How did you put your offer on a house?

Question

Hello BP Members,

I wanted to know how does most investor place a offer on a house? What values or info to look for to determine if your offer will be lower than the appraised value? I read books and few articles It suggest offering 15% less than the asking price?

Let's hear your inputs?

Thanks

Leo Don · Answer

@David Faulkner

@Jd Martin

Thanks guys very helpful info to keep in mind !!

David Faulkner · Answer

Beyond that, the only "formula" you could apply depends on what you intend to do with the property. Flippers will consider profit = ARV-purchase price-renovation cost-holding cost-transaction costs. Buy-n-hold will consider cashflow = rental income - PITI - CapEx - vacancy - maintenance . Multi-family investors will compute project cashflow throughout the life of the investment, including purchase through to sale and compute IRR. Acceptable returns on all of these formulas will need to be adjusted for risk, which is more art than science. Finally, if you consider multiple exit strategies (recommended) you need to run different numbers for plan A, plan B, etc. ... from there you can back out offer price.

David Faulkner · Answer

No formula ... you need to know the comparable sales and have enough familiarity with the town to apply these comps intelligently. You want "like kind" property and assessing this can be part art and part science. For example, don't compare comps on the 130k side to a property on the $900k side. Don't compare a SFR to a multi family. Don't compare a sale 3 years ago to a house for sale today. Asking price is not the same thing as sales price.  To see some examples of this analysis, find some sample appraisals and see how the pros do it with comparables and adjustments. Ask realtors to run a CMA (Comparable Market Analysis) on a property you are interested in offering on and see how it looks (with a skeptical eye since they have a vested interest), most will do this for free if you're going to put your offer in through them.

This is why I suggest getting out there, looking at a lot of homes, put in a lot of offers, and generally pay attention to what sells and for what price ... become a student of the market. After awhile, you will get a good intuitive feel for what properties sell for, what a good deal looks like, and what is a rip off.

As a last resort, if you are financing the property you will likely have a finance contingency and will need to have a professional appraisal on the property before the bank will fund the loan. Even if you get a good deal, don't be surprised if the appraisal comes in at your offer price ... they have little incentive to appraise it for more, but it is their job to let the bank know if it appraises for less than your offer. If it appraises for less than your accepted offer price and you have a finance contingency you can renegotiate the price to match the appraisal, cover the difference out of pocket (not recommended), or walk on the deal. I hope this helps.

JD Martin · Answer

Not really sure what else to say, but my last purchase (the one I referenced above) went something like this:

House was listed for $70k, dropped to $60 and then to $50k. Bank-owned, decent neighborhood, 2br 1ba 1100sf, solid house in need of cosmetics and floor refinishing (bad urine smell/damage). I offered $30, bank came back at $42, I came up to $32.5, bank came down to $40, I came up to $35, bank came down to $37 and we had a deal. My top number was $40, so when they were down to $40 I knew we would have a deal.

Before I made the first offer I went through my numbers at home and determined that it could work at $40k or less. Had my realtor take me through the house and it was a solid house worth moving forward at the right price. After a minor rehab the house currently rents for $650/month, which gives me an annual COC return of 19.5% after rehab but before taxes, insurance, maintenance, possible vacancies and any necessary capital expenditures (major one done with purchase, heating/cooling system). My net annual return after income taxes is about 14%, which is a pretty good return IMO.

Leo Don · Answer

I would love to hear any personal example or scenario where you guys can show me how to do it. I would really appreciate and please PM me so we could get connected.

Thanks

Leo Don · Answer

@David Faulkner @Jd Martin

the neighborhood I'm looking at the price varies from one side of the town to the other. One side there are home selling for 900k and on the other side houses goes for 130k multi family. So I'm just wondering about if there any formula or any rule of thumb to consider?

Also is the 15% off calculation useful ?

David Faulkner · Answer

I ignore the asking price ... that is their number; I offer them my number. Find a house that fits your investment criteria, figure out the price where it would make sense as an investment (but is still slightly below the low end of the comps), call the listing agent and put in a "take it or leave it" offer. If they take it, great ... otherwise, leave it. Repeat as necessary until you have a deal. It is a numbers game, look at 1000, offer on 100, close on 1 type of thing. Even if you don't close on any at first, this will get you really familiar with the market very quickly so you can spot a good deal when you find it. There are other methods to buy properties that are not listed for sale, but that is another thing entirely.

Corey Melkonian · Answer

I look at the neighborhood first as well and see if the price fits. The MLS list price is as good as the realtor doing the comps for market analysis and its a moving target.

JD Martin · Answer

First, I only bother looking at houses that fit my criteria, which are neighborhood, viability as a rental, square footage, and price being "in the ballpark", meaning if I see a house on the MLS or elsewhere and believe I could make it work at, say $50k, and the seller has it priced at $120k, I don't even bother looking, but I will check it out if the seller is at $70k or so.

No formula regarding list price. The last place I bought originally listed at $70k and after a couple of price drops and our negotiations I closed at $37k. It wasn't worth more than $40k to me, so if I had to pay more than that I would have walked even if the list was $41k.

You have to know A)What it will cost to rehab, B)What you can rent/flip it for, C)The depth of the project  BEFORE you make an offer. You don't have to have exact numbers but your room for error decreases the cheaper the house, i.e. you might be able to afford to be $20k off on a $200k house, most likely, but will get killed being $20k off on a $40k house.