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Do’s and Don’ts to come up with your Offer Price

How do you come up with your offer price? Do you offer 10% less than the offer price? Do you get into a bidding war, pay full asking price, wing it or do you have a strategy to come up with your offer price? I am amazed at the responses to these questions and would love to hear your strategy to come up with your offer price. Here are some tips.

Don’ts

1. Asking price means nothing

2. Never pay over what your criteria deems it is worth to you

3. Do not get overpay due to competition and a bidding war

4. No emotions, it is numbers. It either meets your criteria or it does not

Do’s

1. Define your exit strategies – You should have multiple exit strategies such as flip for retail, flip to an investor, rent and hold, lease option, offer seller financing then sell the note, sell the entity holding title, etc.

2. Define your criteria - LTV and Cash Flow criteria. 70% LTV max and the deal must cash flow. I take 70% of rent and subtract PITI. 70% is because I take off 10% each for property management, vacancy and maintenance.

3. Find current and After repair value – Do a CMA, Comparative Market Analysis, appraisal and/or BPO, Broker Price Opinion, on the property for current and ARV.

4. Conservative repair estimate – Most deals need some repairs and savvy investors can add tremendous value with these repairs. Be conservative though as there are almost always surprises when doing rehab.

5. Soft costs – Holding cost, inspections, tax, insurance, utilities, agents commissions, etc. If it is a hold then figure in property management, vacancy and maintenance

6. Create a formula – Create a formula to calculate an offer range based on LTV and cash flow.

Example Formula

LTV formula: Take ARV X 50% – rehab and ARV X 70% – rehab

100K ARV X 50% – 20K rehab = 30K

100K ARV X 70% – 20K rehab = 50K

Offer range is 30-50K

Cash Flow formula:

For the cash flow formula, I deduct 30% of the rent or 10% for each of the following: Property Management, Vacancy, Maintenance.Do you calculate offer price on cash on cash return? LTV? Cap Rate? Other? Please share your formula.

Rents X 70% – PITI for low LTV amount in of 50K

Rents X 70% – PITI for high LTV amount in of 70K

1000 Rents X 70% – 450 PITI = $250

1000 Rents X 70% – 600 PITI = $100

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This entry was posted in Beginner's Advice, Expert Advice, Ryan's Blog, Tips & Standards, Uncategorized. Bookmark the permalink.

8 Responses to Do’s and Don’ts to come up with your Offer Price

  1. I agree that a purchase price of 60-65% ARV would be the ideal situation. But with today’s bidding wars, properties go for more than the ARV, almost!

    I am curious, as well, as to how other investors approach this type of situation in today’s market. When buying for myself, I try to cut a deal with the listing agent so that they can double-end it (double their commission, even if that means giving up my half of it) and are more willing to work with me, but not every agent is able to do it. It all depends on how the bank processes the offers on the REOs. Some banks only want to see the best offer. Some banks want to see all the offers, so the agents are required to submit all of the offers. If that’s the case, there’s no chance of getting a good deal.

    By the way, love your blog!

    Angella Raisian
    http://www.AngellaRaisian.com

  2. Ryan Moeller says:

    Angella,

    I see the bidding wars driving up prices all over San Diego, Phoenix and other overhyped areas. I avoid bidding wars, my offer is based on my criteria period. I have lost many bidding wars, the key is to find deals without competition. I see you are in California, I am not investing in California because of the ridiculous competition and the cash flow is horrendous. I did a lot of research and determined many smaller less hyped cities offer tons of deals to cherry pick from with tremendous LTVs and extremely high cash flow. This results in multiple exit strategies and really mitigates risk.

    I found it interesting that I lost 2 bidding wars and the buyer ended up barely above my bid and was represented by the listing agent. While it is extremely unethical, it happens and I have even offered to pay my buyers agent out of escrow so we can let the listing agent get a double commission and extremely improve our odds.

    I recommend you stick to your criteria. Look at other markets, if you will only invest in California then wholesale or find a strategy where you do not take on too much risk. Buying at retail because the competition bids up the price on a property that does not cash flow and needs repairs sounds like a disaster waiting to happen. The speculation and emotional buyers is crazy in California, not at all for me.

  3. Angella says:

    I’m with you about CA cash flow being horrendous, on the average. I’ve stopped making offers for my investors/buyers in June, when the insane bidding wars started, and told them to wait out this “bubble” we’re in. At least I’m hoping it’s temporary! Believe it or not, some of the homes were were making offers on had over 60 offers, many coming in at more than the property was worth!

    But there is a total of about 6-7 cities in SoCal that are GREAT investments. I actually was investing out of state until this year, but in 2009 I switched back to California. Until June, that is. Most investors might not be aware of the right areas to invest, so they really would be better off investing out of state.

    However, California cities such as Lancaster, Palmdale, Moreno Valley, San Jacinto, and Hemet not only cash flow, but will also have huge appreciation. According to SCAG (Southern California Association of Governments), those cities will have the highest job and population growths in SoCal, which also reflects the . Not only that, but in many cases the properties in those areas have dropped over 75% in price, and are selling at $25-$50/sq ft. That’s cheaper than building a garden shack, so you can’t go wrong with buying a property in SoCal at those prices. Again, you’d have to understand the market and know these areas well enough to make the right purchase, and there is a number of successful investors who thrive in those areas, Bruce Norris included.

    As an example, I personally purchased a 1983 townhouse in June for $28k, and rented it out for $895. But with the bidding wars going on right now, similar units are selling for $50k, so it would not be that wise of an investment today. My friend just bought a house for $90k, also in Lancaster, and is renting it our for $1200. Same as buying in Atlanta or Dallas, but the tax breaks are much more beneficial, and it’s an hour’s drive from home. Identical models were selling for $68k six months ago, but he missed the boat on that one. His house had sold for $350k at the peak, but right now it cash flows nicely.

    So yes, generally speaking – stay away from California. Even buying at wholesale doesn’t make any sense, cashflow-wise, in 98% of Southern California.

    I’ve pretty much stopped making offers in CA in the last few months. If anyone ends up buying property by outbidding the competition, I don’t really consider them an investor. But I wonder how REAL investors are addressing the situation in SoCal, and if they’ve stopped buying in hopes of RE inventory going up towards the year-end.

    Angella
    http://www.AngellaRaisian.com

  4. Ryan Moeller says:

    Very good insight Angella. This is very valuable info for investors in CA. Those cities probably have much less hype and less competition. I do not like banking on appreciation because you cannot control the market. It is an extra bonus when you purchase at a strong LTV and with strong cash flow. From what you are telling me, these areas offer tremendous opportunities. Thanks again.

  5. Robert Kim says:

    Thank you for an excellent article, Ryan. My training as an engineer makes it difficult for me to do many things subjectively and your formulas eliminates this. I’d been using slightly different formulas but essentially ones that come up with the same results.

  6. Fred Unger says:

    This was important information and timely for me and my partner here in Utah. The banks
    are basically leveraging full price on all the REO’s. As new investors, your info along with
    Angella’s was key in our decision to go to several out-of-state market areas that has some
    profit margins in the properties.
    Awesome content, thanks again.
    Fred Unger

  7. Ryan Moeller says:

    Hey Fred,

    Glad my articles where helpful. You seem to be making good informed business decisions, I see many settle for the best they can do in their market and in many over hyped and competitive markets the result is crummy LTVs and negative cash flow. Then your success is based on the market going up which is out of your control. Which markets are you guys focusing on? Best of luck.

  8. Dustin Allen says:

    I just wanted to start out by saying i love the blog.

    I really like your ratios that you provided as well as the Do’s & Don’t s. When I am looking at an area especially such as Lancaster/Palmdale I am looking at the current cash flow, potential increase in home value, but I also look at the potential for the decline in prices.

    Now if everything makes sense now, and also works if prices fall, then i move forward.

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