First Offer! Am I on the right track?

[Joshua Durrin]

Hi. I found a property listed on the MLS for $650k in need of approx. $150k in repairs. The property was an historic property in my area that needed lots of work including a new roof (existing was just paper for over a year). Owner was an investment firm that had it listed for over a year.

Upon contacting the agent they said the firm was just looking for an exit strategy. I was very clear that I wasn’t a retail buyer… many times.

Applying all that I’ve learned so far from BP, I cranked the numbers as such:

ARV was conservatively $769k based on three comparable solds within the past month.

Using 70% rule, meant $538,300 was the max purchase price less $150k for repair costs… leaving max purchase price at $388,300.  

The listing agent had a recent quote (within 3 months) for repairs claiming $116k in repairs. However, seeing that some of the interior was partially completed without having put a roof on the building left me skeptical as to the quality of the quote. So I bumped it up to $150k also to cover holding costs while getting permits on the historical property to a $150k estimate.

I had planned to offer $360k leaving me some additional contingency room and potential for a wholesale fee (less than 5% though). However, “if you’re not embarrassed by your offer then your offer is too high.” So I dropped it to $345k.

It wasn’t taken.

Later, I learned from the agent, however, that the investors claimed to have 7 other offers on the property throughout the year between $600k-$630k. This led me to question whether my formula is too aggressive for my market.

Using the 70% rule I would have potentially profited about $150k on the property. I’ve been told “big risks should deliver big rewards.” This property was in such bad shape that I considered it a big risk and thus it seemed appropriate. I did talk with another investor friend of mine who advised not to go any higher than $400k on the property, so I figured after negotiations I’d land somewhere around my original target of $360k. But with 7 other offers over $600k, is that to say that I can’t apply the 70% rule in my market?

Other formulas suggest applying a fixed profit target to the purchase price (i.e. instead of a 0.7 multiplier, calculating the ARV and subtracting repairs costs, profit, and carrying costs, etc. separately). Perhaps targeting a fixed profit (i.e. $50k) is a better way to start here?

Note, I’ve not even started my direct marketing yet. This was the first attempt of many to come but I wanted to make sure I was headed in the right direction with my offers and business strategy before I'm laughed out of the market. 

Thanks for the input.