How low can I offer?

19 Replies

I'm looking at getting a rehab home with a ARV of 105,000. It is a REO and has been on the market since 4-19-2007. the asking price is 69,900. The home needs updating and there was a pool in the back that was filled with grass I will have to remove. I am recieving a hard money loan of 65% LTV. I want to offer 50,000 for the house. Is this too low?

You mean (ARV x 70%) - repairs, etc. = max purchase price.

You want to profit at least 30% of the ARV. Arguments can be made for less than 30% if the value of the house is high enough and/or repairs are minimal.

Originally posted by "Rehab702":
Typical formula:
(ARV – Repairs) x 70% = Maximum Price.

Better yet: (ARV * 70%) - Repairs = Maximum Price.

That will be (1) more conservative and (2) more consistent since you will be dealing with actual repair costs (the first formula only subtracts 70% of repairs and would thus have you offer more than you should on homes needing a lot of work).

For example, imagine a house with ARV of $100K that needs $50k in repairs (an extreme example, but it makes the point):

If you do it the first way, you get (100k - 50k) * 0.7 = 35k max offer
That would be 85k you would have in a house (after repairs) that sells for 100k ARV (or you are paying 85% of ARV). That's a bit high.

The second formula: 100*0.7 - 50k = 20k max offer, which would be 70K invested after repairs, or 70%.

The nice thing about doing it this way is that no matter how much work is needed, your total investment is always 70% ARV.

EDIT: I guess I was typing while wakefield posted and beat me to the punch.

A typical Hard Money loan can add 10% to your costs. Lets assume ARV of 100k and a loan of 65k.
4 points on the loan = $2600, 18% interest for 6 months = $6,000 (round figure) for a total of $8600 or 8.6% of ARV. You will also have different carrying costs such as taxes, insurance and utilities. So when you use that formula with Hard Money you should still have about 20% profit. That can disappear fast if you blow it on your estimates or exceed you projected time frame.

8)

What is the repair cost? Your 50K offer may be too high. Have they turned down any offers yet? I'd be interested in a picture of the pool!
Geoff

Originally posted by "r2d246":
that sounds crazy? Remove a pool? Won't the cost like at least $10k? Offer them $35k for the house.

I like the $35,000 offer! Be careful....the market is changing rapidly. Cash and a qualified buyer is King. It's easy to go up on an offer after making it but hard to go down. I would suggest offering such a small offer that the lien holder would need a magnifying glass to read it. Who knows! They may say yea. Believe me they have bigger problems on their plate for example the performance of their current portfolio.

http://www.bloomberg.com/apps/news?pid=20601103&sid=a8ilcv.eOxMc&refer=us

I was told by one of my mentor's that you know you've found your bottom when the seller starts flipping out. "If you didn't insult them, then you didn't go low enough."

About removing the pool...

My first, and well my only, rehab was on a 1973 3bd 2ba rancher (purchased for $134k) in North Carolina. The backyard was huge, big privacy fences all the way around, but there was a gigantic pool. The pool took up about 2/3 of the entire back yard. I used a commercial demolision company to remove the pool. This house was to be a rental and a pool along with a rental property is bad news, so it had to go.

The company charged me a little over $5,000 to professionally jackhammer the concrete into small junks, haul away all the concrete, and fill the hole with a truck load of fill dirt. Turned out great, and really opened up the full potential of the backyard. Only problem was getting grass to grow. Its been over a year and the grass still looks a little pathetic. (This is partially due to the insane drought the southeastern US saw this summer)

My advice, remove the pool. Get estimates from at least three companies. Maybe look into a commercial contractor (it worked for me).

Try to get a good idea of what the rehab is going to cost, and remember that they are not going to accept your first offer. If they do, you offered too much. You can offer as low as you want. If it's too low, they may say no. If they think they can negotiate, they will counter. I think 35k is an ok number. But don't go over 40k if they counter. Be agressive. Don't mind their feelings. You are more important, and you don't want to loose money do you?

Why not just jack hammer the cement and use it to fill the pool, then haul in top soil to cover over the cement? It's considered clean fill, at least in my area it is.

-Michael

That's the way I would deal with the pool..I would use water and a dirt compressor after you add the dirt a couple times so the dirt does not settle. Then add a couple inches of topsoil..But of course I am not a contractor/landscape professional.

Rick