Maximum Allowable Offer?

Question

Hey guys it's been a while.   I last posted back in September and since then I've gotten married, went to Hawaii on my honeymoon, and am super close to closing my first deal.  The guy isn't really concerned about the money in the offer, however, he's attached to this house he grew up in and seems to be having trouble letting go.  The house has been vacant for three years.  He knows he needs to move on, but he has a sentimental attachment to the home and it's proving tough to overcome.

The question I have today is about different deal I'm working on.  I went to look at a 2 BR 1Bath house with a garage today in a okay area of town.  I would say it's a C or D area, but it's a great location for a rental as there are a lot of convenient shopping and grocery around and a lot of investors buying in the area.  The current tenant has been in the property for 4 years and has never missed rent according to landlord.  First impressions I would give the tenant an A or B rating.  The home was super clean and non smoking young family.

I'm wondering what my MAO should be based on the following numbers, the ARV is 50-55k.  Repairs will be no more than 5k (extremely conservative estimate), and the home is renting for $600 a month and rent hasn't been raised in the past four years.  I'm hoping to make 5k wholesaling this property.  I'm not quite sure this would be an owner occupant flip, but would be more attractive as a long term rental/income property.

Any advice would be helpful as I plan to make my offer this week and will keep everyone in the thread updated.

Mary B. · Answer

All of my cash buyers max out at 65% of ARV. However occassionally I come across investors that will increase that to 70% of the ARV. Whatever the max percentage is your buyer would be elated to secure a profitable deal that's less than that.

ARV x .65 or .70 minus rehab costs = MAO / MOA

When you are tallying rehab expenses that is separate calculating. If your buyer tells you that they want a minimum yield after expenses on the flip side there are various real estate software to secure those figures. Usually it takes a few minutes to plug in the data and get the results of 2 or 3 exit strategies for your rehabber/buyer. If it doesn't equate to their minimum requirements don't even waste their time presenting the deal to them.

The thing you have to know also, is if your buyer is a wholesaler or a rehabber. I'm all for joint venturing but won't eat expenses on my end so that the next wholesaler can make more money as they flip it to another buyer. You need to know if there is room to flip a 2nd or 3rd time. If it isn't then don't try to force it because the numbers won't be good for someone; whether that's you or the other wholesaler depends...  just be mindful....

Kudos,

Mary

Ben G. · Answer

@Michael Siekerka

It's funny you asking why the owner would want to sell.  I'm asking myself that same question, and I even asked him.  Apart from him saying it being too far away from his other rentals I couldn't find any other motivation.  He has been responsive to calls, texts, and showing me the house quickly.

Ben G. · Answer

@Michael Siekerka

The home has been rented consistently for the past 4 years with no vacancy.  There are all kinds of reasons why owners want to sell properties.  He said he wants to sell it because it's too far away, but I'm thinking that he's looking for some quick cash for some reason.  I looked at the property and I'm not sure it will even need 5k in repairs.  It's a tiny 2BR 1Bath at about 800 sq ft and I was having a hard time finding repairs for negotiation purposes.

Michael Seeker · Answer

Not necessarily. If the rent is $600 on a 30K purchase, that is great...but what is the vacancy?  How long will it take to market this property?  Obviously there is some reason the owner wants to sell, if the property provides great cashflow as-is, then the owner would likely want to keep it.

The fact that you're providing repair estimates makes me assume that there is a lot of deferred maintenance on the property.

Ben G. · Answer

@William T.  I forgot to include closing costs, but I can't imagine they will be that high, but thanks for the reminder.

@Kenneth Huddleston

you make some good points, but I have to think that a landlord would love an investment where they are getting $600 a month in rent on a 30k purchase.  Anyone else agree?

Kenneth Huddleston · Answer

if your hoping to make any money selling the property right away i wouldn't offer more than 30-35k. Any more and the profit margin is just to low and if your selling to an investor the chance that you'll get the actual value is rather low unless you find a novice. As a typical rule, investors rarely ever pay more that 80% of the value at max.

William T. · Answer

@Ben Grise Congrats on getting married and great vacation to Hawaii. This is what I would do: Assume ARV $55K - Repairs $7,500 - Closing Costs $3,000 - Profit $5K - Negotiation Room $2K = $20K MAO  So I would suggest $16K but I would ask the customer, "What is the lowest amount you will accept?".  It just may work for you...

I have a spreadsheet with MAO suggestions based on the ARV.  I obtained this from another wholesaler on BP.