What's your offer making process?

Question

To me, I can make a reasonable approximation of value by looking at basic info like the market the property is in, the stated rents or market rents, occupancy and general info like that which is usually disclosed upfront. Do you make written offers based on that surface info or do you give the seller or their agent an estimate of the offer you are considering until more info is given? We know that upfront expenses shown are usually deceiving in order to invoke a higher price. If you do make offers based on that limited info, do you adjust your offer if, after looking at more detailed info like p&l and tax returns, the numbers are worse than anticipated?

I'm curios how much info you want to see before making an offer. And If you don't have enough info on the property listing, do you contact the agent for more info prior to an offer? I hope that isn't confusing and thanks!

John Leavelle · Answer

@Alex Tobias

Let me give you an example.   Let’s say we find a 4-Plex in a neighborhood that I’m interested in. This property is in bad shape, overgrown landscape, broken fence, exterior needing some attention.  The first thing I do is establish a good ARV based on comps.  Since we have previously thoroughly researched this area we already know how many Multi family properties are there.  We know what properties have sold for over the past year (and what condition at the sale), we know what the Rental rates are.  We decide the property should appraise for $250,000 once we finish the Rehab.  I walk the property with my general contractor to get a preliminary estimate for repairs.  Based on what we find (Let’s say $40,000 Rehab estimate- including a 20% cushion) I’ll determine my offer this way:  $250,000 ARV x 70% = $175,000 My All-in Costs basis.  $175,000 - $40,000 Rehab estimate = $135,000.  $135,000 - $10,000 Holding and Closing cost (2 Closings)  estimate  = $125,000 MAO.

Notice I did not mention anything about the asking price.  With the BRRRR strategy the primary goal is to be able to refinance out of the acquisition financing and pull all my cash investment out.   If the numbers don’t work... they don’t work and there is no deal.  That is why the property must be distressed to justify the lower offer.  I get a whole lot more “No’s “ than “Yes”.  But that is expected.

Todd Dexheimer · Answer

@Alex Tobias  for multi-family, I would renegotiate the offer if during due diligence something came up massively unexpected by all parties. If it is small or something I should have caught I will not negotiate on it. You don't want to get a name as someone that renegotiates on every deal.

Robbie Reutzel · Answer

@Alex Tobias, that is correct. We hope we don't have to re-negotiate but many times it is necessary to make the deal work.

Most of our deals are off-market distressed properties. Direct mail and cold calling are our two main methods.

Robbie Reutzel · Answer

@Alex Tobias, for us it totally depends. If we're close we'll usually write an LOI quickly to lock the property up but if we're way far off I will generally ask the seller/agent (we try to negotiate direct to seller as much as possible and stay away from listed properties), if it even makes sense to write it up. Generally you have a pretty good idea of value and we make sure to have a due diligence period to verify all information given. Due diligence doesn't start until we have all the documents requested.

Good luck!

John Leavelle · Answer

@Alex Tobias

The type of property I described are out there.  It takes a lot of looking.  Mostly vacant run down properties.  I put in a lot of offers and get a lot of rejections.  None have been directly from the MLS.  However, I did purchase a 2fer deal (2 properties for one price) from a Seller I initially submitted an offer from a MLS listing (which was rejected).  That being said, these kinds of good deals can appear once in a while on the MLS.  I’ve seen them.  But, they were not anywhere near my target areas and were too large for my current budget capabilities.

Todd Dexheimer · Answer

Also, industry standard is not 40%. Depending on the asset type, size and class you will likely be between 50-60%.

Todd Dexheimer · Answer

@Alex Tobias as I mentioned, I bid on deals after looking at detailed financials, but you also need to factor in reality. If for instance a seller is self managing and doing the maintenance themselves, then their expenses may be 35%. When I buy, however, my expenses would go up drastically. Same with a seller that has really high expenses.

Making an offer based on not seeing financials runs little risk to me if you are conservative as I stated. You can simply take a survey of the neighboring properties to find out their gross income and expenses and base your number off of that. I would not go into it paying market value if they don't have numbers, but I would not hesitate to make a conservative offer with a Due Diligence inspection period.

Alex Tobias · Answer

@John Leavelle

Alex Tobias · Answer

Do you get many deals like you described? I find that remarkable. Where I live, properties will have multiple bids and sell for over asking on anything cheap. I've never lived in a reasonably priced area though. The main reason I decided to invest in larger deals is because I realistically can't cashflow in the bay area and looking for small deals on the other side of the country isn't practical to do remotely. Thanks for your help though.

Alex Tobias · Answer

@Todd Dexheimer What if you used an industry standard for expenses, but when looking at their financials instead of, say, 40%, expenses were 45%, 50% or even 60% of the gross income? I would think even a few percent higher percent of expenses can make a big difference on cash flow. I'm not saying the expenses can't be improved, but I find the idea of making solid offers based on not seeing detailed info as risky without much upside to that risk and dissatisfying. That's why I asked this I guess. It sounds like most people think they know what they can get out of  a property and are willing to bid fairly close to that end number.

What's your offer making process?

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