THROW ME YOUR BEST AND HIGHEST OPINION
Hello Bigger Pockets Members,
Here is the situation:
I won an third-party auction bid for a bank foreclosed single family home. My bid was the highestest $425k but did not meet the reserve and so the bank may still consider and approve it (or reject it).
The house needs about $200k in work (assume it will take 4-6 months). But then likely worth the similar market value of $850k.
The bank came back and said to send my HIGHEST and BEST offer now for their consideration.
If it were you, what would be your highest and best offer be?
note: fell free to use your own assumptions on economy, future markets projections, inflation and such that you would like. For this example, this is only information available to make a decision....which could include 'walk away' from the deal.
Investment Facts:
Original Bid: $425k (but now asking for highest and best)
Rehab Costs: $200k
Original Total: $625k
After Market Value: $850k (Approx)
Shoot me a number....Let me know...! :)
I'll keep you updated.
You asked for opinions, so here's mine: I don't like to speculate in a peak market.
How long will renovations take? What if cost of goods increases or the work takes longer than anticipated? What if new problems are discovered? What if the market tanks and you can't unload it 6-12 months from now? How well do you know the property condition? How good are you at estimating renovation costs? Can you stay within budget?
Maybe you've got that all dialed in. I think it's speculation in what appears to be a peak market with very little room to go up and a lot of room to go down.
My suggestion would be to stick with your original offer. If someone outbids you, then OK, there will always be other properties.
Best of luck!
Quote from @Nathan Gesner:I absolutely agree with this, seems the future is less likely to continue the trend of double digits appreciation and more likely to dive into negative territory
You asked for opinions, so here's mine: I don't like to speculate in a peak market.
How long will renovations take? What if cost of goods increases or the work takes longer than anticipated? What if new problems are discovered? What if the market tanks and you can't unload it 6-12 months from now? How well do you know the property condition? How good are you at estimating renovation costs? Can you stay within budget?
Maybe you've got that all dialed in. I think it's speculation in what appears to be a peak market with very little room to go up and a lot of room to go down.
My highest and best is $425,000.01
Tell the bank to take it or leave it. Managing a $200K remodel is no joke and at this point it feels pretty risky. I'm not an experienced luxury flipper though. Nobody can't predict the future so hedge against it or don't buy deals.
@Nathan Gesner always nails it on the head. This is what I would strongly consider. I don't think that the appreciation level we are having right now will be continuing in most of the areas in the US. Higher rates, harder to purchase a home if you are 1st time home buyer and per statistics this is still the main clientele out there, the supply chain issues will start to ease within the next 6 to 12 months.
@Sam Mathew
Man they have you in a tough spot.
What is the auction reserve? Sounds like they’re really trying to hit that reserve.. is it close or pretty far?
Sounds like your margin is nice… so going up another $50k to hit a reserve or come closer could be worth it.
They’re negotiation WITH YOU so that’s a good sign.
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Real Estate Agent MI (#422602)
- http://www.firerealtyteam.com
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Sounds like they are just dealing with you. Also that’s a big spread if your numbers are right. I will say doing a 200k rehab is hard to complete under 6 months. My always take longer. If you feel another 10k would get it done seems worth it based on your numbers.
@Sam Mathew
How do you get the money and what does it mean to you if you don’t make anything or lose some?
I would be pretty concerned about a rehab that’s going to take that long - interest rates, inflations, etc. Six months ago, I don’t think most folks would have thought the market would start to “feel weird”.
There’s definitely a chance the value of the property will go up even more in that time, but that could be enough time for things to cool off or your budget to get busted because of material costs. All that being said, $200k is a pretty good spread so that a few things could hit the fan and it still work out well. I’d be hesitant to go up on my bid - the bank knows that things are feeling a little odd in the market too.
I should also mention that I’m pretty conservative in investing, do buy and holds and live in flips and am not a multimillionaire :) So, take my thoughts with a grain of salt. :)
Thank you all for your feedback and input. Greatly appreciated. I will try my best to keep you updated on this if you'd like to learn how this ends.
Nathan G. nailed it on this one.
I am curious what the average home price is where your potential property is located. In some areas, that price point might be average, in others, astronomical. Keep in mind that the buyer pool at the higher price points shrinks as interest rates climb.
A friend of mine flips 12-14 houses per month, without fail, year after year (real flips, not lipstick on pig flips). From our conversations (and sending him deals), I've gathered that he relies on wholesalers to source roughly 80% of his flips. 10% come from MLS offers his agent makes (which is largely a numbers game) and 10% from bidding on bank foreclosures or maybe being handed a deal another flipper friend can't handle or doesn't want. Diversifying your deal sources is vital. Bank properties always end in bidding wars (much like the MLS).
I'd recommend using a tool like Propstream or BatchLeads and search for off market properties yourself. They're both pretty cheap to pull and skiptrace addresses. I love Batch personally but have used both. We've had a lot of success finding HUGE deals searching for homes with the following criteria:
*Single Family Residential (no townhomes)
*Built between 1945-1990
*Owned at least 15 years
*1,000sqft+
*Equity % minimum: 40%
*Owner type: individual or corporate (LLCs)
*Age of owner: 50yrs+
*MLS Status: No (meaning "show me only houses that are not listed"
Optional criteria you can add:
*Occupancy status: "Vacant" or "Non-Owner Occupied" (tenant)
Realize that "Non-owner occupied" will give you landlord-owned properties and "Vacant" will be fewer so your results will decrease. Try running the search with the initial criteria I laid out, save that data and then run the same search with "vacant" added. Then isolate those guys and call them first. Vacant properties generally have more motivated owners.
Happy hunting and good luck on your deal.
Update: So the bank accepted my original offer and I am pretty excited on this project.
I don't know how the bigger pockets updates work, I would like to keep anyone wanting to know, stay updated. But here is the information on this project.
House is 3,800 sq ft; 4 bedroom which I may make into a 5 bedroom
Is on 5 acres of land, has an inground pool, hot tub, forest on 2 acres and a pole barn in back too.
Beautiful city 12 minutes from downtown area also.
I will be closing soon and expecting to put $150-$200k into the home.
Total Home cost to close: $450k
Rehab: $150-200k
Average Home Cost in zip code: $485k
Avg price home for sale with similar size with land in zip code: Ave Income in zip: $1.4-1.6M
Avd household income: $96k
I can rehab and flip, but I would like to consider other ideas also. Airbnb or maybe add some yurts or outdoor cottages in back and rent out. Plenty of land and forest area to do so. I may open a new forum discussion to see what alternative ideas are out there to do with this property.
Please let me know your thoughts or ideas also. Thanks Bigger Pocket friends. :)
I would send them the exact same offer.
Here's why:
1) Your offer of $425,000 is 65% of what the home is currently worth. If it needs 200k of work to be worth 850k, then it is reasonable to assume that the actual value of the home is 650k. Obviously as an investor you want to buy at a price where you can make a profit. (which is reflective of your offer of $425k).
$425k + $200k = 625k
625/850 = .74
Your all in cost 74% of retail value. If you sell with an agent charging 5% commission, you can deduct 42,500 from your sales price. Putting your profit around $182,500 less holding costs.
Also, the bank has already setup an auction and taken bids etc etc. Costing them more money that they're getting negative returns on.
Finally, with them already having had an auction, and you winning with the bid of $425k.... it would be irrational for them to hold another auction in the hopes that hey get a higher bid. Sure, it could happen, but they have to be thinking, "what if it doesn't? Can we go back to @Sam Mathew and ask if his offer of $425k is still on the table?" Hell no. Now the offer is at 375k. Right?
Too make a long story short, I think your offer of $425k is reasonable, and the bank doesn't have any leverage to negotiate.
Good luck!! keep us updated :)
@Robert Wilson Hello Robert! I appreciate the very insightful, thoughtful and logical response. Thanks for the guidance on this. This is my biggest project to date.
Also, as a side update on it. I have the funds to buy the house in cash, all in $430k. But now since the sale of one of my investments (owned free and clear) in Port St Lucie, Florida selling for $450k fell through at the last minute since buyer didn’t get loan approved, now I have to sit and wait until it does sell to get repair work started. I’d rather not take out high interest loans for the rehab work. But oh well, this is part of the fun of it all. Planning for contingencies.
@Sam Mathew Glad to hear you stuck to your guns on your original offer. Too many times I have seen investors make rash decisions based on FOMO, and up their offers. Sound like you have a solid deal. I know you mentioned not wanting to take out an investment loan, but there are unforeseen costs by not starting and completing the project sooner than late. The economy may be in a slump or worse in 6 more months, which could affect your exit strategy. If you're going to be holding for a rental, every week you sit on the project is an extra week of lost income. Lastly, when a property sits vacant it's as if the "soul" of the property deteriorated more rapidly. No, I do not believe houses have souls, but there is something unique that happens to the speed of deterioration in a property that sits vacant. This only translates to one thing for you... higher costs to address unforeseen or new issues due to stagnation.
I'm a PL in Tampa, FL and I invest all over the state of FL. I normally offer 1st position loans, and can think outside the proverbial box due to the fact its my capital, I'm lending. If you want to get started sooner than later let me know and maybe we can find a way to work together. I would be interested in how the project progresses regardless of how you tackle the financial topic. Please keep it posted here, or lets connect.
Thanks Edwin. I will keep this in mind although the property I am purchasing and rehabbing is up in Michigan.
Just a test
@Sam Mathew
So I wanted to follow up on this house purchase. It has been now 4 months and haven’t closed on it yet since the city septic inspection hasn’t finished yet.
I was going to pull out of the deal altogether but the bank said they were willing to work with me and now has lowest the purchase price to $300k. That is awesome even considering market conditions, I have a $125k reduction from my original purchase price. Plus this was a bank auction and plenty of other bidders offered far more at $400k but due to issues (city inspections and delays) outside of mine and banks control they are willing to work with me. Now, even more excited about this deal.
Will be following along. I have no advice as I have never done a real fix and flip but would love to see the outcome and hopefully a big win after the city hurdles.
Thanks for the updates.
If they dropped the price $125,000 then that tells me it was over-priced by $125,000 a few months ago.
I'm really concerned something's off with the numbers.
@Nathan G. Well definitely some unusual factors involved. Im paying cash and bank assumed quick closing. But the city said no closing until they finish up their inspection and approve closing. It’s been 4 months now and bank is tired out and can’t charge me extra since not my fault. So either I pull out but they will deal with it all from scratch again with the next buyer. Im actually pretty happy about it now. Let’s see where this goes.
@Sam Mathew you mentioned you think it will take approx. 4-6 months to complete about $150k-200k worth of work...how sure are you about that? Do you have a long history with your contractor doing 200k-level rehabs, and has that contractor always delivered on-time? ...what will this 200k rehab entail? ...often, foreclosure sales are sight-unseen--have you and your contractor been able to inspect the inside of the property to confirm what work needs to be done?
As others have mentioned, 4-6 months to complete a 200k rehab sounds optimistic (perhaps too optimistic). My most recent rehab was only about $60k, and it took about 9-10 months for the contractor to complete everything... If you ARE able to do a 200k rehab in 4-6 months, please let us know the name of your contractor! ;)
Good luck out there!
Quote from @Leo R.:
@Sam Mathew you mentioned you think it will take approx. 4-6 months to complete about $150k-200k worth of work...how sure are you about that? Do you have a long history with your contractor doing 200k-level rehabs, and has that contractor always delivered on-time? ...what will this 200k rehab entail? ...often, foreclosure sales are sight-unseen--have you and your contractor been able to inspect the inside of the property to confirm what work needs to be done?
As others have mentioned, 4-6 months to complete a 200k rehab sounds optimistic (perhaps too optimistic). My most recent rehab was only about $60k, and it took about 9-10 months for the contractor to complete everything... If you ARE able to do a 200k rehab in 4-6 months, please let us know the name of your contractor! ;)
Good luck out there!
Thanks, yes this is what I am concerned about with the work also. Cannot believe that I'm still trying to close on this house (due to some city items that will be resolved soon), but thankfully, the bank agreed to lower their price down to $300k from $450k. Well worth the wait for that alone.
Wow, it has been 7 months now, and once I close on this house, I will probably start a new thread just talk about the rehab updates and plans for the house. I plan to close finally in another 2 weeks after 7 months of waiting on this one. The good thing is the bank again agreed to lower our final price to $290k for the home needing $150-200k of repair work and will likely (last year would have sold for $850-950k) take a hit when I sell but plenty of buffer room.
I thank everyone for their input and guidance on this. So glad I'm finally moving forward with it all.
Hopefully everything continues to go well. I look forward to hearing more about your journey. Surprised at the time it has taken, but that is part of the process.
Hello All, it’s been quite some time since my original post but I closed on this home a few months ago in Nov 2022, for $290k and the rehab work continues. I will show you the latest picture if I can post it. Again this is a 3,800 sf home on 5.2 acres, so pretty excited to get the work done and see what I will do with it. Likely sell it unless some better idea to keep it and be profitable. I appreciate all the feedback received from you all.
