What's the best way to structure this offer?

Question

I live in a pretty sought-after town just outside of Topeka, Ks (Silver Lake).

Here in Silver Lake, houses rarely hit the market and regularly sell for more than asking price.
I was made aware of a house that is not on the market.
The seller goes to church with me. My father-in-law brought the deal to me and walked through the house with us originally.
The county appraises it at about $151k (in this market, I'm confident after rehab, it can sell for around $160k or more). I have a little bit of insider knowledge on the house and (I think) expected value.

The story goes like this : My father-in-law an elder at our church was sitting down at a church dinner with this fellow and the pastor and other elders. He stated that a RE agent was allowed to walk through (about a yr ago) and offered $60k for the house. The owner (politely, but firmly) asked the agent to leave. Through this discussion, around the table were quick offers thrown "don't sell it to him for $60, I'll give you $65", one said. "I'll give you $75" and it went up like that to about $85k.

My wife and I have walked through the house a couple of times and have figure that the house needs anywhere between $30k and $40k to rehab. (still aren't sure if we'll flip or hold).

I am trying to structure an offer that, both, makes our investment worth the return AND isn't offensive to this retired gentleman and his wife.
In most cases, I would simply make an offer, a hard anchor, and try to negotiate up to a mutually agreeable number. In this case, however, I don't think it to be the best decision. You see, this (retired) couple is very poor, owns the house outright and can barely afford the taxes on the property, as it sits. It is not my intention to get it for "as low as possible" and risk taking advantage of somebody in his position, knowingly. I would like him to benefit from this deal as well. But, it is also not my intention to lose money or work my butt off for a $5k profit...…
I would like to purchase the house for anywhere between $75k and $85k, but am looking for some pointers on how to come to that number together. I don't want to pay more than expected, but don't want to offer an offensively low number..

Thoughts?

Michael Lowe · Answer

well, thanks for the most sarcastic answer possible.
I've figured my numbers, and you're right $75k was the number I want to pay. I'll listen to more people with a soul to figure out the best way to structure this deal so I don't take advantage of a couple of old people in my church.

Thanks for your input.

Brandon Roof · Answer

I few things to address first.  The county appraisal means next to nothing in most cases, so don't use this figure toward any calculations.  I also wouldn't be particularly concerned with offer structure at this point either unless you intend to propose some form of seller financing, which is going to be secondary to the number you propose anyway.  Also, be very careful about what you think you resell the house for, what the rehab will cost and what would like to buy the house for.

When analyzing scenarios such as this you really need to reverse engineer them by identifying the most accurate comps (bring in an agent if you struggle with this but just look for properties of similar size, characteristics and location that have sold in the last 6 or 12 months).  Once you have that number (maybe it ends up being $160k, maybe it doesn't), take 70% of it (or maybe even 65% if you're new to the process), then subtract your renovation, holding and closing costs, which will vary based on a number of factors.

In your case, let's play it safe and say the the home ultimately sells for $150k.  From there, 65% of that figure brings us to $97.5k.  We then subtract $40k for reno (because it will more than likely run on the high end of your estimate), bringing us to $57.5k, which is below the initial offer they received from a realtor and since you don't want to work your butt off for $5k, you ultimately need to offer them less than every other offer they've already turned down.

Long story short, really focus in on your estimates throughout the equation and prepare to move on when you can't make a competitive offer.  Don't start moving the goalposts (i.e. by inflating the sell price or lowering the reno budget without data to support it; using 80% instead of 65-70% in the equation above to sacrifice your eventual return) in an effort to wedge a square peg through a round hole.

Not every property you analyze works, and providing them with a "low" offer isn't taking advantage of them.  As an investor, that is simply the amount you can provide in order to get the desired return on your time and energy.  If you were looking at it as your primary residence, could get it for $100k and put $40k into it and instantly have $20k in added equity, great, but that's not the direction you're approaching it from.  When looking at a home for an investment purpose, you're offer is generally going to be "low" or else it just becomes a really expensive hobby.

Michael Lowe · Answer

@Ryan Evans

That’s a great way look at it Ryan.

I may go that route. That takes a little bit of the emotion out of it, I think

Ryan Evans · Answer

I've done the slow play on a couple of deals like this. I told the sellers the number that worked for me and why. I broke down the rehab costs that I expected and then made an offer with a pass/fail inspection and a decent amount of earnest money. People don't like to be jerked around so I've used the pass/fail inspection a few times to let the sellers know that I'm familiar with the rehab needed and unless something major was uncovered like a collapsed sewer line, I'd close at the price I told them. And I'm flexible with closing dates because some people need a lot of time to move and get their next place in order. That has quite a bit of appeal to many sellers.

Shane H. · Answer

Have you asked why they want to sell and what they plan on doing once they sell?   May give some motivations for the goal they want to reach.

Caleb Heimsoth · Answer

@Michael Lowe don’t overthink this.  Offer 75k, cash and 30 day close. Don’t beat them up over repairs and just close. If they don’t take 75k, move on

Michael Lowe · Answer

@Caleb Heimsoth

I mean, there’s something to be said about the straight forward, here’s my offer, take it or leave it.

I DO have a tendency to over-think, this is probably one of those times...

It’s hard to know what someone else is thinking. In any other case, I don’t think it would matter to me. I’d just make my offer and move on.

In this case, however, it’s important to me to leave them feeling good about our conversation. Just as important as it is to me get a good deal.

Maybe a combination of the pass/fail system previously mentioned, combined with the hard offer is a good approach.

Thanks for the input, Caleb!

Michael Lowe · Answer

Great advice Brandon,

I'm pretty confident with an overall ROI of between $30k and $40k based on some of the numbers listed. Also, based on comps in that area, I've not seen houses sell for much less than my suggested number of $160k. That said, I think it would be wise of me to expect the worse but plan for the best. With that in mind, there is still a profit to be made here, if I take the house for between $70k and $80k, maybe the answer is to hold and rent rather than to flip. That way I can recoup some of the Reno costs, even if I do decide to sell in the future, before I sell. If I decide to hold and rent, I can take my time with some of the renovations, as the majority are cosmetic and even cut some costs by not going as high end as I would if I was trying to sell for top dollar....

Thanks again for the input

Jaron Walling · Answer

Bla bla bla all that matter is motivation. It sounds like a FSBO property that never moves.  If they want to continue paying taxes for something they don't even need that's on them. Make a fair offer and let them sit on it.

Those numbers are exactly same as a flip I'm working on. I wouldn't pay more than $75K. If you want to make a profit or cash-flow you can't pay any more.

What's the best way to structure this offer?

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