Analyzing My Competition

[Jason Merchey]

I have received a response from a seller of a beat up old house in a decent part of town that is going to sell for about $325,000. Asking price: $140,000, and we could pay as high as $130,000. We offered $100,000 and he countered with $137,500. Been on MLS three days. Fairly hot part of town. Rehab budget, including landscaping: $138,500. Closing costs and holding costs: $3,000. Cost of sale: $22,700. Profit: $31,000, which is about 11%. I would be splitting that with my partner, who is going to do everything but provide the money, which I would do. That is only 5.5%, but annually that is okay. And for no work.

So, what I'm wondering is, what thoughts does anyone have? I have been thinking about the negotiating process which our Realtor is going to get into tomorrow... I know that we can go as high as $130,000, but I am wondering, there is probably a 20% chance that another offer will come in tomorrow, and then it will be a "highest and best offer" situation. What can I predict my competition would be bidding? I think things we have going for us is a $100 per sq. foot rehab price with our favored contractor - who tries to net a 12-15% markup, there are plans approved from 2009 on file and that if done at a decent level finish-out would fetch $325,000 in two weeks on the market I am told. We have 1.5% earnest money on the line, three week close. Contingent upon due diligence and clear title. Pretty simple.

So, to get to my question: if my competition, should it submit an offer tomorrow, uses say the 70% rule, and have a similar construction plan and cost, does that mean that they would probably be trying to buy it for $100,000, thereby offering $90,000? In other words, we offered $100,000 but will go as high as $130,000 and still make 10% profit APR, which we will accept. So... are they likely at all to get near to $130,000 in their max price? Or would their profit margin and construction costs seem to make that unlikely? It seems like if I am analyzing their max price successfully, that if it comes to a highest and best situation, I could offer $125,000 as my max, and that would still beat the competition by a ways, and therefore, should stick to $125,000 as my supposed max (with $130k being my absolute max).

Any criticisms, or do I have this well in hand? My bottom-line goal is to get the place, for $130,000 or less, make 10% profit in six months, and not get beaten out in a highest and best situation. Help me understand the 70% rule and how it probably affects my competition.

I'm in Charleston, SC