How to price offers for off-market deals

10 Replies

I have been running into the issue of not knowing how to price offers for off-market deals I find from direct mail campaigns. 

I am operating in a market with a very heterogenous real estate landscape in a relatively small county, so comparable sales data from Zillow, Realtor, etc is a little finnicky. 

Does anyone have a strategy for how to price offers? I am hoping to send some blind offers in my letters, and I want to develop a good system for determining price.

Thank you!

-Eli


@Eli Kallison

Hey Eli,

I think at minimum you need to figure out what the properties in that area would rent for.  Once you have that information you can work that number in for cash flow and cash on cash return based on a number you pay for a house.  You can use different down payments and even all cash scenarios to figure out different numbers.  

After doing these exercises you can come up with the perfect number to offer on a house based on your investment criteria.  

Your offer shouldn't be based on market value, it should be based on the returns on the investment that you are seeking.

If you don't know how to analyze numbers on a rental I would suggest watching a youtube video by Brandon Turner called "Calculating numbers on a rental property using the 4 square method"

Good luck!!!!

Account Closed

I will give you one scenario that happens all the time.  Elderly person passes away, home if fully paid off.  Children don't want to deal with the property.  They sell it at a deep discount.  

This is just one answer to your question.  There are many more though.

@Eli Kallison

Account Closed

Here is a sample of working the problem:

If you know you can get $1000 for rent then you start there

Rent: $1000

Plug in price of home: $100,000

25% down = $25000

Loan- $75,000 @ 3%

Principal and interest- $316.20

Taxes- $104.17

Insurance- $29.17

Vacancy 5% -$50

Repairs 5%- $50

Capex 10%- $100

Tenanats responsible for: water, garbage, electricity, gas, gardening- $0

Add your costs up- $649.54

Rent minus costs- $1000 - $649.54 = $350.46 monthly cash flow

Yearly cashflow- $350.46 x 12 = $4205.52

Cash on Cash return- down payment $25,000 + closing $3000 (3%) + Rehab $10,000- Total cash investment $38,000

Annual cash flow $4205.52 divided by total cash investment $38,000 = .11067158 x 100 = 11.6% Cash on Cash return

Change the rent amount and the price of the home and plug them in and you can work out the number to see if it works for you or not.

I hope this helps!

In many markets the "value" of a property has no correlation with what rents are. Besides, looking at it in that way is too myopic, it really only provides you with one possible exit strategy. 

Partner up with a local realtor who knows something about investments and negotiation. They will be able to tell you what retail values are ARV for properties should be. You can use that info as a guideline and make offers accordingly.

Best of luck!

Originally posted by @Damaso Bautista :

@Eli Kallison

Account Closed

Here is a sample of working the problem:

If you know you can get $1000 for rent then you start there

Rent: $1000

Plug in price of home: $100,000

25% down = $25000

Loan- $75,000 @ 3%

Principal and interest- $316.20

Taxes- $104.17

Insurance- $29.17

Vacancy 5% -$50

Repairs 5%- $50

Capex 10%- $100

Tenanats responsible for: water, garbage, electricity, gas, gardening- $0

Add your costs up- $649.54

Rent minus costs- $1000 - $649.54 = $350.46 monthly cash flow

Yearly cashflow- $350.46 x 12 = $4205.52

Cash on Cash return- down payment $25,000 + closing $3000 (3%) + Rehab $10,000- Total cash investment $38,000

Annual cash flow $4205.52 divided by total cash investment $38,000 = .11067158 x 100 = 11.6% Cash on Cash return

Change the rent amount and the price of the home and plug them in and you can work out the number to see if it works for you or not.

I hope this helps!

Thank you for this explanation Damaso. Much appreciated. The rent to cost ratio in this area is pretty abismal, so cash on cash is low. But, the market is and has been quite hot for owner occupants and some vacation homes. I'm hoping to send out offers below market value of home in bulk via direct mail and then turn around and sell on mls for retail. I'm just having a tough time figuring out how to get a system down for blind initial pricing (subject to visual and professional inspection later on) that doesn't require manual analysis of each property that I mail. 

@Eli Kallison

The problem with blind initial price is that you really don't know what you have.  It can work if you know what the price of a complete gut job house will sell for and then you can get a house that is at least living for that cost.  That way you can pretty much know that you are going to be able to resell it as is and make money.  But I think those nuggets are very hard to to find.

Good luck in your journey!

Depends on what you plan to do with it. I'd base it off numbers. Give them a fair offer that fits the numbers. Base numbers on comps and rent. If you are familiar with the market you should be able to have a general idea then pin point an offer price.