Whats a good offer price?

[Dena Zeid]

Looking into my first potential flip in ny.   I'm new and want to make sure I don't offer too high a price.  Here's the financials:

Selling price: 280,000

ARV= 380,000

Rehab costs= 40,000

Offer would be all cash.  

What's the maximum allowable purchase price for this deal?  I know according to the 70% rule it should be less than 230,000, but I don't think I would be able to get any deal if I focus on the 70% rule.  What percent profit is factored in the 70% rule?

[Ross Denman]

Personally, I wouldn't pay more than $210k for this home.

Here's how I would go about it.

• Find out what their motivation is. If there is a specific goal in selling, then you may find a creative way to purchase the home.
• Pick the home apart and exaggerate the repair cost. You can probably easily justify a $55k rehab if pushed. Prices vary by contractor and region. Your true numbers may be $40k, but if they were willing to do it themselves... it may very well cost them $55k.
• Comp the property as low as possible - you could probably pull comps to support $300k, maybe even less in today's market. Whoever offers the first number typically loses. Ask them what the lowest price they would consider is. Then start the negotiations at about $150k (maybe even less if their initial price was lower than anticipated.) You have to do this with confidence and without even flinching. Expect them to be appalled rebut with the attitude that you're surprised that they want so much. If they don't gasp and choke at your first offer... then you offered too much.
• Explain that the home is only worth around $300k in great shape and it will cost you $55k to get it there. That put's a break even price of $245k. You are offering them a quick cash close with no realtor fees. In my area, that's 6-7%. With numbers like that, $210 seems justified and if negotiated well, you may be able to get it for even less.

Remember, we make money when we buy value. If you can't get a property for numbers that make sense... it was never a valid deal in the first place. Don't get over eager or emotional. Patience and rationality are very important... especially early on.

[Ned Carey]

Originally posted by @Dena Zeid:

ARV= 380,000

What's the maximum allowable purchase price for this deal?  I know according to the 70% rule it should be less than 230,000, but I don't think I would be able to get any deal if I focus on the 70% rule.  What percent profit is factored in the 70% rule?

 The 30% left over from the 70% rule covers your soft costs (Buy, Hold, and Sell costs) and your profit.  Soft costs are easily 10% but can be as high as 20% of a deal if you use hard money and it is a long project. 

If  you are paying cash then you may be able to do fine buying at higher than 70%. A better was is to actually calculate your actual soft costs the way @J Scott does.  You might want to buy his books. they are excellent. 

[Dena Zeid]

Thanks Ross Denman for your response.  The house is listed through a realtor so how can we avoid realtor fees with an all cash offer?  Again, I'm a newbie so pardon me if my question seems silly.

[Dena Zeid]

thanks Ned Carey for your response. I am familiar with j Scott's site and I was looking at his blog about fixed costs. That's how I came to the conclusion that my fixed costs are around 40k. According to Scott's formula my purchase price should be 270k. ( 380,000 - 40,000 - 40,0000 - 30,0000). In which ARV is 380k, holding costs are 40k, rehab is 40k and profit is 30k. But according to the 70% rule my purchase price should be 226k, that's a big difference. Your thoughts would be helpful. Thanks.

[Ned Carey]

The 70% formula is a rule of thumb. A rule of thumb is never as good as doing real calculations. It is mainly useful to keep less experienced people out of trouble, because most would underestimate or leave out altogether the hidden costs. 

Personally I would want to make more than $30K because it doesn't take much for that to get eaten away by mistakes and unexpected costs.

[Crystal Smith]

@Dena Zeid Throw out the 70% rule. If you're really going to invest $280K then the answer to your question depends on the target Return on Investment (ROI) you've established. If you're target is 10% then your return will be $28K; if your target is 20% then your return is $56K. W/ your target profit number you then work your way back to a max offer. (ARV-profit-rehab-holding cost-marketing/realtor costs= Max offer)