Deal Analysis (Offer flat rejected). Should I change my offer?

Question

Hi everyone,

Thank you for taking a look at this analysis.  I currently own a 4-unit that is successfully cash flowing, but this is my first stab at single family home investing.  This is a 4 Bedroom, 1 Full, 2 Half-Bath house located in the Chicagoland suburbs.  My plan would be to buy, renovate, live in x5 years, sell.  Rents in the area would command about $2200, which would not allow positive cashflow, so long term rental is not an option.

Home has been listed for sale since June 2018.  Interestingly, they currently have two offers on the table.  One cash-offer flipper who wants to close immediately (seller can't move that fast due to personal/family considerations), and one conventional offer which is more money, but FHA and likely won't get approved due to the non-livable condition of the home.

Current Asking Price: $280,000

After Rehab Value: $305,000

Estimated Repairs: $65,000-70,000

• $15,000 Kitchen
• $5,000 Full Bath
• $2,500 Half Bath
• $2,500 Half Bath
• $15,000 Windows
• $10,000-15,000 Central AC install + ducting
• $15,000 Paint, Drywall repair, Flooring repair, Misc

Following the recommended formulas -- ($305,000 * 70%) - $70,000 = $143,500 offer price.  Well, I offered $138,000 to possibly negotiate up to that final $143,500, but was told I'm way below the other two offers, and to not even bother.

Would you apply this calculation and purchase strategy differently?  If even the local flipper is offering more than I am, than I'm assuming I'm missing something.  I had expected to come in about what they would, using this formula.

Wondering if you all would adjust your offer and take another shot, or move on.  Thank you for your help and insight.

Russell Brazil · Answer

What is the value of the property in it's current condition? The market determines the property's value, not a spreadsheet.

You can not force numbers onto a property and location simply because a spreadsheet or calculator spits out a number. You need to find the properties and locations that fit the numbers.

That doesnt mean you cant offer lower than a property is listed at. Ive bought properties up to $250k under list. But that is because that was where the market valued the property, and I was able to, with a lot of time and effort get them down to the correct pricing.

You are offering almost $150k off the list price.  Are there other properties in similar condition in this neighborhood selling for $150k below this properties list price? If not, then you are simply wasting your time, and other peoples time to boot.

You need to locate the neighborhoods where there is a large price spread between nonrehabbed homes and rehabbed homes.  If the price spread is too narrow, then your goal can not be accomplished. You need to bend to the market, the market does not bend to a spreadsheet.

Chris Jensen · Answer

@Christopher Boyle here's my take.  If your analysis is sound and includes educated estimates that you're comfortable with, but the results are just not supportive, move on.  Let someone else chase that dog.  Other opportunities do exist.  There's some wiggle room, but don't overly force the numbers to accommodate the selling price, and don't overly force the selling price to fit the numbers.  If they don't align both ways, best to let it go.  Best of luck to you!

Chris

Nik Moushon · Answer

First i dont understand how you can put $70k in repairs and then value it at $305k. You lose 65% of the money you put in. I think your evaluation of the numbers and ARV are off somewhere. If a house needs THAT much work (which your repair numbers suggest) and still has 2 offers on the table that are somewhere near asking price then your ARV of $305k is off. Check you comps for the area and see what a completely redone house is going for. That flipper is your first clue that somethings off. Try to find what his number is and see if that works for you. Because obviously if time was their only issue on that you could get in at that price since you are flexible on time. Secondly, you have to go by your market value. This BP formula of immediately taking off 20-30% of the asking price is not going to cut it in todays market, especially in big city markets like Chicago. You will get laughed out of the room with those kind of offers 99.9999% of the time, even in lesser markets. The market is just too hot and EVERYBODY knows it.

Joe P. · Answer

While your analysis is correct, I don't think the seller is going to consider your opinion. They need to sell at the sale price, or else they wouldn't have put it up there at that price. It's probably at market value.

They may be wrong, their house may be unlivable, their expectations aren't realistic -- but they haven't changed the asking price to convey that. I don't think it hurts to put in an offer, but some agents won't even bother.

I do not recall which savvy investor said it, for some reason I think it might have been @Russell Brazil (sorry Russell if I tagged you incorrectly), but he led a response for someone with a similar problem; their offer was so much lower than asking and the investor was upset their agent either wouldn't put in the offer, or that the seller wouldn't even consider it.

Point being that just because your analysis may be correct, the analysis may not be accurate for the area or property you are trying to buy. If crappy homes can sell for 280k and the ARV is 300k, then prepare to pay market value, or don't plan to play in that market.

Now, counterpoint, if comps in the area suggest your offer is fair, then by all means, continue forth. You're just dealing with an incompetent seller or agent who put the house up for sale for an exorbitant amount, but I don't think there are many cases of that.

Rehabs tend to be similar cost (depending on finishes) in a 200k house as they are in a 400k house. A new kitchen may be 30k in a 200k, and 40k in a 400k house, for example. Why not find a distressed property in need of full rehab at that cost where you can bring the value up to ARV, not something that only has 20k room and needs a 65k rehab, where the seller won't sell it to you anyway? It just seems like a lot of things not working in your favor -- you're trying to jam a square peg into a round hole.

Christopher Phillips · Answer

@Christopher Boyle

Are you able to post any interior pics? Would help to get some perspective on the work.

When looking at the numbers: $317,000 for the flipped home next door. Less your $70,000 repair costs is $247,000.

Your repairs include things like central air. Don't know too many flippers installing that these days unless the rest of the neighborhood has it. But a $317,000 home with central air? Not sure if that's needed, but if the $317,000 has it then it's okay I guess.

So, $247,000 would be the number before protecting your profit and carrying costs. But, that's your problem, not the sellers.

If your final number is $143,500, then you're trying to protect $103,500, which is unrealistic.

You're basically trying to offer them a little bit more than the land value.

A more realistic gap would be $25,000, as a guess, to include about $10,000 in profit and cover the closing and carrying costs, which would be an offer around $222,000-$232,000

The other option would be to cut your $70,000 to closer to $50,000 in repairs.

Russell Brazil · Answer

If the house next door was flipped, then you have at least 1 data point to look at. What did that sell for on the first transaction.

Joe P. · Answer

Chris - everyone knows what you're trying to do. We're trying to tell you why it won't work.

Not only will you not be able to get this house for the pre-repair value -- the market is dictating a different price that is advantageous to the seller, or he is out of his mind -- but you will sink money into a house that has a clear comp.

Again, you can try, but as others have said, you will probably be laughed at. Not every market is like this, but the one your in simply is. So look to other markets where your distance between current value and ARV is higher and you have an opportunity to not only make profit, but also get a property at a fair value.

Christopher Boyle · Answer

Thanks for the input, and I appreciate the perspectives.  This property is in non-habitable condition (no kitchen flooring or appliances, major water damaged drywall in multiple rooms, damaged bathrooms, plumbing issues, etc.) and unfortunately there are not any other distressed properties currently for sale in the immediate area to serve as a comparison.  There are also not any properties that have closed in the last 6 months that are similar distressed.

My thought was to therefore use the after rehab value of the market to estimate an offer price, since that data is much more prevalent.  The best comparison is the house next door -- very similar with a better layout and finished basement, and sold for $317,000 (and had clearly been flipped).  All other similarly spec'ed move-in ready homes in the area have sold for less.

Deal Analysis (Offer flat rejected). Should I change my offer?

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