Real Estate Investor · Albuquerque, NM · Member since 2011 · 156 posts · 20 votes
Ok let's say owner is selling house sat 90k, and owes 85k on it. What do you base it on whether it is a good deal or not? If they owe less than the house is worth or owe significantly less? What should I know exactly from the seller, before deciding if it is a good deal to fall through on? I know obviously it's a bad investment if they owe more than it's worth.
I know you should be at least making a deal at 70% below the ARV or less, if they aren't willing to sell it below 70% of what it's worth, does that automatically mean it's not a deal?
Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
15y
Without knowing your strategy, it is impossible to answer your question.
If you are intending to flip, then yes, the guideline formula is to buy at 70% of ARV less repairs and that guideline must fluctuate devending on specific circumstances such as, if the property's ARV is only $75k, you will likely need to buy below 70% less repairs or your profit margin will be too small for the risk and effort.
If you are a buy and holder, the only thing that really matters as far as the financials is the cash flow. If the gross rent, less the 50% expenses, less your debt service = cash flow, then you may (or may not) have a good deal. if it does not, then you likely do not have a good deal (of course there are other factors to consider such as potential future appreciation, tax deductions, principle pay-down, etc)
If you have a seller who owes only $5k less than the actual value of the home, then you have no deal unless the lender is willing to short pay the loan for significantly less than what is owed which is unlikely unless owner is way behind on payments.
Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
15y
Without knowing your strategy, it is impossible to answer your question.
If you are intending to flip, then yes, the guideline formula is to buy at 70% of ARV less repairs and that guideline must fluctuate devending on specific circumstances such as, if the property's ARV is only $75k, you will likely need to buy below 70% less repairs or your profit margin will be too small for the risk and effort.
If you are a buy and holder, the only thing that really matters as far as the financials is the cash flow. If the gross rent, less the 50% expenses, less your debt service = cash flow, then you may (or may not) have a good deal. if it does not, then you likely do not have a good deal (of course there are other factors to consider such as potential future appreciation, tax deductions, principle pay-down, etc)
If you have a seller who owes only $5k less than the actual value of the home, then you have no deal unless the lender is willing to short pay the loan for significantly less than what is owed which is unlikely unless owner is way behind on payments.
Real Estate Investor · Albuquerque, NM · Member since 2011 · 156 posts · 20 votes
15y
In order to have a deal, seller must owe 70% or less than what the property is worth correct? If they owe more than 70% than it is not a deal right? I never see in videos or articles them mention what the owner owes on it, all they ever mention is getting it at 70% of what it's worth, minus repairs, minus your fee and your get your max offer, but they dont ever mention the importance of knowing how much they owe..
If they owe 75k on a house, and you negotiate to 50k after all the repairs, and your fee, and you relist it for 70k to the buyer, who ends up paying the difference of the 5k? Why is it important to know how much they owe? ( i already have an idea, i just want others opinions on thoughts of the importance of knowing how much the seller owes.)
Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
15y
Will gave you a pretty comprehensive response above. This question is pretty hard to answer because it depends on a number of variables and what your goal is with investing.
70% of "ARV" minus repairs is what is often quoted for FIX AND FLIP projects. This allows you to pay the transaction and holding costs and hopefully still turn a nice profit.
If you are seeking out buy-and-hold properties you GENERALLY won't get a lot of appreciation on properties you are able to purchase at a steep discount. The heavily discounted properties are good candidates for the 50% rule of thumb. As Will mentioned you will also get tax shields, amortization, and appreciation and need to consider these factors in addition to the cash flow the project will throw off.
There are many exotic methods to make money off of properties with thinner spreads too. You can do "mortgage assignment" ("WHOF"), sub-to purchase with either a wrap sale or lease/option, listing agreement, etc.
There are tons of ways to make money in real estate so there is really no formulaic way to determine whether or not a deal is good. It takes practice and experience to determine whether or not a project will yield the adequate return to be worthy of your effort in working the deal.
Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
15y
When you purchase a house from a seller, the seller is obligated to pay off their mortgage at the time they sell. So, if you negotiate a $50K purchase price and the seller owes $75K on the house, they will be required to pay $75K at the closing to pay off the note.
If they're only getting $50K from you at closing (the sale price), they'll need to bring $25K more with em to the closing. If they can't get $25K, then they can't sell to you for $50K. In fact, if they don't have access to any cash, they can't sell to you for anything less than $75K (the amount that pays off their note).
Since many people are in debt and don't have access to cash (especially motivated sellers), this is why it's important to know how much the seller owes on his mortgage.