Is our offer strong enough?

Question

Type: REOListing: $130,000Our offer: $140,000, no closing contributions from the bank, $1,000 EM, preAPPROVAL (not prequal)Estimated Value in Current Condition: $150,000Estimated Value After Renovations: $195,000Listing states only cash or FHA 203k loans will be considered. We went with the latter.We are worried our offer may not stand out enough for a highest and best opportunity, if there were to be multiple offers. We are currently waiting for the 7 day waiting period to end and then they will review offers. Any thoughts?

Russell Gronsky · Answer

@Tara Smith, it is usually in the seller's interest to sell for highest and best. No matter if there are competing offers or not, you will probably get a call from the listing agent asking for highest and best offer. They don't have to tell you if there are other bids or not and regardless if they say there are or aren't other bids, you can never know for sure if that is true or not so my advice is to stick to your numbers. Fall in love with your numbers, not with a piece of property. Falling in love with a property will make you emotional and investors don't make decisions off emotions if they want to actually make money in this business.

Sharon Powell · Answer

Tara, if typical home prices in that area are selling at 130-140 and you rehab it to 195, you may have a hard time finding a buyer. Please know that holding costs can sneak up and kill your profit if they aren’t accounted for up front.

Tara Smith · Answer

@Michael Faust Thank you!@Russell Gronsky Thanks for your feedback! The area is fairly rural, average home price about 130k-140k. We plan for about 25k in reno. This house is very nice for the area (or would be after being brought back to life), that’s why I was concerned we would be out bid. You have a good point on the numbers, perhaps we’ll sit tight on the offer we have in right now. I may be underestimating what it’s worth in the end. We’re new to this, in what situation does a bank ask for highest and best? Only if competing bids are close?

Billy Amberg · Answer

@Tara Smith If you are going with a 203K loan it will take significantly longer to close. Though there are many pros to the 203K loan there are also a lot of cons if you are not prepared. I have been considering doing a 203K loan myself and started a discussion on the topic here: The 203K Loan: An Open Discussion. Been getting some great information and stories about BP members' experience with the 203K loan.

Russell Gronsky · Answer

@Tara Smith, In your case, I would be concerned that you're over-paying. But again, I don't know what market you're in. Reason why I say that is assuming you buy it for $140K and make no improvements to it, you pay all closing costs ($5K-$7K)...there is your $150K. IF you were to try and sell it in a year or two, you'd be looking at breaking even or being slightly negative when factoring holding costs and sell costs. You'd have to plan to keep this house for a long time.Now assuming you will be doing renovations since you're using a 203K loan, you still have closing costs. So your renovations should be $20K...maybe $25K, so you end up with about $20K of equity (140K purchase + 5-7K closing costs + 25K renovations). Again, I don't know what market you're in but in the markets where I buy, renovations by a contractor come in around $25 a square foot, so you can eat up $25K of renovation budget pretty quick.Remember that just because an REO is listed at a certain price, doesn't mean that's what the bank will sell it for. They have a target sale price based on big data crunching the asset manager does in some downtown office building, 2,000 miles away. They list at a certain price but they will let it go for less in many cases...but again....depends on your market.

Michael Faust · Answer

@Tara Smith . My answer is you have to make offers to get deals. A cash offer over asking price is a great start. Most likely after the 7 day waiting period the sellers Realtor may ask you for your final highest and best offer. Just remember you make your money when you buy the property, and remember there are always other deals if this one doesent work out. Best of luck. Mike

Russell Gronsky · Answer

Depends on where the house is located. Buyer paying closing costs is typical for an REO. Although, they sometimes have a Title company they work with and you won't have to pay title costs.That's about all I can say. The area where the house is will largely drive if it will be a bidding war or not. I've been outbid on REOs because I wasn't willing to have less than $40K of equity in the house from the moment I buy it. And I have bought REOs, with no competition, on places with $75K of equity from the moment I buy them. All depends on the market and time of year....but mostly, the market.

Thomas S. · Answer

Your highest and best offer has nothing to do with sellers price or the market. Your offer is only based on what financially works for you. If it doesnot satisfy th eseller yu move on. In business there is no value in getting into a bidding war. You do not want th eproperty if it is priced over what you are willing to pay.