I'm making an offer, take a look

Real Estate Deal Analysis and Advice 76.8K Posts 10.2K Discussions

I will be making an offer in two days on a property. I ran the comps, drove the comps, inspected the house and have a good feel for it's value. She has two other properties she also wants to sell me that I'm hoping get so I'm giving her my best price.

Comps (with .5 mi, 15sq', same bd/ba etc. ) show a range of $195-230k.

A near identical property with slightly better features (larger yard, driveway and a little prettier) sold a week ago for full price, $235k with multiple backup offers according to the agent.

The property is 12 yrs old and feels like a worn rental. Renovations will include a few doors, flooring, int paint, stucco repair, ext fencing fix, and the like. I didn't find any major structural issues and I plan to have a home inspection sniff out component defects which will be deducted if found.

I am anticipating a generic 'lipstick' remodel to the tune of $10-12k max.

I plan to list flat-fee MLS for $400 with 3% to buyers agent $6900 .

I'll have to evict tenants.

I'm factoring a 3 month holding time (although I suspect it will be less from what I've been seeing w/ properties at this price point).

I'll be financing it.

I'm paying closing costs (Title, escrow, etc) $2500?

All totaled I'm figuring no more than $25k in costs.

I should be able to sell it for $229k fairly quick.

I plan to offer $180k

Sound offer? Too skinny? What say you?

You'll be financing it how? Your own cash? Conventional? Hard money?

You're paying $180K plus $12K in fixup and have comps of $195K? You're not seriously considering this, are you?

If $235K is the high recent comp, it would be crazy to use that as a value these days. During the bubble, sure. Now you want the LOWEST recent comps, not the high ones. So, I'm not at all convinced your $229K is realistic. If you have a dozen GOOD comps at $225-235K and one or two lower, I might believe your $229K number. If you have half a dozen around $195K, and they're solid comps, $195K it is.

Even if you get $229K, $192K all in is 84%. There's not profit there. You need to be at 75% at the very highest, which means you need to be paying no more than about $148K. Even in CA!

An eviction in CA can take six months. If you're paying hard money at 15%, that's 1.25% per month while you make that happen.

Jon Holdman, Flying Phoenix LLC

Yeah, I'm with @Jon Holdman - waaaay too skinny. Unless I'm missing something - you can probably do waaaay better than this. There are always a TON of extra costs that you never really can prepare for.

I like the 70% rule - Take the conservative, low end future value ($200,000) , take 70% of that = $140,000. Then subtract repairs (and double your estimates).

Total you should pay = $120,000.00. That would be a deal.

My opinion anyways! Thoughts? Will M?

Medium fbprofileBrandon Turner, BiggerPockets | [email protected] | http://www.BiggerPockets.com

Paying 180K will solve that seller's problem, but then you'll be the one with the problem of not making any money here. The numbers given by other posters above should open your eyes.

I'm with these guys. How much is the cost of your capital? If you plug that in, it looks like you'll break even IF you sell at that high end of comp value AND your rehab costs are correctly estimated.

We always have a "minimum standard" of profit when we go into a flip. In this price range I wouldn't do it w/o a reasonable expectation to earn $40K after all expenses. If you're using hard money your capital costs will be huge. Based on what I see I wouldn't pay more than $120K for is as the other guy mentioned. Good luck, let us know how it goes.

Agree with all - worst case monetary scenario = you'll be happy with any sale price in your comps range. Gotta make that money!! Don't do a deal just to do it, even if there's 2-3 more from that source. They may be bad->mediocre too. You could sell stuff on eBay for a better margin. :)

For comps, make sure they're in the same sub/immediate neighborhood. I've been doing TONS of comps lately and the half-mile rule can't be a blanket rule. I'll use a comp with different beds or baths & adjust if it's in the same sub vs. a higher priced comp in the sub next door.

For ex, I live in SUBURBIA heaven - my house would appraise $120-$130k, but directly behind me is a different sub where those specs would appraise $180-$190 (10yrs newer tho).

Did you forget to budget for profit? Or do you do this business pro bono?

There is one very golden rule you should learn in real estate:
It will take longer, cost more, and you will make less than you expect.

Make your offer based on that and you won't lose money.

Aaron Mazzrillo, Advanced Home Sales, Inc. | http://www.aaronthehousebuyer.com

Even if you use 229K as the selling price (which you should not) using the 70% rule less your estimated rehab (12K) will give a purchase price of 148K. That's not even factoring in all of the other potential cost indicated by previous postings. Not a good deal!!

Let me also point out that your rehab estimate is too low. How do I know? Trust me. $12K will get you a LOT less than you think it will, and if you do a $12K rehab, I can guarantee you won't get anywhere near the top of the market value.

I'd start by doubling that rehab estimate.

Thanks for all the input!

BTW, I misstated one of the figures , the Comps are $195-265k and I place ARV at ~$230k. Again, $230k is substantiated by pulling the comps, driving the comps, a recent sale 5 doors down, as well as input from a broker I have a working relationship with (not a BPO though). Not to be arrogant but I'm comfortable with that valuation.

Even if you get $229K, $192K all in is 84%. There's not profit there. You need to be at 75% at the very highest, which means you need to be paying no more than about $148K. Even in CA!

Valid point and sound advice it is too slim, thanks.

As far as there being "no profit" I'm (was) still expecting to clear ~15-20k (gross) providing my assumptions are correct. What am I missing? Here's how I'm estimated my costs, rounded up to the nearest 500.

$1500 Inspections (termite +Home + appraisal)
$2500 Closing Costs (Title ins + Lenders policy + Escrow + Loan srv fee)
Note, closing costs are split on the buy and the sell so $2500 represents both halves.
$2000 Conventional financing ( Owner occupied w/ at least 20% dwn)
$12,000 Repairs *see below
$4000 Holding costs (assumes 6 month vacancy on a 4.5% OO 30yr fixed)
$7000 RE commissions (3%)
___________
$29,000 total buy/sell transaction costs.

Is there something big I missed or are you rather saying that even if my assumptions are correct $15-20k is not worth the risk? Either way thanks for the insightful advice.

Regarding repairs, this of course is the biggest variable. My estimate is based on the following:
New carpet/pad (900')
1 new interior door
1 new exterior door
1 screen door
Yard clean
Fence fix
2 stucco patch areas painted to match
Complete interior paint
Misc minor things like interior door knobs, outlet covers, bathroom fixts etc.

I plan to pay for a home inspection and if any defects are found that would affect resale I intend ask the seller for concessions on these. I expect at least one or two faucet, toilet or appliance issues. If it's over $250 I'm going back to the seller.

All the work except for the carpet and help with the yard clean will be done by myself and a friend of mine. He's a retired builder who's partnered with me on 3 other deals and charges me $20/hr cash more as a favor for opportunities I've sent his way in the past.

Question: I ball park $12k for the above repairs with price concessions from the seller for those discovered while under contract - reasonable estimate? J Scott?

Some additional info:

I anticipate 2-3 weeks to bring the property to sale condition once vacated.

I plan to make closing contingent on vacancy and allotting 60 days to close for this in the contract. If there are problem tenants I'd either extend closing or walk away. They are on a month to month lease. I know CA evictions can be a nightmare. Believe me I know.

I plan to list the property while under contract. The contract I use (via Michael Quarles) includes that provision. (BTW where'd he go?)

One last question:

I am curious why use a flat percentage (75%) vs a flat dollar amount? Most houses in my area start in the low-mid 300's. Given that it sounds like you would walk away from a CA deal if you couldn't book at least $80k but elsewhere - say the Midwest - you'd settle for less than $80k on a deal. seems like a lot of money to leave on the table, just curious as to why?

$4000 Holding costs (assumes 6 month vacancy on a 4.5% OO 30yr fixed)

Are you planning to actually move in? That always makes rehab a challenge.

Even if you do, this might work. Once. When a lender makes an OO loan, they don't expect it to be paid off in six months. Don't expect to get a second loan from the same broker or lender.

How are you getting away with 3% commissions? Are you an agent?

Jon Holdman, Flying Phoenix LLC

Where are your costs to evict the tenant?

Check out "occupants from hell" for a little glimpse at the games that can be played in CA. This deal is terrible. RUN as far and as fast as you can away from it.

[/i]How are you getting away with 3% commissions? Are you an agent?[/i]

I've used flat fee MLS offering 3% to the buyers agent. Has worked good for me so far.

I do not intend to move in. Regarding a OO loan, I've done it once before and sold in just under 90 days. I've spoke with others who have as well. My impression is that the lender isn't as concerned about it as some may think. I 've used the same lender for 3 NOO loans and 2 OO , one of the with a short turn around. While I don't plan to do this every time i recently sold my primary residence so i plan to take advantage of that. If he balks i can go elsewhere. Honestly I'm not too worried about that.

Check out "occupants from hell" for a little glimpse at the games that can be played in CA. This deal is terrible. RUN as far and as fast as you can away from it.

Run Forest RUN!!! Really. Just up and run? My theory is that any deal is doable...at the right price. And the right price is what this topic is about. Not to be cavalier about it but this is just a 12 yr old worn rental that needs freshening up. I bought a house at a sheriffs auction a few years ago that was a real heap. Now that one I could understand, But run from this one though??? Think I'll just reduce the offer .

Tenants issue was covered previously.

I practice talking myself out of a deal as opposed to talking myself into one.

If I find that I can't talk myself out of one then I know I have a good deal. On the other hand, if I notice that I am talking myself into a deal and relying too much on everything to go right in order for a deal to work... that's when I run.

"I do not intend to move in. Regarding a OO loan, I've done it once before and sold in just under 90 days. I've spoke with others who have as well. My impression is that the lender isn't as concerned about it as some may think. I 've used the same lender for 3 NOO loans and 2 OO , one of the with a short turn around. While I don't plan to do this every time i recently sold my primary residence so i plan to take advantage of that. If he balks i can go elsewhere. Honestly I'm not too worried about that."

Will, man, you're playing with fire. The lender may not care but the feds do. You & your buddies will get fined for this if caught. Please stop doing this & follow the rules.

Originally posted by Will M:
...
As far as there being "no profit" I'm (was) still expecting to clear ~15-20k (gross) providing my assumptions are correct. What am I missing? Here's how I'm estimated my costs, rounded up to the nearest 500.

$1500 Inspections (termite +Home + appraisal)
$2500 Closing Costs (Title ins + Lenders policy + Escrow + Loan srv fee)
Note, closing costs are split on the buy and the sell so $2500 represents both halves.
$2000 Conventional financing ( Owner occupied w/ at least 20% dwn)
$12,000 Repairs *see below
$4000 Holding costs (assumes 6 month vacancy on a 4.5% OO 30yr fixed)
$7000 RE commissions (3%)
___________
$29,000 total buy/sell transaction costs.

Is there something big I missed ...? ...

Insurance - you will have to keep the property insured since you will be getting a loan (4.5% OO 30yr fixed).

Originally posted by Will M:
....
Some additional info:

I anticipate 2-3 weeks to bring the property to sale condition once vacated.
...

Most 4.5% OO 30yr fixed loans will have some kind of provision requiring you to occupy that house for a minimum period (typically 12 months is what I've seen). Doesn't sound like you intend to do that ...

Originally posted by @Glenn Espinosa :
I practice talking myself out of a deal as opposed to talking myself into one.

If I find that I can't talk myself out of one then I know I have a good deal. On the other hand, if I notice that I am talking myself into a deal and relying too much on everything to go right in order for a deal to work... that's when I run.

Glenn Espinosa - the OP has ALREADY talked himself into this deal; it sounds like he is trying the talk US into this deal too!

Originally posted by Will M:

I do not intend to move in. Regarding a OO loan, I've done it once before and sold in just under 90 days. I've spoke with others who have as well. My impression is that the lender isn't as concerned about it as some may think. I 've used the same lender for 3 NOO loans and 2 OO , one of the with a short turn around. While I don't plan to do this every time i recently sold my primary residence so i plan to take advantage of that. If he balks i can go elsewhere. Honestly I'm not too worried about that.

I'm pretty sure you just publicly admitted to mortgage fraud...

Originally posted by J Scott:

I'm pretty sure you just publicly admitted to mortgage fraud..
I am sure he just did.

Secondly, why use the 75% figure rather than a flat profit? Because it works for most investments though it too needs to be adjusted as price points go up or down in range. Example, if you use just a flat profit of 20k, and it takes $200k investment, then you made 10% profit. Not bad, but not good. If you use that same $20k and have to invest $400k, then your return is a measly 5% and no room for error. This is why pros use %'s.

I would disagree with Jon on not using top market numbers for CA but only because of my experience and knowledge of the CA market. Prices are going up, and a fully rehabbed home will command top dollar with likely multiple buyers in the price range you are looking at. Again, I am only speaking of my market, not Nationwide.

Lastly, I agree with everyone here regarding the FACT that this deal is way too tight even with your $230k exit value. Offer lower or move on.
I also agree with J Scott in that your rehab figure will likely need to be higher and include some kitchen and bathroom upgrades to obtain full market price. With renters in there now, I would imagine the fixtures and cabinetry is in need of upgrades.

Medium be logoWill Barnard, Barnard Enterprises, Inc. | http://www.barnardenterprises.com

Originally posted by Will M:
[/i]How are you getting away with 3% commissions? Are you an agent?[/i]

I've used flat fee MLS offering 3% to the buyers agent. Has worked good for me so far.

[b]I do not intend to move in. Regarding a OO loan, I've done it once before and sold in just under 90 days. I've spoke with others who have as well. My impression is that the lender isn't as concerned about it as some may think. I 've used the same lender for 3 NOO loans and 2 OO , one of the with a short turn around. While I don't plan to do this every time i recently sold my primary residence so i plan to take advantage of that. If he balks i can go elsewhere. Honestly I'm not too worried about that.

Check out "occupants from hell" for a little glimpse at the games that can be played in CA. This deal is terrible. RUN as far and as fast as you can away from it.

Run Forest RUN!!! Really. Just up and run? My theory is that any deal is doable...at the right price. And the right price is what this topic is about. Not to be cavalier about it but this is just a 12 yr old worn rental that needs freshening up. I bought a house at a sheriffs auction a few years ago that was a real heap. Now that one I could understand, But run from this one though??? Think I'll just reduce the offer .

Tenants issue was covered previously.

I see. This is referred to as a "Thief" or "Criminal". Look those terms up after the "Occupants from hell" thread I suggested to you.

I'm pretty sure you just publicly admitted to mortgage fraud...

With all due respect, you're being dramatic, if not misinformed. The selling of my house having an OO note , without an occupancy certification rider , was not a rental, and I actually lived in, all within a few months of the purchase does not constitute occupancy fraud, not by a stretch. I am sure you are good at what you do. I'm also sure Law is not it.

Regarding my reply to Jon, I do not intend to occupy the house during the rehab. After its rehabbed I plan to count the property as my primary residence until it is sold. I plan to fix it, resell it, profit and pay taxes on any proceeds I receive from the sale of my house. *here's the important part* I disclose ALL OF THIS to the lender I work with as just I have in the past. If this time I cannot obtain OO rates based on the information provided so be it.

But nonetheless, thanks all for the cautions surrounding the issue.

I appreciate the constructive input. Honestly, I'm kinda surprised to see (the few) snarky remarks pop up in response to someone merely seeking some advice, thankful for that advice, and actually planning on heeding much of it as well. WTF guys ??

But whatever, that's sometimes the nature of online forums.

Happy Holidays all.

Originally posted by Will M:
I'm pretty sure you just publicly admitted to mortgage fraud...

With all due respect, you're being dramatic...

Sorry, I'm not sure how to string those specific words together in a way that's both factual and non-dramatic. So, I'll stick with factual and dramatic...

And based on everything else you said in your follow-up post, one of two things is true:

1. It's not really an OO loan you're getting; or

2. You're committing mortgage fraud.

And if it's #2 and you're disclosing your intent to your lender, then your lender is committing mortgage fraud as well. Do some research, and you'll find MANY investors and lenders/brokers who went to jail after the real estate boom for this very reason.

Sorry if that sounded dramatic...

And if it's #2 and you're disclosing your intent to your lender, then your lender is committing mortgage fraud as well.

I see. And exactly who would the lender be defrauding - themselves? Interesting legal concept. Kinda like calling the cops for hitting myself and them charging me for assault.

Do some research, and you'll find MANY investors and lenders/brokers who went to jail after the real estate boom for this very reason.

It's clear you have not. Investors, homeowners and mortgage brokers found committing occupancy fraud possess a few basic commonalities;

Homeowners who claimed OO when in fact it was intended as a rental occupied by a tenant from the start.

Homeowners who claim OO but instead have a family member occupy the residence in their place.

Investors who claim OO to get lower rates when in fact they have a primary residence elsewhere.

Mortgage brokers who falsify records in order to obtain loan approval from the lender.

You claimed I have "publicly admitted to committing fraud." Bold statement. Please cite me one single case where a homeowner received an OO loan without occupancy riders or HUD and was charged with Occupancy Fraud for selling the house they lived in, shortly after purchase - as was the case for my sale. You implied there were many, just one will do. It appears you're out of your element.

When you discover no such case law exists, as evidenced by the conspicuous absence in your next post (if any) then perhaps reflect on the wise adage:

"When you know a thing, to hold that you know it, and when you do not know it, to admit that you do not--this is true knowledge" ~ Confucius

As far as my post response is concerned, I was only going off the info you stated. If you are disclosing your intent to the lender and they agree to provide the loan I don't see any fraud, of course you failed to mention that in your OG response.

Medium be logoWill Barnard, Barnard Enterprises, Inc. | http://www.barnardenterprises.com

One other thing, my comments were not not ended to be snarky but direct and to the point to emphasize the importance of not committing fraud. I am not an attorney and do not claim to know even one percent of the law, but I do know rehab numbers and legal issues aside, your deal is not deal unless you offer less. The 75% rule is a good one and one I not only preach, but one I practice as I created it for my business use for my investments of rehabs.

Medium be logoWill Barnard, Barnard Enterprises, Inc. | http://www.barnardenterprises.com