Am I low balling my offers?

20 Replies

I've run the numbers on quite a few properties in my search area and have found that the majority of the ones I like the numbers aren't good on unless I offer way less than the asking price. I'd like to stick to my numbers so I don't buy a bad deal but the most recent one I ran came up with an offer price at 40% of the sellers list price to make it work. This was the lowest so far but most of them have been around the 50-65% of list price range after looking at rehab costs and rent rates etc. Should I be considering what the rent rates should be instead of where they are currently? If I would offer on something based on those rates and get it, do I raise the rents from day 1?


Thanks in advance for any help/advice on this!

Originally posted by @Elliot Marszalek :

I've run the numbers on quite a few properties in my search area and have found that the majority of the ones I like the numbers aren't good on unless I offer way less than the asking price. I'd like to stick to my numbers so I don't buy a bad deal but the most recent one I ran came up with an offer price at 40% of the sellers list price to make it work. This was the lowest so far but most of them have been around the 50-65% of list price range after looking at rehab costs and rent rates etc. Should I be considering what the rent rates should be instead of where they are currently? If I would offer on something based on those rates and get it, do I raise the rents from day 1?


Thanks in advance for any help/advice on this!

The market will dictate the prices, not what numbers work for you.  Look at what comparable properties in the market you are looking in are selling for.  If your required numbers don't work in that market, look at other markets.  If you are inheriting tenants you inherit their leases which depending on the lease and the local laws, you may or may not be able to raise the rent soon after purchase.

Originally posted by @Elliot Marszalek :

I've run the numbers on quite a few properties in my search area and have found that the majority of the ones I like the numbers aren't good on unless I offer way less than the asking price. I'd like to stick to my numbers so I don't buy a bad deal but the most recent one I ran came up with an offer price at 40% of the sellers list price to make it work. This was the lowest so far but most of them have been around the 50-65% of list price range after looking at rehab costs and rent rates etc. Should I be considering what the rent rates should be instead of where they are currently? If I would offer on something based on those rates and get it, do I raise the rents from day 1?


Thanks in advance for any help/advice on this!

 If you're offering that low, it will be a while before you can buy a property. You have several options:

1. Change your buying criteria - maybe you're being very conservative, like some investors here on BP who swear by the 2% rule (buy a $50,000 property that rents for $1,000/month). While that works back in 2009-2013 and in some markets, that basically doesn't work anymore. In a rental property, you have to factor in not just the cashflow you get from a property but also the equity build up and any appreciation you can create (or force). For example, if the rents are lower than market, what can you do to increase the rents? If and when you do that, you can increase the value.
Also, in some markets, the 50% of rents as expenses rule of thumb is also not true. You have to understand your market more.

2. Change your strategy - maybe buy-and-hold with the 1% rule does not quite work in your market but maybe fix-n-flip does. Have you considered rent to own as an alternative strategy?

3. Change markets - if your market is not amenable to cashflowing rentals, then invest elsewhere.

4. Invest as a passive investor in someone else's deal (or investors who can find good deals)

5. Don't make offers on MLS listed properties but focus on finding OFF-market deals instead

@Elliot Marszalek I am in a similar situation in Miami FL. Although we are in a highly priced market more so than PA if thats where you are investing. 

When I analyze deals I use the 50% rule and the 1% rule (you can find more info on that here on BP). When I analyze this properties will be listed at around 400k and I will offer 285k as an example. I am looking on the MLS and do not have a good source for "off market" properties as @Michael Ealy suggested.

@Elliot Marszalek you will have better luck looking off market. Find distressed property owners. The majority of people on the MLS are in a position to wait for a market priced offer.

@Jordan Hamilton there are plenty of sources for off market offers.  Check your city/county website.  Properties with tax liens and pre-foreclosures are public record.  You will find plenty of owners who are willing to sell at a discount In exchange for cash/and or a quick close.  

I,m a disposition manager here in Miami Dade & Broward county

in this current market you will never get an offer accepted under asking , ever

a lot more buyers than houses

@Bill Plymouth Thanks for the info, will check that out.

@Christian Gros I don't think "never get an offer accepted" applies in the Miami market but I do understand what you mean. For example if you look at the trade history for many properties recently sold you can see the asking price and the sold price. Many of those are below what was originally asked on MLS or other methods.

Thanks for all the responses. Maybe I'm just doing bad math, these are how I've been evaluating the properties.

For the live in flip homes I've been looking at the basic formula I use before I dive in deeper to the details is (ARV*0.7)-Rehab cost= Initial Offer Price. If it looks like it might be a good deal with that then I go look at the property in person and get a better idea of the estimated rehab cost and adjust my offer price accordingly.

For the rental/house hack properties I analyze I just use the rental calculator and fill it in as accurately as I can. Most of them won't even break even at the list price. If it's one that I'd actually want to move into and house hack I try to get as close to break even or slightly positive cashflow as possible and if it's one I don't want to move into and just look at as a rental I try to get to +$100 per door cashflow. 

It may also be that the area I'm looking in is just too small as well, I have my search set up to look for properties that are within a 20 minute drive of a set location.

You will almost never find a deal with that criteria on the MLS. If you could get houses for 70% ARV-rehab everyone would buy them. Most people can barely get 80% to flip with off market deals in most areas. IMO you're being unrealistic with your expectations for how you're going to find this deal and how much you will make off it and if you keep going down this road, there is about a 0.001% chance you will find something that works. Read everything you can on here about how wholesalers are finding their deals because those methods are the only ways you might get close to those numbers. It will take a lot of leg work, door knocking, cold calls and people saying no before you find it. It could be 100 attempts or it could be 1000

@Bryan Devitt Thanks for that tip. The reason I ran the numbers that way is because that was the formula that's mentioned in the UBG for flipping houses. I definitely need to learn more about the wholesaling process. I listened to a few youtube videos on it with people who do it as a day job and it sounded like a whole lot of things you need to know before you even start.

The problem is successful flippers do not get their deals on the MLS. People who let properties get to the point of needing that much work don't just list them to move to a new place. Auctions used to be the easiest place to get properties that would work with those numbers but there are far too many people in the business right now so those properties are going for way above where they should. People are either running razor thin margins and making their money off the volume and discounts their contractors give them for that volume or they're newbs who are breaking even or losing money thinking "they're selling for this much and the pros do it, so it must be able to work at that price" and they don't know what they don't know, so they take a beating usually and have wives that are pissed and tell them they're never allowed to do it again

What @Bryan Devitt said x1000!

I make the same gripes all the time.

This is why I’m currently trying to build an innovative marketing machine to reach motivated sellers before the competition.

I really appreciate the feedback. Thought I was doing it right going by the formulas and calculations but I guess they don't hold true entirely with today's market. Like everyone says, you don't know what you don't know and it's really great to get responses that have constructive criticism so I know where/what I need to improve to be more successful. I have to admit I almost felt bad even considering offering at some of these prices because I know that if I was in the sellers shoes it might even be insulting regardless of how much work the property needs. So far the only one I've put an actual offer in for is bank owned so at least there's no emotional attachment to it.

Lot of good feedback here. You mentioned originally "should I be considering what the rent rates should instead of what they currently are?" Absolutely! Get to point where you can see a property and instantly know what the market rent is. I almost don't even pay attention to the current listed rents. I know at first glance what the rents should be based on unit size in my farm area. Learn your market. 

Any "deal" that happens to pop up on the MLS requires IMMEDIATE action. My last property was on the market for under an hour. I made a full price offer immediately after getting the email without seeing the property and it was literally 3 miles from me. I later found out a good friend was going after the same property and he was a cash buyer. I was just quicker. Get the deal under contract and back out later if you want. Daunting yes but just take action.

Outside of the MLS I wrote about 20 letters to owners of properties that fit my criteria and got into two negotiations. Didnt come to an agreement but hey, I made headway and the driving for dollars concept was proven. Get out and find a deal once you really take the time to learn your target area. Hope that helps.

Sounds like some really good advice from everyone here. I was curious if you were trying to wholesale these properties? At 40-50% of the list I'm guessing that is what you were trying to do.

Stop using fixed rules you hear on the internet, they're all BS. Anyone that tells you a hard & fast rule they use has no idea what they're doing. Especially if they say it can be used for a wide geographic area. The criteria I use to evaluate something in one area will be different than what I use 5 miles away ... many factors must be taken into account. Until you realize that everything is fluid, you don't know the area well enough to risk your capital.

@Daimian Leslie

No I'm not even really sure how the wholesale process works. I understand the basics and that you're a middle man for the transaction but I was looking to purchase for myself not to sell to someone else. Like many have said, I'll have a hard time finding anything if I'm sticking strictly to what the UBG says. I think I may have been over estimating the rehab costs as well which would also help explain why the offer price would be so low compared to the list price. 

Maybe the next time you are looking at a property, do your numbers and post it on BP and see what some of the others here (possibly some who are in your area) will respond with recommendations.

I see you're doubting your numbers and can't possibly see how almost nothing works??  That means you're doing something correctly.... I would be concerned for you if you're seeing any number of properties "working" off of listed sources.  Everyone and their brother is now an "investor".....deals are as abundant as (insert cheeky metaphor here)...

@Elliot Marszalek - take it from someone who just walked away from a deal for this very reason, stick to the numbers and make the deal fit your criteria not the other way around.  The great deals are not as abundant as the bad deals, but they do exist you just have to find them!  The last thing you want to do is buy a bad deal for the sake of saying you bought something because you will have to live with that decision for possibly years to come.  

Originally posted by @Elliot Marszalek :

I've run the numbers on quite a few properties in my search area and have found that the majority of the ones I like the numbers aren't good on unless I offer way less than the asking price. I'd like to stick to my numbers so I don't buy a bad deal but the most recent one I ran came up with an offer price at 40% of the sellers list price to make it work. This was the lowest so far but most of them have been around the 50-65% of list price range after looking at rehab costs and rent rates etc. Should I be considering what the rent rates should be instead of where they are currently? If I would offer on something based on those rates and get it, do I raise the rents from day 1?


Thanks in advance for any help/advice on this!

 Incredible content in the responses you received. I'd like to add to your question regarding the rent rates.

As you've heard, you have to honor the current tenant's lease. Depending on your State's laws, there may be a max allowable % to increase rents. Or, if a bad tenant, for example, find a new tenant and increase to market value.

Do ensure the numbers work as is. I had a recent purchase, current tenant rent $1000, market rent $1200. I ensured numbers work with current rent. Icing on the cake when the rent increases to market value!

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