First Whosesale Deal: Are my numbers right for my offer?

Question

I have a motivated seller in Maryland who is looking at possible foreclosure. I base my numbers on: (ARV x .65) - repairs = Max Offer. In this case: (285K x .65)-15K= (185K) - 15K = 170K max offer. Her mortgage bal = 75K. I am being told these numbers work everytime. However, I know my seller will want to know why my offer is so much lower than 285K? She knows repairs would be around 15K-20K. 1.)Does my max offer sound right? 2.)Which is a better exit strategy: subject to or assignment. She's abt 3 mos behind (abt $6500 due Nov 1st) she's getting FC notices.

Troy Fisher · Answer

Elizabeth Y. , why would a buyer take that much? If her Mortgage balance is 75k, she's walking away with 95k, with a fast close (15-30 days), she doesn't have to pay 6% to a realtor, she doesn't have to do 25k in repairs, and she doesn't have to wait 3 months, and be 3 more months behind which would put her out another 6500. Let's look at those numbers 285k -6% -Closing Costs -Repairs -Holding Costs So: 285k - 17,100 = 267,900. (6% Agents Cut) 267,900 - 5,000 = 262,900. ($5000 for closing costs, Title, Taxes, Ins) 262,900 - (25,000 + 2300) = 235,600 repairs and an additional month of holding costs. 235,600 - (6,500 + 6,500) holding costs for being on the market for 90days, and paying back the 6,500 she still owes 222,600. Is what she'd actually get at closing minus her 75k leaves her with 147,600. Instead of 100k. Now, don't explain to her that. $$ amount but the process. Plus if she's 3 months behind on her mortgage payments, she probably doesn't have the 25k for repairs. Quick and easy response to the seller. "Ma'am, I have to offer this lower amount because of the amount of work and expense there is in flipping a property. I am offering you a quick close. I am offering you a way out from foreclosure. I am offering you a chance to start a new, fresh chapter of today, instead of hoping to do it in 3-4 months." YMMV

Dave Grosse · Answer

just a suggestion - I always lean to the low end on ARV values. It MAY sell for 285K, but it'll have to be at least as nice as the one other house that sold for that. I'm assuming you'll be flipping to a rehabber and not doing a retail flip? Either way though, you or the rehabber will want to sell the house quickly and usually that means it has to be much nicer than everything else for the same price as the others, or just as nice but at a lower price. Ideally you want to be the nicest and cheapest house on the block (or the neighborhood). Start low and work your way up if you need to! Good luck!

Kelly P. · Answer

Don't forget to account for the back payments that will be due. I normally do not justify my offers but rather tell them that it is the best I can do. I don't want to get into a discussion on value with someone who is emotionally invested - they will ALWAYS say the house is worth more than it is.

Account Closed · Answer

Thanks @Belinda D.! I am changing the repairs cost amount, it was too low.

Account Closed · Answer

Thanks again @Dave Grosse and @Erik Hitzelberger. Roof is 2yrs old. AC Unit is 12yr old and Furnace is 3 yrs old. The kitchen and kitchen floor is outdated. Same with the two bathrooms. Old paneling in basement needs to come out I'm sure. Hardwood floors on main level and old carpeting in basement. The carport cement driveway needs some work. There is a tenant that will be moving out the first of the new year. I base my repairs at $10 per sq ft. Its a 1273sf house. There seems to be no other major repairs necessary. In a well sought after neighborhood. I will not be rehabbing myself. Thanks again for everyones thoughts and suggestions.

Account Closed · Answer

I had a Realtor run COMPS for me. Two other homes, same as hers, sold for 285K/275K near her street.

Account Closed · Answer

Thanks so much for your suggestions, @Dave Grosse, @Troy Fisher, @KellyP.,and @Alan Russell! She has no other offers at this time. I feel better knowing that I'm being fair to her. Thanks again!

Account Closed · Answer

She is 3 payments behind, approx $6500 is due Nov 1st

Belinda D. · Answer

Elizabeth Y.

Dave Grosse · Answer

Elizabeth I would also factor in how much you want to make on the deal. I've found that my end buyers want the property anywhere from 60-70% of ARV. ARVx65%-repairs-YOUR CUT(don't get greedy!) = MAO. Also, excellent breakdown by Troy above. If she decides that your offer isn't enough and decides to hold out, she's left with a foreclosure and $0. $95K sure sounds better than $0 and a foreclosure to me. Help her understand that if she doesn't already. A few other considerations how sure are you of repair cost? have you had a contractor come and give you a bid? i think we tend to underestimate repairs, especially when starting out does she have other offers?