Where do you factor in rehab costs?

Question

I came across a property I really like but there is no doubt some work needs to be done. Its an almost all original 1925 craftsman bungalow. I was late to the game initially and they took another offer at list price but the buyer fell out of escrow shortly after. Considering that and the work that needs to be done I put in an offer $10k below list price. The seller is countering back at list. I am the first offer since the first fell through. The agent is sure the seller will accept my offer at list price. At this point, I just want my offer accepted so I can at least look further into what needs to be done and get an inspection.

My main question - If you know work needs to be done on the property is it better to factor in rehab costs into your offer price or should you offer list price and then ask for credits for rehab costs?

Bryce Lowe-White · Answer

@Christopher PhillipsThanks, that is pretty straight forward. I believe the list price is slightly overvalued compared to the comps in the area. Many comps sold for below list and this one needs more rehab than the comps. That said I think I should stand firm on my original offer, $10k under list. Have you ever seen this work out for the buyer? I guess it all depends on the situation, right.

Account Closed · Answer

I would hate to be buying somewhere where I had to "sell myself" to buy an overpriced property.

Dave Foster · Answer

@Bryce Lowe-White, Don't let the 1031 issue cloud your analysis on this property. the sellers 1031 has no impact on you at all. And you cannot materially impact his 1031 unless he has already located the property he wants to replace this one with. He as 45 days after close to identify potential replacements and 180 days after close to complete his purchase.Where you can score some good will points is to keep your offer where you want it but agree to his 1031 contingency. He's basically wanting to wait on closing his sale until he finds the right replacement property. If you dont' agree he's just left with his normal deadlines. But if you do he feels some pressure off. Not a bad negotiating point at all.

Matthew Paul · Answer

I sense emotion clouding this potential purchase . Me , I would resubmit my offer 20K less than asking , if the seller doesnt want to deal , walk.

Christopher Phillips · Answer

@Bryce Lowe-WhiteYou can't flip a pure flip rehab. 1031 isn't for short term gains. The original intent must have been to "hold for investment" like with a rental property. The investor would have to rent it out for a period of time or let it sit there for at least a year or so to avoid IRS scrutiny. Investors have 45 days to identify a property post close if they haven't already done so. Max 180 days or before tax filing date, whichever is earlier, to complete the process.But that's on the seller's side. Doesn't have an impact on the quality of your offer. Once someone gets a full list offer in a seller's market, they would be hard pressed to take less.From the buyer's perspective, @Mike McCarthy is correct. You have to "sell" your offer. Could be listing "valid" comps in the area, or could be from removing contingencies or offering cash, or could be from finding a valid issue from the inspection that the investor didn't already know about...

Bryce Lowe-White · Answer

@Christopher Phillips@Mike McCarthyThanks for the feedback. I'd like to stand firm or I hear Mike's suggestion to throw it back in their court and counter back $5k under. I'll make sure to specify needed rehabs - windows, kitchen (possibly), floors. I am certain list price is overvalued with the rehab. Also we are pretty sure from just looking that the electrical panel will need to be updated. If costs add up significantly after inspection I'll likely back out of the deal anyways.Owner is an out of town investor with a specific number in mind, especially because they had an offer at list that fell through. The sale is also contingent on 1031 exchange. Seller still needs to locate another property. I need to read up more on how that all works as well. My agent mentioned something like they have 90 days from our accepted offer to find a property. Anything you can share from experience with 1031 exchange?

Mike McCarthy · Answer

Don't forget, you can always counter at $5K below list, or $3K. If there aren't other offers on the table, they might not be willing to miss out on a buyer just for $5K.Also, is this a regular homeowner (non-investor)? Take the extra step in proving you're a good match and you won't fall out of escrow. You are paying cash, or have all the pieces for a mortgage (good credit, good debt to income, etc). You can also state that during your walkthrough you saw that it needs: (a kitchen upgrade, the hvac is old, etc) and state these are things you don't plan on bringing up in the inspection phase. Maybe you'll work with them on closing dates.Basically, sell yourself as the best buyer they'll get - regardless of the price.

Christopher Phillips · Answer

Bryce Lowe-White It generally depends on the market and the seller's motivation. Many sellers have a number in their heads, right or wrong, and in a seller's market they tend not to budge. You have to decide if that $10k is worth losing the deal over. At today's rates, that's only a $60-$70 per month. Obviously, for a flip you have to protect your profits. For a rental, you have to protect your cash on cash returns.

Christopher Phillips · Answer

Bryce Lowe-White In general, your offer should be based on what you know now from the original tour(s) of the house and compared to comps in the area. Credits after the inspection should be for major previously unknown items.