The other day, one of the members of the MMM Challenge received a tip about a property. The seller contacted the investor through a website and entered all the information. It seemed like a good possibility. So let’s take a look at the deal analysis process and post offer.

The seller indicated that the house needed some cosmetic repairs estimated at $4,000 and was willing to sell it for $50,000. Comps looked like the house might be worth $106,000 after repairs. Good deal, right? Let’s start running the numbers. Owner reported repairs were for materials only and clearly on the low end. When estimating repairs, a good rule of thumb is to estimate materials and then multiply by 3. That is, materials typically only make up 33% of total repair costs and labor makes up 66%. Clearly this is just a general rule of thumb and each project will vary significantly. That means repairs to this property would cost between $10,000 and $12,000. Not having seen the property myself, this is just a conservative ballpark estimate.

Looking at the comparisons, we found two recently sold properties that were brand new construction that likely inflated the value (an older home should be priced lower or depreciate compared to a newer one). Looking at zillow.com and a few other sites, we came up with an after repair value (ARV) of $85,000. Still seems like a good deal, right? Let’s break down the deal.

Before you call the landlord, there are some homework. Many counties have a website to look up deeds or you can go to the City/County Clerk’s Office and apply to register the deeds. Look up the purchase price, purchase date, and liens against the property.

All of this will quickly tell you how much is owed on the house and, subsequently, what kind of offer the owner might accept. Then search online or call a local real estate agent to find out the following:

1) What is the “average days on the market” (how many days from listing to sale) for this type of property?

2) What is the “Current Inventory on the Market” (Backlog of houses waiting to be sold) in months (less than 6 months is seller’s market, more than 12 months is strong buyer’s market)?

3) What is the “Average Selling Price to Selling Price Ratio” in today’s market?

Also, take a look at rentometer.com to find average rentals in the area and research the number of rentals in the general market on the web. All of this should take an hour or less and will tell us what exit strategies might work in this market.

Now we call the owner. Let them know that he works with a group of investors who help people out of situations; however, he will need to get more information. Also let them know that he is only willing to find a win-win solution. Ask them what would make you want to leave such a lovely home. Then listen! You have to find out their needs and if they are really motivated. If they ask you how much you are willing to pay, don’t answer. Let them know that you will make them a fair offer after you have enough information to evaluate the property. If the landlord doesn’t want to give you information, let him know that you get a lot of calls and you don’t want to waste his time. Be willing to walk away. In this case the owner indicated that it was the house of his recently deceased father and that he did not want to spend time and effort fixing up and selling the property. Next, make an appointment to meet with the owner, preferably on the same day so the owner can’t scout deals for other investors.

Be sure to bring an offer to purchase or purchase and sale agreement with you to the property. You’ve done your homework and know the maximum amount you’re going to offer. Every market is different, however, as a general rule, the maximum bid is:

[ ARV – Repairs – Transaction/Holding Costs – Profit ] x 70%. In this case: [ $85,000 – $10,000 – $5000 ] x 70% = $49,000.

When looking at the property, make sure you understand and inspect any major expense items like electricity, HVAC, plumbing, roofing, termites, etc. You’ll also want to include a 15-day inspection clause in your offer so you can get a professional appraisal. Once again, establish rapport with the seller and truly discover the motivation to sell. In some cases they need cash now and in others they just don’t want the hassle. Motivation drives the offer. In this case, the owner accepted an offer of $42,000 for a 30-day closing.

It looks like a winner. In this case, the property can be wholesaled in the range of $50,000 – $55,000 with a potential profit of $8000 – $13,000. In our next blog we will explore some of the other exit strategies available to this investor.