One question that gets asked a lot is how much to offer for a foreclosure? How much to bid? At asking? Above asking? Far below asking? So in this article, I’m going to discuss this in detail.
In these blogs we discuss owning and operating rental real estate in the Dallas, Fort Worth, Denton metroplex. If you are new to these blogs please read “Getting a Mentor” first.
So, how much to bid? Actually, this has nothing to do with the asking price. The asking price is more an indication of the listing agent’s and the seller’s strategy than anything else. Strategies range from pricing low to attract attention and create competition to pricing high to allow room for negotiation. What you want to bid is what makes economical sense in that particular deal to you. You must learn to ignore the asking price.
There are three things to look at when you bid.
First, what is a marketable value for the property? Marketable value is the amount for which the property can be marketed when it is in market condition. What’s market condition? Well, the market will tell you. Your agent should be able to pull up other properties that have sold recently in the subdivision or area that are similar to your property, in size, age, general features etc. In what condition are those properties selling? Are they all freshened up with new paint and carpet? Is the landscaping spruced up? And, what are they selling for? An agent who knows how to invest in residential real estate will be able to tell you not only what the market value is but also what condition is expected to result in a sale. So, the first step is to sit with your agent and arrive at the market value of your property (in market condition). There will be properties that sell at the top of the market. There will be properties that are “priced to sell”. Market value is typically the average sale price of a good number of comparables in market condition. Read more about comparable market analysis in our earlier post.
Note that the property you are purchasing may not be in market condition. It may be much better or much worse. You need to know where the market is first, both in price and in condition. Get this information from your agent.
What will it cost to get this property to market condition? After you have established market condition, look at your property and see what it would take to take it to market condition. All new carpet? All new paint? New landscaping? Fix foundation? Fix pluming leaks? Rewire the house? What? Then, price the repairs. Note that this category does not include creating “wow-factors” and “set-aparts”. These are limited to things that you need to do to get it to “market condition”. Once you have that list, you need to price it. Your mentor is crucial here. As you get started, you may not know the investor pricing for these items. If you price it using retail that you are used to, you’ll end up way over-estimating the repairs and it will impact your offer. You will lose the bid. Also, this is too early a stage (note you have not won the bid, you don’t have a contract to purchase yet) to invite contractors to give you bids. You are wasting their time. Contractors who work with investors will ask you if you own the property or are at least in contract yet. So input from your mentor and/or your investor real estate agent is very important here.
What’s the equity that you want? After you know how much it would cost to bring the property to market condition, the question to ask is, for the work you are signing up to do, how much equity you want left when you buy the property? Note, that in real estate you make money at purchase. Some investors have a fixed amount: $10,000, $20,000, $30,000 whatever. Some have a percentage of market value, 10%, 15% etc. Another method is to require equity based on complexity and cost of repairs in bringing it to market condition. If I am signing up to do a lot of work, then there’s a lot of risk and so I expect a higher reward. If I am just going to repaint and install new carpet, then it is a well controlled, low risk project and so I am willing to settle for a smaller reward. That’s the discussion you need to have with your mentor. You can collapse complexity and overall cost of repairs into a cost per sq ft number. If the cost per sq ft of repairs is $5 or less, then it is an easy fix. If it is about $10 per sq ft, then the fix is bound to be more complex and more risky. For a repair cost of $5 per sq ft, I may be satisfied with a dollar-to-dollar return. That is 100%. That is doubling your money. If, it is closer to $10 per sq ft, then I may want closer to $2 for every $1 I spend. If it is $15 a sq ft to repair, I may just want to pass on this deal and find a more controlled one.
So your bid should be market value (at market condition) minus how much for repairs to bring it to market value minus how much equity you want . That’s it. Note that the seller’s or listing agent’s asking price does not enter this equation. It just does not matter.
For those who are still worried about asking price, these questions come to mind:
What if I am way under the asking price after calculating the bid amount as described above? Simple answer: Move on to the next property. Either this property will be bought by someone who is a novice investor who is not working with an experienced mentor and/or agent or will sit on the market till the selling party come to their senses.
What if I overbid and leave money on the table? Simple answer: There is no table! If you offer after calculating what you want out of the deal and you win the bid, you win – period. The thinking that you might have gotten a $1000 more if you had bid a little bit less will more often than not deny you the opportunity of making 10s of thousands of dollars on that deal. Be smart, work with a smart mentor, and then it’s just “rinse and repeat”!