I’ve made offers on over 250 properties, and most of my offers find the circular file. I’m very focused on the distressed market – offering a price calculated as such: List Price: $100,000 After 30% ARV deduction: $70,000 Repair Escrow $5,000 Profit $5,000 So – I’m offering $60,000 for a $100,000 list price. Am I doing something wrong? Is my ARV allowance too high? Are certain markets say, Leavenworth Rd – KCK, permitting for margin than others? I’d love some advice!
So the magic formula is
MAO = (70% *ARV) – Repairs
MAO = Maximum Allowable Offer
ARV = After Repair Value
Repairs = Costs to repair and update home to ARV Value
So in your scenario, I would need to know more.
List Price: While we know the list price is $100,000, the list price is totally irrelevant to figuring your offer other than the fact that if your offer is way below the list price, the seller is less likely to talk to you.
Repair Costs in your scenario is $5,000 and in 17 years I have never seen a house that only needed $5,000, but I guess it is possible.
Profit of $5,000 – NEVER do any rehab with an expected profit of $5,000. And usually, you don’t use the MAO formula and then subtract profit. Now if you are going to flip the house in a wholesale and make $5,000 that’s different.
Let’s look at a scenario where we have all the facts and figures:
Let’s say you found a nice subject house that is listed for $100,000, the average house in the subdivision is selling for about $140,000 and there are a few totally renovated homes that are similar in size and shape that have sold for $155,000. You walk through and determine the subject house needs the following updates and repairs to bring it to the $150,000 value: a new roof ($8,000), it needs painted inside ($3,000), it needs painted outside ($3,500), the carpet needs replaced ($3,000), the hardwoods need refinished in the kitchen, living and dining ($2,000), it needs granite in the kitchen ($4,000), all new appliances ($2,000), all new light fixtures ($1,000) and a new faucets ($1,000). You know it should take you about 6 weeks to get the renovations complete, another 4 weeks to market and get it under contract and another 5 weeks to get it closed for a total of almost 4 months holding time. And you will need to pay a Realtor 6% to sell it.
Taxes: $1800 per year or $150 a month
Insurance: $150 a month
Utilities: $150 a month
So the numbers from this scenario
List Price: $100,000
Repair Costs: $27,500 in hard numbers plus $2,500 for what iffs, brings repairs to $30,000
Holding Time: 4 months
Holding Costs $450 a month
Maximum Allowable Offer for Full Rehab
So if we plug this into our Maximum Allowable Offer Scenario
MAO = (ARV x 70%) – Repairs
MAO = ($155,000 x 70%) – $30,000
MAO = $108,500 – $30,000
MAO = $78,500
And if you are wholesaling it, the MAO would then say you need to buy it for about $73,000
Maximum Allowable offer for Average Home Resale
So then we need to look at the repairs needed – is the house really nasty and does it really need all those items? Or is it totally livable as it sits, just needs cleaned and a new roof and exterior paint job to live in it, but the carpet is not brand new, the counters are Formica, the appliances are not new and the fixtures are all brass, a
If it’s livable as is, with a good cleaning and a new roof, then you need to go back to comps and see that the average house is selling for $140,000. Run your repairs again taking into account only the roof, the exterior paint, and cleaning and the fact that that would take you 2 weeks to make repairs instead of 6. That gives us new numbers
After Repair Value: $140,000
Repair Costs: $12,000
MAO = (ARV x 70%) – Repairs
MAO = ($140,000 x 70%) – $12,000
MAO = $98,000 – $12,000
MAO = $86,000
And if you only want a $5,000 wholesale profit, you could then offer about $80,000
What a Realtor would list it for:
Speaking as a Realtor, If it was livable and just needing a roof and a exterior paint job, I would suggest to the home owners clean it from top to bottom and then list it for about $95,000 and then I market the heck out of it, sell it for about $92,000 and I would split a 6 percent real estate commission with the buyers agent of $5,700 and if I had an extensive real estate investor buyers list, maybe sell it to one of my landlord buyers with out the benefit of a buyers agent and pocket the whole $5,700.
And if you talk to a lot of investor across the metro, that MAO has inched up to between 75% and 80 % of Maximum Allowable offer, but I don’t suggest that as you could end up with no profit.
Why are none of my offers getting accepted?
This is the same problem we are facing at the KCInvest office, offers are not getting accepted. Yet I get email after email from wholesalers with deals what gives?
Not Many Deal To Begin With
The number one reason why OUR offers are not getting accepted, is that we are dealing in nicer areas, take a look at the average house the area wholesalers are shipping out and we are dealing in the $80,000 to $500,000 neighborhood, but most of the houses I see from wholesalers who do a lot of deals are in the $50,000 and lower ranges. They can get the deals because there are more of those houses for sale and less retail buyers in those markets, the average home buyer under $50,000 is going to be a real estate investor and not an owner occupant buyer, less competition to buy the houses, more motivated sellers, more deals. But less profit.
Owner Occupant Buyers
The next reason our offers are not getting accepted is that we are competing with owner occupant buyers who are going to pay more than an investor will each and every time. So we are looking for the really bad house in a really nice neighborhood or a seller who has a really HUGE motivating factor to sell their home. The really bad house needs more repair that the average owner occupant buyer can do. Or they have some huge problem and want out of the house now, not later.
Newbies Offering Too Much
The third reason why our offers are not getting accepted is that there are a lot of newbies and wanna be investors who are willing to put the property under contract for too much money and then try to wholesale it. The seller gets excited and then gets mad when the wholesaler who can’t sell it does not buy. This makes the investor look bad to those sellers and they will not look at another investor offer and end up listing it with a Realtor who is going to net a higher sale price for their seller, usually.
My word to the newbies – learn your numbers and don’t offer too much just to get it under contract only to back out, it makes the rest of us look bad when you back out. If the numbers don’t work, let the seller marinate a bit, their price will eventually come down and it will come down way faster if we all are offering about the same amount. But if you go in and offer 20% more and can’t close the deal, you just wasted 2 to 3 months of your sellers time and 2 to 3 months of your effort.