How To Calculate My First Offer

Question

Hey, Reo here.  Bran new.  Hoping to get some help on my first deal.

I want to offer to buy a lady’s house.  She’s an old widow who doesn’t really want the property.  She got it when her husband passed and doesn’t know how to be a landlord (charges less than half average rent)

House is worth $227K.  I already got CMA. 5 bed 2.5 bath 1400 sq ft upstairs.

Here’s my embarrassing attempt at doing the calculations:

- horrible condition, so $40K in repairs

- I want 30% equity position for safety cushion, so subtract $68K from $227K

- Realtor 6%, Title fee 1%, Buyers closing cost 3%.  So subtract another 10% or $22K

Leaves me with $96K.  Should I offer this little old lady $96K to buy her house?

(Her late husband bought it for 99K in 1996)

Help please

Andrew Syrios · Answer

Getting a 30% equity position on top of the closing, title and realtor fees is quite a bit. If you can get it, OK, but generally that's considered as part of your equity when using the 70% rule or other similar types of analysis.

Travis Moe · Answer

@Nathan Reo

Welcome!

Don't do your own calculations. Just don't. At least, not yet. Sure... use the 70% rule to quickly determine if a property is even close and worthy of more careful scrutiny... but don't try to be a human spreadsheet. Just use the BP calculators. Focus on getting your inputs as accurate as possible and then let the calculator do the math.

Let's run your details thru... This is just meant to be illustrative... certainly not actionable advice.

• You don't really state what your goal is for the property. You didn't mention what it could rent for so, I'll assume you intend to flip it. 
• You didn't mention the location, so it's hard to know things like taxes, etc. I'll use my local SoCal rate of 1.25% of purchase price - hopefully your area is much lower or uses lower assessed value.
• I'll assume the CMA of $227K is for the rehabbed property. This is the ARV. 
• $40K worth of repairs
• You're brand new, so bank on needing the better part of 180 days to purchase, rehab, list, negotiate, and close the flip. 
• You don't specifically state a profit - but you say you want 30% equity. I'll use $68K as the desired profit. 
• With purchase closing costs at 3%, it looks like you intend to finance it, but you don't mention the details -  so I will assume all cash purchase.

here is a cocktail-napkin analysis (link only good for 7 days from now).

If I plug all those numbers into the flipping calculator on BP and I get a maximum allowable offer of $93,810. That's the most you can offer the Little Old Lady given your specs.

Don't worry so much about what she's into it for or what her late husband bought it for or that her favorite poodle, Snookums, used to sleep under that oak tree in the backyard. Fact is, it's in terrible shape. It could be worth $227,000 but it isn't right now. You can only be assured of what it is worth to you given your goals. Offer what you can to get it at a price that supports your game plan. The vast majority of offers will get rejected - some by sellers vehemently offended by your price. @Alexander Felice would tell you to "Suck it up, Buttercup." and just keep plugging away at it. It only takes one good deal to make it all worth it.

I hope this helps. Good luck!

Jay Helms · Answer

DM sent.

Lassy G. · Answer

@Jay Helms

Great idea that “mastermind”. Please provide more information to me.

Matthew Otero · Answer

@Jay Helms  Hi Jay, so I’m interested in this mastermind group thing you mentioned. I’m new in experience but have been educating and establishing my business for the last 3 years my partner and I purchased and own a rental property and are shopping for the next. I’ve been thinking about joint a group of more seasoned professionals to learn from and share with.

Jay Helms · Answer

Hey Alex. In the most simple form, a mastermind group is a collection of like minded individuals who routinely gather and connect to push one another to higher achievement. I’ll send you a DM with details on joining mine

Alex Jr · Answer

@Jay Helms Hey Jay, What exactly is a mastermind group and where can i join one?

Thank you

Currently a Realtor

Jay Helms · Answer

@Nathan Reo - the purpose of your 1st Deal is to help get you to your second. Have you thought about joining a mastermind group to push you for clarity and accountability on achieving your goals?

Nathan Reo · Answer

Wow, great response!  I actually plan to buy and hold and do a lease option.  We want to make the downstairs a “mother-in-law suite” or whatever it’s called, so we want to put in a kitchenette downstairs.

It’s 1115 41st in Ogden UT.  (I hope I’m not violating any rules by telling you that).

Yes, 227K is ARV

I want to walk into the deal - even before repairs - with 20-30% equity in the home.  The I intend to cash flow it for at least 5years doing a lease option.

In regard to financing, I’m still very confused about how I will proceed with that but a mentor, Kris Krohn, has encouraged me to sandwich lease it.  So maybe I’ll do that.

But to be honest I’m so new I’m basically just repeating words I hear like a toddler.  I don’t know what the #%>} I’m doing.

My goal is to create at least $600 cash flow/passive income and to just take action.  I tend to be so indecisive I never actually make a move so I don’t want to be paralyzed in hesitation

How To Calculate My First Offer

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