How low is too low for an initial offer?

7 Replies

I’ve just been approved for up to 200k fha and have found a 2 unit home that I plan to househack. The listing is for 185k and has everything I’m looking for In terms of location and amenities. This is my very first deal and I want to get it at the best price I can. What are your strategies for an initial offer, that I could apply to my situation? Any other tips for a first timer are certainly welcomed and appreciated!!
@Brandon Reed , I have to say I don’t have much experience calculating MOA. I don’t believe there will be a ton of rehab cost, but I will be stepping foot inside the place tomorrow and can look for potential big ticket items before getting an inspector in there. I would be eager to learn more about MOA and all the variables considered in that evaluation! Is there anything you would recommend to read up on? Thanks so much for the advice!

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.

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.

@Taylor Walber if this is an investment, the price you pay should be based on its income. What is the market rent for the side you aren't living in? What will the total income be if you move out and rent both sides? What are the expenses? Even though you plan on living there now, if you move in a few years, you want to make sure it is a solid investment.

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.