REO PURCHASE

12 Replies

I am a new investor and recently submitted a bid on a Property (REO),
it is listed for $300 and needs alot of work. My contact suggested I a bid of $270. I wanted to bid 70% or 80 % of the asking price . The property needs alot of work I say $50+ he is saying 20,000,. The comps in the area are $ 365,000. My contact says that if I submit a bid for 70% or 80% of the asking price my chances are slim of getting it awarded. What is the rule of thumb for purchasing REO's I thought it was to bid 70% to 80% of listed price because of repairs and other costs involved in purchasing Real Estate.....My concern is that if the repairs are in fact 50+ I might loose out on this deal...any advise will be appreciated..

Take a look at the fair market value of similar homes in the area. This would establish your ARV. If you are doing this for a Rehab property then you would take the fair market value less your repair estimate and then take off 30%. That would be your offer price not 70% of asking price.
Watch your repair estimates. I just ran into someone that is planning on remodeling an upstairs bath. They estimated 20K because they would have to destroy the ceiling on the first floor. I asked them why not cut an access hole in the subfloor after you remove the tub and nail the piece you cut out back?
Sometimes there are smarter ways to do things

So if the FMV is $340,000 and repairs are 50,000 then asking price will be $340 - $50 = $290 so asking price will be 30% of the $290. I know that for a newbie doing rehab can be challenging. However, I need to learn and get my feet wet. I might make a few mistakes at the beginning hopefully they wont be very costly....Thanks for your time.....

1.) The bank has had the home appraised and photographed to death. They know exactly what is wrong with that property and have factored that in to that list price.
2.) Next time, in your purchase offer, ask them to provide their foreclosure appraisal to you.
Now, an appraiser is not a home inspector and only catches the obvious needed repairs. Many appraisers do not adequately deduct the "market reaction" to the needed repairs on their sales comparison analysis but only deduct "actual cost". Therefore the list price could be inflated.
3.) As a new investor, you need to take a contractor to the home and have him give you an estimate for repairs.
4.) As far as your estimate of value upon repairs. How old are the sales you are using? The market has gone down in most places so they need to be very recent. If they sold before 1/07, they might not be good indicators of current market value.
IT'S GREAT THAT YOU HAVE THE COURAGE TO ACT AND DON'T LET US DISCOURAGE YOU-----Just do more research cause you need to be sure of the repair costs and current market value before you know if you have a good deal.

I have purchased a number of REOs and I have financed even more for other investors.

1. Do your homework. Figure out what the property will take to get it to market condition.

2. Using the formula mentioned I would then refine it.

ARV * 70%. Then subtract expenses and everything else. Factor in buying and selling costs, holding costs, and everything else plus a contingency.

That is the most you can pay and still make money if you do this deal. It is also more or less the most any other investor would pay if you wanted to flip it for some reason. As a flip you would only make a slight bit given that you have not put in a flip fee before determining your maximum price.

3. Do not offer your maximum to start. You want room to go up a bit if they counter.

4. The bank can not sit on the property for ever. They are legally prevented from doing so. The bank is not investing. They are disposing of an asset from a bad debt.

Forget what they want. Focus on what works for you. If they do not like it they can say no. If they say yes then you have a deal that you are happy with. Banks are not concerned about how you feel. You should not be concerned about how they feel. Getting the property off their books makes them feel great. Remember they are getting paid by the hour to watch someone else's money. The defaulted loan was a problem. You are solving that problem. At the same time it is your money on the line. Plus your time. If you take down one deal you might be missing another. Make this deal the one you really want because of a great price rather than pay too much and miss something better.

John Corey

Thanks everyone for the great information...I dont so feel so alone with this. I put in my bid for $270 and have not heard anything yet. I am working on other things I am not giving up. I guess because I have not heard anything that means my bid was not accepted. It is amazing this property has been on the market since March they prefer to sit on it and incur more cost than to sell it for below market value. I am learning especially on the WORLD of REO's. I am not going to get discouraged there are bigger and better deals out there all for me....Thanks for your responses I really appreciate it..

The 70% of ARV minus repairs formula is normally factored taking 70% of the ARV first and then subtracting repairs. Multiplying first versus subtracting first gives you a different result because of the Please Excuse My Dear Aunt Sally rules.

Check out these posts for some more discussion of the 70% rule:
http://forums.biggerpockets.com/viewtopic.php?t=5707
http://forums.biggerpockets.com/viewtopic.php?p=18225&highlight=#18225

Originally posted by "REI":
That is the most you can pay and still make money if you do this deal. It is also more or less the most any other investor would pay if you wanted to flip it for some reason. As a flip you would only make a slight bit given that you have not put in a flip fee before determining your maximum price.

Though this is generally good advice, when wholesaling the number one factor is not whether you are buying it at 70% or even 60% of ARV. The most important factor is what investors in YOUR area are buying them for. In some of the slower markets right now, a rehabber may not buy something for even 65% of ARV minus repairs. In some of the markets that have not slowed down, investors will buy properties for 80% of value all day long.

Investors don't just buy properties to rehab, either. A wholesalers best customers will be investors looking for long term rentals and investors who carry notes. These investors don't care as much about percentage of ARV value. They care more about cash flow. Some creative investors even have strategies that they can buy the right deal for 90% or even sometimes 100% of ARV. Not that I would advocate some of these strategies, but the point is learn YOUR customer if you are going to be a wholesaler. You must learn your customers and their specifications for purchasing a property first, and then you can accurately determine if you can make money on it or not as a wholesaler.

Darmax, your contact I am guessing is a realtor. And the first thing you will learn about realtors in this business is that they are NOT investors. As John already shared with you, factor your own numbers that work for you on a deal, and then stick with them no matter what a realtor or a banker tells you.

If you are planning on rehabbing a property to resell retail in a steady market, I would highly recommend that you take a conservative ARV, multiply it by 70%, and then subtract a conservative estimate of repairs. That number should be your maximum offer.

In your example, a house that should fairly easily sell for $340,000 that needs $50,000 in repairs to sell it, I would take $340,000 * .7 minus $50,000 which equals $188,000 as my maximum offer IF I was buying it as a rehab project to resell on the retail market.

Got it!!!! Imagine the bank was not accepting 270 so 188 is out of the question. Now I really understand how to calculate. I will take into account the market and what things are going for in particular neighborhoods. It seems that is all about the numbers and the research. The more you research the more prepare you are to make sound decisions....Great thanks everyone for Real Estate Lesson #1

Originally posted by "Ryan Webber":
Though this is generally good advice, when wholesaling the number one factor is not whether you are buying it at 70% or even 60% of ARV. The most important factor is what investors in YOUR area are buying them for. In some of the slower markets right now, a rehabber may not buy something for even 65% of ARV minus repairs. In some of the markets that have not slowed down, investors will buy properties for 80% of value all day long.

Investors don't just buy properties to rehab, either. A wholesalers best customers will be investors looking for long term rentals and investors who carry notes. These investors don't care as much about percentage of ARV value. They care more about cash flow. Some creative investors even have strategies that they can buy the right deal for 90% or even sometimes 100% of ARV. Not that I would advocate some of these strategies, but the point is learn YOUR customer if you are going to be a wholesaler. You must learn your customers and their specifications for purchasing a property first, and then you can accurately determine if you can make money on it or not as a wholesaler.

Very good point Rudy.

Ultimately the value of a property is set by the buyers. What they will really pay. If you have a list of buyers for your deals what they will pay is going to determine your market.

No buyers and there is no deal unless you want to hold as a rental. Then the key is what the renters will pay.

It is always what someone else will pay that determines what you can afford to pay and still make a profit.

John Corey

ARV - Yes, After Repair Value.

On an appraisal it will tend to called 'Subject To" value as there is a check box where the appraiser says the value is subject to the repairs listed on the appraisal.

John Corey

Originally posted by "happylogan":
Doh! I finally got the brain synapses to fire. So ARV and Subject to are the same but refereed to with different terms.

NO. Be very careful about the following.

Subject-to can mean 3 or more things when dealing with real estate.

When I started subject-to was used in offers. The offer was subject-to the following contingencies. Hence some older investors will use the term to refer to the weasel clauses (the contingencies).

Subject-to on an appraisal is when the appraiser offers their opinion as to value. They are saying that their estimate is subject-to certain specific things being true or other things being repaired. There is a box they check. Either the value is 'as-is' or it is 'subject-to' repairs.

The most common use of subject-to these days is when buying a property where you take the title subject-to the existing liens. In effect you are buying the equity and agreeing to take over the payments for the existing loans on the property.