Make offer as a Hold Investment or as a Flip?

[Stephen Beaudoin]

I'm looking into a 2-unit property to wholesale and trying to run the numbers... I'm new and have very few relationships with buyers - so I'm looking for insight.

The question is, do I make an offer for a flip investor or for a buy and hold investor? 

The difference could be around 50K since the carrying cost is part of the buy & hold strategy and a flipper would want to put more money into repairs/landscaping.

Should I really try and feel out the seller a bit more or is there a larger group of investors for one vs the other?

Thanks for the feedback.

[Tom Mole]

@Stephen Beaudoin, you need to know what your buyers are looking for. I know you said that your buyers list is very short, but have you asked those on your list what they want to buy? Remember you can sell anything, just find out what your buyer is looking for and provide it.

That said you were asking about deal evaluation. First of all, what the seller will accept is not (or should not be) contingent on your exit strategy. Therefore, there's no real difference of $50k here, but I get what you're saying. "I wanna know what my Maximum Allowable Offer (MAO) should be."

OK, you're gonna wanna develop a little rapport with your seller, 'cause you're gonna want to negotiate. I know, nobody "wants" to negotiate, but really you do. You're gonna want to make an offer and in negotiation an offer is just a invitation to a conversation, so start out having that conversation.

I'd want to know why the seller is selling? I'd ask him how much he owes on the property (even if I already have a good idea of the amount.) What repairs does the property need and why hasn't he already done those repairs? Does he need the proceeds of the sale right away or could he wait for some time if I offered him more? You know, stuff like that.

Now when it comes time to put up or shut up, I'm gonna start with an all-cash offer that's gonna make me feel like I'd be stealing from him. He's gonna choke and say, "No, Hell no!" I'll explain that this is the most my finance guys could go on a property like this in this condition and in this neighborhood, BUT I could offer more if he'd consider helping with the financing. I'd offer a small down payment and a higher price if he would accept payments over time. He'll say, "Hmm, I don't know." I'll make a third offer. I can offer even more if he'll let me make payments without a down. Then I'd immediately show how much more he'd get by accepting this offer. (An amortization calculator comes in handy here.)

Of course, the specific price points would depend on how much he owes in financing and what those terms are. For the sake of argument let's just say he's got a Loan to Value (LVT) of 85% at 3%, but the property could bring in 8% cap (Capitalization Rate). I could turn around and offer the property to my buyers at 95% of market at 4%. That would be possible with a Buy 'n' Hold investor. My assignment fee would be the 10% arbitrage in the sales price and the seller would get the 1% spread in the interest rate.

For the offer to make sense on a flip deal I'd guide the seller toward the second offer. I might offer him 90% of market and maybe 10% down. I'd be looking for a spread of at least 5%-10% between current market value and After Repair Value (ARV). The seller would carry his financing until the property closed after the rehab. The Flipper would be all-in for 10% of purchase price, repairs, holding costs and my assignment fee. The lower acquisition price would mean that the buyer's ROI (Return on Investment) would be higher. Of course part of the holding costs is paying the mortgage in the meantime, but that could be offset with any rents that come in.

Whatever offer that was made, it would be contingent on an inspection period and approval of my partners (in this case, buyers).

Keep in mind that if your seller (or buyer) jumps at the first price you offer, then you made the wrong offer. If they don't say anything, you've made the wrong offer. If they say anything at all, even "Hell NO", you are in the ballpark! (This is the time when I like to say, "what do you think would be a fair price for this property?") Once you settle on price and terms, put it all on paper and get it signed. Don't leave with only a verbal agreement!

There are lots of details that I glossed over here, but it should get you started. Not least of which is to check with the state you're wholesaling in for any restrictions on that kind of trade. Some states, like Ohio, require you to be a licensed real state agent to wholesale. I'm not sure about Massachusetts. Let me know if you have any questions or want to drill down a bit more.

Cheers!!