How much I offer: does it really matter?

Question

Hello BP Friends,

I’m a new investor in the market for a live-in flip. I am wondering if paying what would normally be considered “too much” really matters if I am just going to perform a cash-out refinance soon anyway. Please challenge my rationale in this example:

Let’s say the seller wants $100,000 for their house, it is in an excellent location to rent rooms out, and it is getting little traction on the marketplace. I would have to spend $50,000 to achieve an ARV of $200,000. Because I will apply for a cash-out refinance of the property after the repairs are completed, I think I should just give the seller the price requested ($100,000) to ensure I grab the property instead taking the risk involved with offering less (let’s say $90,000). My down payment will not be drastically different even if I put down 20% of the purchase price ($20,000 versus $18,000). My rationale is that difference ($2,000 in the example) does not matter much anyway because the bank will insist when I refinance that I keep 20% equity in the house ($40,000 assuming my ARV estimate is accurate). I grant the time-value-of-money principle says I could have reinvested that $2,000 difference, but that matters little to me given that I spent $70,000 (50K in rehab costs plus 20K down) to make $50,000, a 28% ROI. The house is now worth $200,000 and that  $2,000 is "stuck" in the house as equity either way. I also grant the risk of my offer strategy goes up as I replace fictional numbers with real ones, but wouldn't same rationale still apply?

Regards,

Danny

J Scott · Answer

You should always know the maximum you *can* pay, and then decide from there the tradeoff of trying to get the property for less.

If you think there is great risk offering less than $100K and $100K is a number that makes it a worthwhile deal for you, then offer $100K...

Nicholas L. · Answer

@Danny Lambert

a few things

yes, what you offer matters.  and there's no way to know in advance whether 10k is going to make or break a deal until you have a specific deal.  it might depending on all the numbers.

also, not sure if you've been looking yet, but it's extremely unlikely in today's market that you are going to find a house on the MLS listed for 100k that needs 50k to be worth 200k.  those types of deals are usually found off market.

finally, be sure to include all costs in any eval you do.  a lot of the transaction costs get overlooked on BP and they are non-trivial.  a live-in flip is a great way to reduce risk but if you buy with financing and then refi that is still two sets of closing costs, probably with lots of delicious fees for the lenders.  include these costs in your analysis!

hope this helps

Josue Vargas · Answer

Offer what you can afford, I assume there will be a grace period where you can back-off the deal, except loosing some or all earnest money, etc.

If your numbers works, then you should ideally have other alternatives to back-off the deal or do something else, hopefully without getting into the negative numbers.

If you are reconsidering a deal of $150K for +/- $2K reinvesting strategy or whatever, I would say you are better off waiting and keep looking.  On the other hand, sometimes these deals are just gut feeling, market in the area, appreciation, hot spots, upcoming construction, facilities, schools, etc.  How knows your area better than you?  Maybe that's not the case though.

Sergey A. Petrov · Answer

The difference is still $10k no matter which way you look at it. Downpayment difference of $2k is a meaningless number as your cost basis (using the purchase price only for the sake of simplicity) in the property is still either $90k or $100k. If it is worth $200k after the rehab it is still $200k less either $90k or $100k. You decide how much of an added equity you are ok with.

Billy Daniel · Answer

If it's not getting traction in the market, then I would offer less.  You're really only talking a day's worth of time added.  If you're willing to offer full price then you'll accept their counter anyway (if they counter).

In the end however, it really only matters what the numbers work out to when considering your goals and comfort level!  Don't get stuck in analysis paralysis and lose it all together!

William Anderson · Answer

Never feel rushed to close a deal, you found that one and you will find others.  I would say it depends upon the market.  If it's a seller's market and you are pretty much rock solid on the $200k when you apply for the refi then go for it.  If the market is soft and the chance of other buyers stepping up is small, offer a lower price.  Most sellers will counter.  I can't think of a single case where the sellers did not counter when my client offered less than the selling price.  Don't be afraid to walk away if the numbers don't work.

Danny Lambert · Answer

Yeah, that makes sense. That advice and the advice from your books have been quite helpful.

Danny Lambert · Answer

Good point. In my case the property is right next to urban public transportation, so I know the place will appreciate and be popular with renters.

Bruce Woodruff · Answer

Sometimes you have to pay a little more (which you are doing by offering full price)....but you only do this if the deal is an excellent one....IE, either great ROI or great appreciation.

Danny Lambert · Answer

Good point about the loan costs. I would have to finance the purchase and rehab, then refinance the house when finished…I think the purchase price matters less to the investor when they are financing the deal (because they’re investing less money into the deal) and plan to hold onto the house for twenty years or so, but it is still significant.

How much I offer: does it really matter?

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