First Offer! Am I on the right track?

9 Replies

Hi. I found a property listed on the MLS for $650k in need of approx. $150k in repairs. The property was an historic property in my area that needed lots of work including a new roof (existing was just paper for over a year). Owner was an investment firm that had it listed for over a year.

Upon contacting the agent they said the firm was just looking for an exit strategy. I was very clear that I wasn’t a retail buyer… many times.

Applying all that I’ve learned so far from BP, I cranked the numbers as such:

ARV was conservatively $769k based on three comparable solds within the past month.

Using 70% rule, meant $538,300 was the max purchase price less $150k for repair costs… leaving max purchase price at $388,300.  

The listing agent had a recent quote (within 3 months) for repairs claiming $116k in repairs. However, seeing that some of the interior was partially completed without having put a roof on the building left me skeptical as to the quality of the quote. So I bumped it up to $150k also to cover holding costs while getting permits on the historical property to a $150k estimate.

I had planned to offer $360k leaving me some additional contingency room and potential for a wholesale fee (less than 5% though). However, “if you’re not embarrassed by your offer then your offer is too high.” So I dropped it to $345k.

It wasn’t taken.

Later, I learned from the agent, however, that the investors claimed to have 7 other offers on the property throughout the year between $600k-$630k. This led me to question whether my formula is too aggressive for my market.

Using the 70% rule I would have potentially profited about $150k on the property. I’ve been told “big risks should deliver big rewards.” This property was in such bad shape that I considered it a big risk and thus it seemed appropriate. I did talk with another investor friend of mine who advised not to go any higher than $400k on the property, so I figured after negotiations I’d land somewhere around my original target of $360k. But with 7 other offers over $600k, is that to say that I can’t apply the 70% rule in my market?

Other formulas suggest applying a fixed profit target to the purchase price (i.e. instead of a 0.7 multiplier, calculating the ARV and subtracting repairs costs, profit, and carrying costs, etc. separately). Perhaps targeting a fixed profit (i.e. $50k) is a better way to start here?

Note, I’ve not even started my direct marketing yet. This was the first attempt of many to come but I wanted to make sure I was headed in the right direction with my offers and business strategy before I'm laughed out of the market. 

Thanks for the input.

Dang, those are some HUGE numbers...   =)

The 70% Rule is really just a guide - in many CA markets the formula tends to be too conservative.  Hedge funds and other aggressive investors have pushed it closer to 80% and for some guys they are not looking at the %, they are looking at the $.  In other words, if they can make $50K on the deal in 90 days, the % may be irrelevant to them.

But on the other hand, this is about ROI. If I have to tie up $600K in capital to net $10K, that's not good ROI. Most guys with big money have a minimum threshold (ROI %) that they need to make on their money.

I hear that story all the time about "the seller already had several offers above $xxx" to which I say "Well, he should have taken one of those offers.  As an investor, I have a limit to what I'm willing to invest, especially in a property that needs such extensive repairs...".

You are in a crazy world out there.  I think your head is in the right place; it comes down to the discount that you can get and whether or not a cash buyer will be interested.  When I lose a deal, I like to figure out later what my competitor paid.  In many cases, it's a STUPID amount of money, and I have seen multiple guys in my market lose their SHIRTS because they got caught up in a bidding war and paid too much.  How do you compete with STUPID?  You CAN'T, unless you want to join the stupidity.

Stick by your numbers and make solid offers.  If you lose a deal, learn what you can from it and move on.

Some investors do it differently, but I use the 70% Rule as well when determining my MAO. However, I only wholesale my properties and I do not fix and flip just yet. But in my case, I'm also dealing with properties between 50-150k, not 750k ARV properties.

That being said, I never make offers that break this rule. If it doesn't work, there's always another property. I don't try to squeeze out a potential deal because that wouldn't look so good to my buyers who I want to build a relationship with. Especially just starting out, you want to market only great deals. It builds credibility a lot quicker as well. Good luck! 

"I hear that story all the time about "the seller already had several offers above $xxx" to which I say "Well, he should have taken one of those offers."

AMEN!

If the house is listed for $650k for over a year and they got an offer for $630k, they were probably strongly advised to take it.  I call BS on 7 other offers $600K+.

Originally posted by @Joshua Durrin :

Hi. I found a property listed on the MLS for $650k in need of approx. $150k in repairs. The property was an historic property in my area that needed lots of work including a new roof (existing was just paper for over a year). Owner was an investment firm that had it listed for over a year.

Upon contacting the agent they said the firm was just looking for an exit strategy. I was very clear that I wasn’t a retail buyer… many times.

Applying all that I’ve learned so far from BP, I cranked the numbers as such:

ARV was conservatively $769k based on three comparable solds within the past month.

Using 70% rule, meant $538,300 was the max purchase price less $150k for repair costs… leaving max purchase price at $388,300.  

The listing agent had a recent quote (within 3 months) for repairs claiming $116k in repairs. However, seeing that some of the interior was partially completed without having put a roof on the building left me skeptical as to the quality of the quote. So I bumped it up to $150k also to cover holding costs while getting permits on the historical property to a $150k estimate.

I had planned to offer $360k leaving me some additional contingency room and potential for a wholesale fee (less than 5% though). However, “if you’re not embarrassed by your offer then your offer is too high.” So I dropped it to $345k.

It wasn’t taken.

Later, I learned from the agent, however, that the investors claimed to have 7 other offers on the property throughout the year between $600k-$630k. This led me to question whether my formula is too aggressive for my market.

Using the 70% rule I would have potentially profited about $150k on the property. I’ve been told “big risks should deliver big rewards.” This property was in such bad shape that I considered it a big risk and thus it seemed appropriate. I did talk with another investor friend of mine who advised not to go any higher than $400k on the property, so I figured after negotiations I’d land somewhere around my original target of $360k. But with 7 other offers over $600k, is that to say that I can’t apply the 70% rule in my market?

Other formulas suggest applying a fixed profit target to the purchase price (i.e. instead of a 0.7 multiplier, calculating the ARV and subtracting repairs costs, profit, and carrying costs, etc. separately). Perhaps targeting a fixed profit (i.e. $50k) is a better way to start here?

Note, I’ve not even started my direct marketing yet. This was the first attempt of many to come but I wanted to make sure I was headed in the right direction with my offers and business strategy before I'm laughed out of the market. 

Thanks for the input.

$650k is definitely too high - not a rehabber's market. 

Is the property still for sale now?

@Adrian Chu

Believe it or not, the property sold for $640k.  It went in and out of escrow a few times but was eventually sold for $640k.  Way too high if you ask me! But then again they're the ones that MIGHT make some money (keyword = MIGHT).  I'm still waiting to get my feet wet with my first deal.  

I'll be interested to the progress on this property as it goes through the rehab and such.  I'll post an update as I see it happen.  

Originally posted by @Joshua Durrin :

@Adrian Chu

Believe it or not, the property sold for $640k.  It went in and out of escrow a few times but was eventually sold for $640k.  Way too high if you ask me! But then again they're the ones that MIGHT make some money (keyword = MIGHT).  I'm still waiting to get my feet wet with my first deal.  

I'll be interested to the progress on this property as it goes through the rehab and such.  I'll post an update as I see it happen.  

Is it somewhere in East Bay?

@Adrian Chu

Yes it was... Alameda, CA.  The property has been restored quite nicely since I drove by it last.  It appears to be owner occupied though. 

Originally posted by @Joshua Durrin :

@Adrian Chu

Yes it was... Alameda, CA.  The property has been restored quite nicely since I drove by it last.  It appears to be owner occupied though. 

 I know which one you're talking about.  It had potential, but at $640K, there was little chance of doing much with it.

I think the 70% rule is good rule/guide to stick with. Any historical property can be challenging depending on what the architectural committee will and will not allow. Lastly, in a subject that old there is always the unknown of what is behind the next door.

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