How much to bid at a sheriff sale?

Question

Great website!
What a great source of information.

I am a buy and hold investor.... for the most part.
Briefly I have purchased 3-4 family buildings in the NY tri-state area. I have experience buying and managing these.
In my area, prices are still high and not even close to having positive cash flow. I will not buy w/o positive cash flow.
The sheriff sales may offer opportunities.
I would pay all cash and take money out after the fact.
I realize you HAVE to do your homework, title searches etc (and that is another post)

My question is how do you determine how much to bid for a property? How much positive cash flow is "enough"?
(assuming I had a mortgage w/20% down)
I'm looking for a simple basic guideline.

One formula someone told me:

If you can break even with 20% down, and a  10 yr mortgage after all expenses.
Basically the house would be paid off in 10 yrs.

I do feel I "need" to buy so unless it's a very good deal, I can sit and be patient and if I miss it, thats fine.

Any guidelines or input would be greatly appreciated!

Steve Babiak · Answer

The "1.5 rule" mentioned in a post above turns out to be very similar to the "65% of ARV" or "70% of ARV" rules - that "1.5 rule" yields a "67% of ARV".

But it does not seem to subtract out any needed repairs, which the MAO formulas usually take into account.

As for sheriff sale purchases, property condition is a crap shoot - and you should usually expect the property to be crappy and make you want to shoot yourself if you don't account for condition properly :D

If you can evaluate condition (both interior and exterior) ahead of time, you can get a ballpark figure for repairs needed, and subtract that from the 65 to 70 percent rules.  And I would encourage you to even cap your max bid lower than that, since you still have to account for any property that is still occupied (and that you might have to do "cash for keys", and that occupants can become irate and inflict damage, plus other factors...)

And of course, purchasing with the above 65 to 70 percent rules does not guarantee that there will be positive cash flow; those formulas usually are used for re-sales.  Evaluating cash flow requires using all-in acquisition costs, market rents, and expense estimation to get a number; the "50%" and "2%" rules of thumb can be used as guidelines here, as posted above by another member.

Raymond B. · Answer

Hi Steve,
Welcome to the forum.

You will find a lot of great information at this site.

Here is a link that should help you determine your purchase price.
It is also a great guide concerning rental properties.

http://www.biggerpockets.com/forums/52/topics/18371-help-me-understand-this-deal-and-5-2-rule

Raymond

Mark Gustafson · Answer

Mar 20 '11, 10:33 AM

Vote

We buy property at auction daily. We have come up with a very simple formula to "test" our auction price (this works in Chicago only and for us only). We determine the retail value of an auction property that is flipped as-is with little to no renovation and divide the retail value by 1.5. That is the most we pay for a property.

For example: 
	  Retail Value = $300,000 
	  Auction Value = $200,000 (300k/1.5)

There is a lot of math that goes into the 1.5 rule - like carry, taxes, commissions, assumed profit margin, assessments, and years of experience, etc.. This rule works for churn&burn and long term hold properties. If you are looking to hold a multifamily property long term under this rule you should be able to finance out 90%+ of your equity and stabilize in at a 10 cap with a 13%+ cash on cash return. These metrics work in Chicago only and have been tested against hundreds of properties.

Drew Friestedt 3F Properties | 3F Xchange | Chicago, IL

@Drew Friestedt  Such simple math that I have found ( thru our own purchases) to be spot on.  It does not matter how you slice it , at the end of the day you will be real close to that 1.5 figure as pr your above example Thanks Drew

Mark G

Drew Friestedt · Answer

Steve - I would encourage you to calculate your own metrics and not rely on mine.  There are many factors that go into that simple number and the factor changes based on the purchase price and renovation dollars.  For example.  If you buy for $100K, renovate for $100K, you clearly can't sell for $150K (100x1.5) and expect to make money, although you might be able to make it up in volume... ;)  Another way I look at long term hold deals is stabilized unlevered yield.

For example, generally speaking if you can stabilize a property at a 10% cap rate (Net Operating Income / Total Development Cost) your numbers will work.  However, this will not apply to highly distressed areas.

Say you think a property can generate 30,000 in net operating income (NOI = Rev - Expense excluding debt service).  The value of the property at a 10% unlevered yield = $300,000 => (30,000/10%).   If you can stabilize a property at a 10% unlevered yield, applying 6% debt will generate positive leverage and make your cash on cash numbers even better.

Here in chicago the market targets 7 to 9% cap rates to value properties.

J Scott · Answer

This seems to be missing some very important information...

For example, for a flip property, what if the property needs $100K in rehab?  If you don't factor rehab costs into the equation, you're GOING TO overpay.

And, for long-term holds, how can you calculate a reasonable purchase price without factoring gross rents into the equation?  If there are two properties that have an ARV of $300K, where one will generate $60K per year in gross rent and another will generate $40K per year in gross rents, according to your formula, the maximum purchase price is the same for both, which clearly isn't the case.

Steve R. · Answer

Thanks the replies.

Drew, can you tell me the formula of how you get to 1.5?
(so I can calculate it here)
Since most of the properties here need between 5-30k in renovations, and I'm a buy and hold guy, that would be a consideration.
I understand if you don't have the time.

Thanks

Drew Friestedt · Answer

We buy property at auction daily.  We have come up with a very simple formula to "test" our auction price (this works in Chicago only and for us only).  We determine the retail value of an auction property that is flipped  as-is with little to no renovation and divide the retail value by 1.5.  That is the most we pay for a property.

For example:
Retail Value = $300,000
Auction Value = $200,000 (300k/1.5)

There is a lot of math that goes into the 1.5 rule - like carry, taxes, commissions, assumed profit margin, assessments, and years of experience, etc..  This rule works for churn&burn and long term hold properties.  If you are looking to hold a multifamily property long term under this rule you should be able to finance out 90%+ of your equity and stabilize in at a 10 cap with a 13%+ cash on cash return.  These metrics work in Chicago only and have been tested against hundreds of properties.

How much to bid at a sheriff sale?

Most Popular Reply