How low is too low for an initial offer?

Question

Stephen Brown · Answer

Hey @Taylor Walber, consider this. Can I live for free? The MAO that @Brandon Reed spoke of is an excellent example for an investor buying an investor property. I use it all the time. And the info the @jason DiClemente gave is great to, because when it comes to rentals, the income from the property is very key.

If you are going to live there, what mortgage can the rent from one side support (PITI)? If it can pay the mortgage payment, then the cost to live there for you will be repairs and vacancy reserve.

This is not a purist way to look at it, but it is one way. My sons first house was a 4 bedroom, where he rented out the other 3 bedrooms. He paid retail (why listen to Dad) and their rent paid the mortgage. He got married, moved out, costs have gone up, and he made a few adjustments, rented out the 4th bedroom and continues to hold it. It may not be a spectacular investment, since he bought it 'wrong'. But he was happy with it then and now.

Just my two cents.

Russell Brazil · Answer

Well if the value of the property is $250k, and there are 10 offers, then even $240k might be too low. If the properties value is $150k and there are no offers, Id start at $125k.

The list price might or might not have any correspondence to the properties value.

Brandon Reed · Answer

Yeah you definitely want to know your MAO going into any negotiation with the seller. If you find that your MAO is actually above the asking price, ask the asking price (unless of course you have a reason to believe that the seller would take less). If your MAO is below the asking price...go ahead and make a decision right now to not offer above your calculation. Stretching above your MAO for any reason is generally a really bad idea barring extenuating circumstances.

You are of course going to need to know your ARV in order to calculate your MAO. So definitely take note of the "big 4" while you are looking at the property (Roof, A/C *indoor and outdoor*, Plumbing, Electrical), plus anything else you can see. Also ask about overdue maintenance if the person showing you the home has that knowledge.

Once you know the ARV (make sure this is as solid as possible), you can calculate MAO as:

ARV  x  [65% or 70% (depending on several factors)]  -  Repair Costs  =  MOA

Dig around BP for blog posts on the topic. It's not an incredibly complex idea but it's important that you know all that goes into it.

Brandon Reed · Answer

Hey @Taylor Walber - Way to go on finding your first potential deal!

Have you been able to calculate your MAO yet? Do you know how to do that?

Ned Carey · Answer

@Taylor Walber the MAO formula mentioned above does not apply to rentals it is for flips.

How low is too low for an initial offer?

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