The purpose in making an offer isn’t to have some fancy paperwork that neither the seller nor the buyer understands. An offer is meant to start the process of a meeting of the minds. Once you have a meeting of the minds for both buyer and seller, you can make a deal.
I’m often asked how I figure out what to put in my offers. I’d like to walk you through a real-life offer we just made. It was on a pretty big fixer upper and this is how it went:
Dear Seller and 123 Main St,
Thank you for taking the time to read this and show us the property. As I told you, we buy houses to either fix up for resale or to hold as rental properties. What we can offer you is dependant on which of these scenarios fits your house. In this case, all the major systems need to be replaced. Major systems include things like roofs, HVAC, electrical and plumbing.
Because of the large rehab needed, this house will probably need to be a fix-up and resale. That being said, I’ll make an offer for both situations and walk you through how we came up with our numbers.
After finding comparable properties that have sold recently, we determined that once the house is all fixed up, it’ll bring between $160,000 and $170,000. Let’s split the difference and use $165,000 as our CARV, which means conservative after repair value.
In order to figure what we can pay, we take the CARV and then back out repairs, holding cost, buying and selling cost, and then an acceptable profit. What’s left over is what we can pay. We call this our top offer. Let’s do that for your home:
CARV: $165,000
Minus $1,000 in closing costs to buy
Minus a 6-percent realtor’s commission when we sell ($9,900)
Minus $5,000 in closing costs when we sell
Minus $65,000 in estimated rehab costs
Minus $5,000 for holding cost and oops
Minus 20 percent of CARV as acceptable profit
Top offer then equals CARV – all expenses – acceptable Profit= $46,100.00
So Offer 1: $46,100 cash. Close anytime. All we need is time for Lee Perkins to run title.
The next two scenarios will work if we can keep the house as a rental. We can do that two ways: short term and long term.
If we keep it as short term rental, we use the some now and some later approach.
Offer 2: Purchase price $80,000 with $35,000 now and the remainder due in five years secured by a first mortgage on the property. We can close this at anytime. All we need is time for Lee Perkins to run title.
The way we come up with our long term hold offer is by first by figuring out what the house will rent for. My gut tells me it will rent for around $1,300 a month. From that, we subtract a 35-percent expense factor for taxes, insurance, vacancies and repairs. We then factor in our desired cashflow of $300 a month, and what is left over is how much we can afford to pay for the house each month.
So $1,300 minus 35 percent minus $300 cashflow= $545.
That means we can afford to spend $545 on a mortgage payment.
Offer 3: I will give you $100,000 payable in 184 payments of $545/month secured by a first mortgage on the property. We can close this at anytime. All we need is time for Lee Perkins to run title.
Do you see how we just made three very different offers and we didn’t use any fancy words like owner carryback financing or balloon payment? But it’s all in there.
While making an offer, describe it in terms that make your seller understand how and why you came up with your numbers. Once they understand, they’re more likely to do the deal. But if they don’t, the deal will never happen.
Joe and Ashley English buy houses and mobile homes in Northwest Georgia. For more information or to ask a question, go to www.cashflowwithjoe.com or call Joe at 678-986-6813.