OfflineI'm at the stage where I'm getting ready to put in offers. I see a lot of different formulas out there based on all the research I've done so far on this forum.
30 Days Book does 85% to cover agent fee, bargaining adj, buyers market, and closing costs. Most of those aren't applicable to a rental investor. Then subtract for rehab, profit, negotiation room and fee. Just from running the numbers a couple of times, these can go real low.
That's ok?
Then I see a lot of people saying take 70% of the ARV and subtract rehab, fee, negotiation room. I'm guessing that formula has the end-buyer profit already built into it?
So my question is about getting a deal as fast as possible. What if we submit offers leaving out the rehab costs initially, with contingency of right to inspect, then once the offer is accepted, estimate what rehab costs are going to be, and renegotiate the offer?
To me this seems like the fastest way to get a deal accepted without looking at the property upfront. What do you more experienced guys think about this?
Thank you,
Marc
UPDATE: I've given two examples running the numbers below.
New REI in SWFL!
I am also at that point when I'm ready to make offers. I am down to 10 properties and told my agent about it. I said I want to discuss contingencies in the contract before making an offer. He also asked when i wanted to look at the properties but I think you're right, it would be better if it was possible, to make an offer without seeing the properties and just renegotiate later when the offer gets accepted and then you count in the rehab costs when you finally see the property. So I agree.
I would like to know what other people think as well. Glad you opened this forum so I didn't have to. Good luck to you.
the brave may not live long but the coward does not live at all
I am at the same point and have gotten both answers. On the one hand get the best offer you can and assign it. On the other get the most accurate max offer to include rehab costs and make an offer. The main point is to get the best (lowest) offer in relation to ARV you can to give you the most room to make money and your final buyer to make money.
Looks like we're all at the same point in the process. I'm going to show you the numbers I broke down to give you an idea of what they are. Maybe there'll be an issue you can point out, or you can share yours. Looks like it's just us on this one for today.
OK so here's the numbers I've ran:
PROPERTY #1
Ask: $69,900
FMV: $61,750
Ask % FMV: 112%
FIRST ROUND OF REDUCTIONS:
6% - Agent commission (Flip investor only)
3% - Buyers market
3% - Bargaining adjustment (Flip investor only)
3% - Closing costs if sell (Flip investor only)
12.5% - End buyer profit
TOTAL: 27.5%
OK. So these reductions remain the same on all my deals. I could opt to get rid of 3 out of 4 if I have a rental investor who won't be reselling the property as a fix/flip.
The reason why I went with 12.5% built-in profit over 15% is because I'm hoping it will help me lock up deals with increased odds. But this isn't set in stone.
So from now on I just multiply FMV by 72.5% (100% - 27.5% = 72.5%)
FMV x 72.5% = $44,769
Minus my fee: $ 2,500-
TOTAL: $42,269 (MAO) (Max Allowable Offer)
OK. That's my max allowable offer (no rehab). Here's how I'm doing negotiation room (NR). I'm either doing minus 5.0% of FMV or minus 9.4% of MAO.
These numbers are based on an arbitrary $5,000 of negotiation room on an example property with a FMV of $98,000 and MAO of $53,300. Here's those numbers:
NR9.4%MAO: $3,973-
NR5.0%FMV: $3,088-
So here's my three offers, if they get rejected or countered I'd just submit the next one down:
1. $38,296 (NRMAO)
2. $39,192 (NRFMV)
3. $42,269 (MAO)
Turns out my MAO is 68% of FMV (no rehab). I could multiply FMV by 70% then minus my fee if I was trying to save time. This way I have a formula that makes sense to me.
Estimated rehab costs on this property are $9,500. So that would bring all of my numbers down to:
1. $28,796 (NRMAO)
2. $29,692 (NRFMV)
3. $32,279 (MAO)
Still, the only reason I know the estimated costs on this property is because I was in the house. When using the 25 to 1 strategy, am I going to go see 25 properties before I make an offer? Or do I just make offers without rehab costs factored in? Is that in "bad taste?"
Anyway, I'll do it again on one more property real fast:
PROPERTY #2
Ask: $84,900
FMV: $69,639
Ask % FMV: 122%
FMV x 72.5% = $50,488
Minus my fee: $ 2,500-
TOTAL: $47,988 (MAO)
NR9.4%MAO = ($47,988 - $4,511) = $43,477 (NRMAO)
NR5.0%FMV = ($47,988 - $3,482) = $44,506 (NRFMV)
MINUS EST. REHAB COSTS: $21,600
(that's a lot of rehab)
Anyway, that's how I "sharpened my pencil." Am I doing this right? Thoughts, suggestions, comments, etc. Should I include rehab costs in initial offer?
Thanks,
Marc
PS. Running these numbers the "hard way" really gave me a clearer vision of what to do when calculating my offer, actually.
EDIT: OK I realized you can't really make room for negotiation based on a percent. It just doesn't work as you do higher priced houses. The spread becomes too high as the numbers go up. I'm just going to use this valuation formula: http://www.deangraziosi.com/real-estate-forums/contracts-and-offers/8995....
New REI in SWFL!
There is a thread here that has as an very quick example like this
ARV -30% -repair costs- your fee.
Quick and simple. The 30% is to cover your closing fees, realtor fees, etc.