How much can you offer for a property? You must know this number before you make an offer. You also need to have an idea of what exit strategy you intend to use before you make the offer.
If the MAO (maximum allowable offer) is “X” what is the ARV (after repair value) of the subject property? What is that number percentage wise? In order to determine this, you need to know what type of spread wholesale buyers are looking for in your area. This will vary depending on your market conditions. Sometimes that percentage needs to be adjusted up or down depending on your market.
Wholesale buyers in major California markets, New York City or the DC area MAY be buying property at 90 to 95% of FMV as there is a great demand for property. Retail buyers are paying full asking price and higher for properties that are post rehab. Certain areas in markets such as Indianapolis, Detroit or Atlanta MAY be running more in the 30 to 35% of FMV or less. The important thing is to make sure that you are leaving enough room for wholesaler buyers to rehab the property and then still be able to sell it at a below retail price. The wholesale buyers have to be able to make a profit.
Check with your local REIA clubs (Real Estate Investment Association) and/or other wholesalers if you aren’t sure of what the average spread is in your market. “What percentage of ARV are buyers looking for?” is the question to ask. Also ask, “Where are wholesale buyers buying?” This will determine “YOUR” MAO.
During your training I’m sure you’ve heard the following statement:
“As real estate investors we buy properties one of two ways, either cash or terms. When we make a cash offer we need to buy at a significant discount, however, if we can work with you on some sort of terms agreement we can usually get much closer to your mortgage balance and sometimes even your asking price. Which of these options would work best for you?”
When looking at a Lease Option or Owner Financed transaction we will need more financial information about the property beyond FMV. We would need to know FMV, FMR (fair market rents), monthly payments PITI (principle, interest, taxes and insurance) and the current mortgage balance before we can discuss any type of owner financed terms. When working with this information we can now formulate MANY different types of offers. If your seller will not divulge the necessary info to calculate a best case “win-win” situation for both parties, your hand is forced to present them with “YOUR” MAO cash offer. In this case start your offer low and know what “YOUR” MAO is. DON’T GO A PENNY ABOVE THAT NUMBER! When making a cash offer it should feel like someone just punched you in the gut.
IT SHOULD HURT!
If you are ever comfortable making an offer to someone you are offering too much!
They are going to give you a counteroffer regardless of where you start, so start low.
Think about it ….
You can also ease the pain a bit by stating “My offer is in no way intended to be insulting,
however, in order for this property to fit into our portfolio at this time we are not in a position to offer any more than “X”
If “YOUR” MAO is rejected be sure and let them know that you would like an opportunity to beat their best offer before they make their final decision. Don’t forget to follow up with them until the property is sold AND closed. Many offers fall through and sellers become more motivated as time goes on … particularly if they had it under contract, considered it a done deal, and it failed to close.