How much to offer on off-market property?

Question

I'm about to reach out to a home owner, best neighborhood in the area and this house looks a little forgotten about. Doing a bit of research it looks like the owner is 69 years old, "purchased" the house in 2003 for $100, so I'm guessing family gifting.

The estimated purchase price online is about $315,000 so if I'm correct you offer 70% of the price minus any repairs.  Assuming it needs $50,000 in repairs/updates that would mean I'd need to be under $170,000 on the property is that correct?

I'm also very risk adverse, so if it's estimated value is $315k I'd assume $300k and if I thought $50k in updates I'd probably go with $60k in updates to be safe so then really I'd want to offer $150,000.. Do deals like this actually happen?

This would be a buy and hold.

Bob Daniels · Answer

There's only two numbers that matter, what price is he willing to sell for, and how much are you willing to pay.  You go with the lower of the two numbers.  If he wants more than what makes fiscal sense to you, then you simply walk away and reengage him at a later date to see if he has changed his mind on the property.

Other then that, I've found that the more I listen and the less I talk, the better the negotiations go.  Figure out what's going on in his life and play on those situations and emotions.  He have kids living in another state?  Ask him how great it would be to be able to relocate closer and be able to spend more quality time with family etc.  Plant reasons why he should move other than the fact that you want to buy his house for as little as possible.  Once he expresses at least some interest, find out what he is willing to sell it for before you tip your hat and let him know what you would offer.  It's just like poker, the last person to act has an intrinsic advantage.  If you start the conversation by saying you will buy the home for 275k, and he was willing to sell it for 250, then you just left money on the table by opening your big mouth too soon.

While anything is possible, it's not likely that he is going to sell his home for less than half the fair market value.  Usually the killer deals like this are due to pending foreclosures, or some other time sensitive life event where they need to sell immediately and can't wait 30+ days for a traditional closing.  After all, why sell it to you for 150 when he could sell it on the MLS in a week for 275 - 299 and close a month later?

Personally I buy a lot of my deals subject to the existing loan, which often means I need a bare minimum amount of money up front to gain control of the property.  Because of this, I can theoretically offer significantly more money than any other investor since my initial cash outlay is so low.  The only thing I really care about is 'Am I buying this property for under fair market value'.  Obviously a bigger discount is always better, but I'll buy properties with even a small margin if the terms are good enough.

Scott Passman · Answer

@Eric P. The 70% rule you are using is a general rule for flipping homes.  If this is meant to be a buy and hold, those numbers aren't what you should be evaluating with. You would need to run the numbers to determine what this market rent is for this home based on location, bedrooms, condition, etc. and use that income to determine what kind of monthly payment would make sense to cashflow. You would need to factor in budgeting for vacancies, repairs, capex, property management etc. along with monthly mortgage payments and any rehab you think it will need.  Use these numbers to determine what kind of offer you could make that would be profitable.