing too much of your time and thought in this project as it is listed at $100k and with your offer your not even likely to receive a counter, unless there is additional information that would lead you to believe your offer would be entertained.

Mark S. · Answer

@Matt Hudson I have purchased and remodeled 6 houses over the past couple years and every one of them has had unexpected costs. Have learned to always build in a cushion in the reno budget. It’s just really difficult to catch everything when you inspect a place. Or you don’t build in a cushion and then if something unexpected comes up you just decide what has to give from your original budget.

Theresa Harris · Answer

@Matt Hudson  To make them comparable, run the numbers with the same value per sq foot.  I get with the higher purchase price, you won't be doing as many renos, but you need to see how that affects the ARV to compare apples to apples.

Brandon Roof · Answer

I don't believe you are being overly conservative, but I would categorize myself as being extremely cautious and conservative when it comes to estimating rehab budgets and ongoing expenses, so with that in mind, can it be a good deal?  Possibly, but I tend to walk from these scenarios.

I always go into an offer knowing my best possible offer because it helps remove emotion from the equation.  Using your case as an example, I see a listing, schedule a showing, determine my expenses versus expected revenues and determine the highest offer I can make based on the return I am seeking on my investment.  If that number ends up being $62.5k and somebody comes along on offers more, I move on.  Either they beat me and have a better grasp of what revenues and expenses will be, thus securing themselves a good deal, or they just ended up taking on decades of headaches in a marginal investment.  I'd rather miss out on a close call than up my bid in desperation to land a property.

Max T. · Answer

@Matt Hudson

Why did your repair cost change in the counter?

Theresa Harris · Answer

It is great to have plan A and plan B.  In offer 1 you have $14K of repairs/renos, but in offer 2 you've lowered that to $10K, yet the ARV in offer 2 is higher by $7.5K.  Not sure how that works.

Matt Hudson · Answer

@Brandon Roof

You're exactly right about moving the goal posts! I 100% agree. I'm just trying to gauge whether I'm being overly conservative. The sellers agent said they'd entertain offers at sub $75k and will certainly not get $100k for that property. I appreciate your insight.

Wes Ripley · Answer

Matt, I would recommend that you reframe your approach.  Being conservative is fantastic and will make sure when you finally get a deal, it will probably be a good one!

That said, there is a difference between being conservative in approach and being sloppy with numbers.  Do as best you can to identify your scope of work and attach the appropriate costs to that.

Replacing floors?  Great, attach your material and labor costs per square/ft.  Painting, do the same.  And down the line.

Once you’ve done that, you have you expected budget.  You can add a contingency budget as a separate line, but your planned repairs are your planned repairs.

ID your scope of work and your ARV.  Consider the difference between using you me contingency budget and not as the difference between a single and a double.  Only then will you be able to evaluate on the back end how well you did at projecting your costs and comp evaluations.

Matt Hudson · Answer

@Max T. - In the original offer I gave myself a $4k cushion in case of extra repairs.

@Theresa Harris - Like I told Max above the $4k buffer just in case. The ARV increased because I was less conservative with the $/sqft. Instead of going $65/sqft (which is the low average $/sqft) I bumped it up to $70 which is more like medium-low in that area. The overall average is $85-90 for similar properties however this street is a little rough still and won't warrant that $/sqft.

Matt Hudson · Answer

@Brandon Roof Good mindset! That counter offer is the max I'd be willing to go. I'm having my contractor go out there today to walk through with a fine tooth comb to get an exact rehab estimate. I'll know more once that happens. Again, thank you!

Am I being too conservative? Would you walk this BRRR deal?

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