Fwiw I have been ridiculously busy the past 6 days but I literally just set down my iPad and got out of bed to respond to this post.
This topic of highest and best has been brought up many times, and I'm seriously considering writing a blog post about it, because most people are imho, looking at this the wrong way, especially people new to REI.
Please bare with me this might get long.
Let me start by saying that when you are faced with a highest and best response from a seller, if you don't already know what your highest and best offer is instantly, then your doing your due diligence the wrong way.
And to @Nathan Ward when you said you made an offer and then viewed the house, I knew right then there where problems. I will never write an offer without viewing a property. There are many reasons for this that I won't go into right now.
Ok lets get into the meat of this.
There are 3 key numbers to look at when buying a property for flips and buy and holds.
1. ARV - After Repaired Value, or Market Value
It doesn't matter if you plan on selling or holding the property you still need to know this, unless of course your paying cash and have no intention of getting it financed later.
2. Rehab Cost - The amount of $ it will take to make the property Sellable/Rentable.
3. Purchase Price - The maximum amount you can profitably purchase the property for. This has nothing what so ever to do with Asking Price. We and investors should not care what anyone is asking, our only concern is if we can buy the property for a price that makes us a profit.
(other factors such as location, and financing will also be considered, but not in this post)
The only number of the 3 listed above that is in our control is #3 - Purchase price. The rehab is a number we can not control much, sure you can cut corners or skimp on certain repairs, but in general rehab cost are what they are. And ARV is also a fairly static number, the majority of the time a 3/2 is only going to sell for $x based on the comps, over rehabbing with granite counters and Hwood floors doesn't always pay off.
Follow me here Im getting to the good stuff
Ok now you have done you due diligence, and you know that you can sell that house for $100,000 and you also calculated your rehab cost and you are confident that you will have this house turn key for a total rehab cost of $22,000.
Now is when you ask yourself how much is the minimum amount of profit you are willing to make. Some of us will be content making 15% on a flip, so $15k is the minimum acceptable profit ( each person will have their own min profit margin) . In that case we calculate our max PP like this
$100k Sales price
-$ 22k Rehab cost
-$15k profit
This results in $63k max purchase price
This doesn't mean your offer should be $63k, start off where you feel comfortable. People in Austin are going to have more competition then people in Hobokin.
Sometimes my first offer on this property might be $45k, and other times it might actually be $59k. It depends on many factors, but it all comes down to how much competition I expect on this property. And how bad I need the work.
I have actually made initial offers over asking price, because asking price doesn't matter !
Lets say this same house was listed at $25k, and we have the same max PP of 63k, would we be upset if we paid $50k, 2x's asking price ? Heck no, because we still bought the house $13k under our max PP.
Too many times I see people chase the shiny ball trying to get the house for a ridiculously low price only to loose the deal and they end up making 0$, not to mention the time lost in due diligence.
At the same time, when you loose a deal, but you submitted your max PP, you can be confident you went after the deal the right way. If your loosing too many deals, double check yourself and make sure your estimating is correct.
The best advice I ever received was from a good friend/mentor of mine in Philly.
Loosing a good deal never hurts as bad a buying a bad deal
@Joshua D. feel free to tweet that =)
