I found a deal...now what?

Question

So I was doing some house hunting with a friend for some experience and came across a distressed property on market. Asking price is 175 with the comps in the area at around 215. I think it has mold, needs new carpet, some bathroom remodeling and some light kitchen work. I'm thinking about making an offer for 150 and wholesaling it to someone with the resources to make a profit. Any advice on the next step?

Mitch Messer · Answer

Hi @Melvin J. Joseph. Hold on a minute: I don't see a deal here yet at $150K.

Assuming your repairs are $15K (which could be waay low with the mold), the standard Maximum Allowable Offer (MAO) formula (70% * ARV - Repairs) would suggest you should offer no more than $136K.

And that's assuming you do the deal yourself. To earn a wholesale fee on this deal, you'd need to get it even cheaper!

Barry Pekin · Answer

@Melvin J. Joseph,

I'm not a fan of on-market properties, though they can work.

The first thing you want to do is come up with a good ballpark offer and present it to the seller (or when it's listed, the agent).  Find out how flexible the seller is.  Maybe they're firm at $175K, in which case it's not the deal you think it is.  Maybe you can negotiate them down, but if you can't, it's clearly not going to work.  If they're not flexible in price, you're wasting your time doing anything else except follow-up with the seller.  Maybe several weeks on market with no interest at their current price will soften them up.

Now, if you're able to get it under contract for a good price, it's time to exercise that due diligence clause.  This is where you get to inspect the property and see if there are any surprises.  You could bring in a skilled contractor, but I'd argue your inspectors should be your buyers.  It's up to them if they want to bring their own contractors.  Some will prefer to have their own expert with them, while some will have the experience to do it themselves.  And in the end, your estimate really doesn't matter.  What matters is what they're willing to pay.

Mitch Messer · Answer

@Melvin J. Joseph While $120K is certainly headed in the right direction, there's no need to guess here.

If you have access to the property, which I assume is vacant due to the mold, you should be able to have a skilled contractor go through and identify all the problem areas and the cost to address each of them. This is how you'll determine your total repair budget, which will dictate your MAO.

Getting the seller to accept your presentation of the repairs and the budget carries you most of the way toward getting a deal. Being more knowledgeable about the repairs needed than the seller is themself is how offers get converted into contracts!

Good luck!

Melvin J. Joseph · Answer

@Mitch Messer it's ironic you should mention that. I was advised by an outside source that my offer should be more akin to 120 (so as to leave room for negotiations as well). Thoughts?

I found a deal...now what?

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