Analysis vs. Offer Strategy

[Michael Temple]

I want to collect some input from other investors on the best way to handle the strategy of analysis vs. offers. Here is what I mean. Every single day I get leads sent to my email from my Realtor, Zillow, and Trulia. I open each and do a quick scan primarily looking at price and area to narrow downing the list for some to take a second look at. As you might imagine I discard a bulk of these.

After sifting it down to a small handful I go in and look at them, look at photos, area of town, rental rates, etc. This is part education for me and part deal hunting. If I find some that look promising I start doing some quick analysis (1% rule, potential rehab costs, etc.) if I get particularly interested in something I might dump the details into BP calculators. The idea behind this entire exercise is based on @David Greene book on BRRRR trying to get good at deal analysis by doing A LOT of them. I try to do a full analysis of a deal every day.

I reach out to my Realtor and go physically looks at a super small number of these. Now here is where the question comes in...

Most of these I don't make offers on because after looking at them in person I see the rehab is going to be higher than I thought relative to ARV and current asking price. For example, I just went and looked at one on Friday priced at 50K. ARV is approximately 80K. Estimated Rehab after crunching the numbers is $30K. So to BRRRR this deal, I would need to get it for around 25K (80K x.75 = 60K - rehab (30K) = 30K - other costs (financing, closing costs, etc.) = 25K max price.

As you can see that is 50% discount from where it is currently listed, which is highly unlikely I would get it. So question, should I just offer on it anyways or wait until stuff like this comes down into striking distance of what I need or sells before?

As you can imagine waiting until it gets down to those levels has been a spectacular failure so far. Nothing EVER comes down to that level or even gets close before somebody buys it. I generally save them to my list and check every couple of days to see if there is a price change.

I am really struggling with this because all the Realtors I am talking to keep telling me making offers like that "isn't a realistic approach" and the unsaid part of that is "its a waste of our time to work with you if you keep doing this because nobody is taking you seriously". I actually had a Realtor tell me that once in a nice way, but the meaning was clear. At the same time I know if I don't make offers I am getting nothing, nada, zilch. Ala Wayne Gretzky "You miss 100% of the shots you don't take".

In addition, I listen to the BP podcast and other investors that keep saying things like they are making 20-30 offers PER MONTH! I have to wonder if their offers look like my example offer above and they are just putting it out there to see what happens. Knowing 99% of them will be rejected.

I would love to hear how others are doing this. Are you doing 20-30 Offers per month knowing almost all of them will fail and possibly irritating your Realtors to keep writing all of these up or are you being more selective and do a lot more analysis vs. offers?

[Brian Sparr]

Hi @Michael Temple -

I can't speak to the thought process of any of these people making 20 or 30 offers a month, but, here are some things that come to mind for me:

1) these properties that are listed for $50k, are they worth $50k? Will they appraise for that? Will they realistically get an offer in that range from anyone not trying to BRRRR? If they will, as an agent, I am 100% wasting my time - your time - the listing agent's time - and the seller's time by writing a formal offer up at half the value. If your agent is smart, the most they'll do is make a verbal offer at your price ... then, if the listing agent indicates a deal might be reached, then you formalize into a written offer.

2) I'd take a closer look at the rehab costs to try and find ways to shave it down.  If you're planning on doing this multiple times, can you buy some items in bulk to reduce the cost?  Is there a different type of product you could use (ie, wood floors vs LVT)?  Can you work with a different contractor who's willing to take a little less on each job since they know you'll be a repeat customer?  Get creative to get this cost down.  And understand, from the appraisal standpoint when this rehab is done, you will not get a higher valuation because you used more expensive products.  The $10k Viking range is viewed no differently than the $500 GE range - to the bank, an updated kitchen is an updated kitchen.

3) There's no rule that you have to pull 100% of your cash out of this deal after the refi - which is what your equation is currently doing.  Would it be the end of the world if you left $5k or $10k in the property?

Here's an idea for your example property ... take the $30k rehab and find a way to get that down to $25k ... get rid of the $5k closing costs by using a lender credit (ie, take a higher interest rate) ... leave $5k in the deal ... now, your equation becomes: $80k * .75 = $60k - $25k rehab = $35k + $5k (willing to leave in deal) = $40k offer price.  You're still below the ask, but at least now you're in the ballpark.

Good luck!