How much do you pay for owners in pre-foreclosure? - Posted by vk60546

Posted by Joe Kaiser on April 30, 2006 at 21:45:14:

Good, logical points in terms of linear thinking (fortunately none of
which are applicable once you understand how the game is played).

Again, which do you think is more important at the moment, what it’s
worth or what he’ll take, or doesn’t it matter?

Joe

P.S. And just so we’re clear concerning your earlier comments, you
have no idea what my “method” even is at this point . . . that I am
willing to wager.

How much do you pay for owners in pre-foreclosure? - Posted by vk60546

Posted by vk60546 on April 25, 2006 at 08:45:52:

I’m negotiating with an owner in preforeclosure at the moment. Equity is around $50K. Calculates as follows:

  1. ARV - 200K,
  2. ALL Repairs, late fees, etc… are 20K.
  3. Loan balance is 125K.

How much would you pay to the owner? I want to be fair, but don’t want to loose my shirt and this is my first deal.

VK

How much do you pay? - Posted by Joe Kaiser

Posted by Joe Kaiser on April 25, 2006 at 18:33:44:

“How much would you pay to the owner,” is the wrong way to
think about this, as is how much the property is worth and what is
owed and all that other stuff.

None of that matters. None.

I know everyone thinks it does, but what a house is worth and how
much it costs to fix it and what the equity may or may not be has
ABSOLUTELY NO BEARING ON WHAT THE OWNER WILL TAKE.

They are two completely unrelated constructs that should never be
confused or tied together.

You don’t need to know ANYTHING about the value or fix up work or
equity in order to make a deal with the owner. In fact, I prefer not
knowing 'cause all that does is confuse and get in the way of the one
thing I’m there to do . . . make a deal.

The question, really, isn’t “what would you pay?” The question is
"what’s the very best deal I can make?"

And then you go make that deal.

I’d start with, “what does the owner want?” And I’d negotiate hard from
there, testing for, exactly, the absolute best deal he’ll make me
. . . and write it up from there.

Once it’s written up, we can then figure out whether or not it’s a good
enough deal based on the numbers that matter (but I’ll let a new buyer
do all that work. I have zero interest in kicking more bricks).

Forget confusing what something is worth with what someone will
take. Make sure there’s a total disconnect there so you don’t somehow
mix up the two.

MAO?

Ugh, no.

Not now, not ever.

Joe

Re: How much do you pay for owners - Posted by Brian_wa

Posted by Brian_wa on April 25, 2006 at 12:53:26:

One thing you should consider is looking closely at the repair estimates. Get a couple of good contractors to make sure the numbers are good. Cuz it may need only 10k instead of 20k.

Another thing is to look very closely at the ARV. If you under-appraise then you may be cutting yourself out of a good deal. If you over-appraise then you’re in for some bad time once you bought the house…

I don’t think it would be a good idea for you to buy it conventionally as the closing costs would be too much… It’d be good to do a subject-2 to lower your costs. If you do a subject-2, you probably can give the owner around $5k to 7k) (2k up front and the rest when you’re done).

The best thing you should do is ask what this owner needs and try to meet his needs then. Cuz he may need only 1k to 2k move away. You never know.

Brian

Re: How much do you pay - Posted by Joe

Posted by Joe on April 25, 2006 at 11:03:12:

With this little equity, I would effectively give them nothing. dutch broke it down in a little more detail for ya. But, I would only give them enough to walk … just a couple $k.

Re: How much do you pay for owners - Posted by dutch

Posted by dutch on April 25, 2006 at 09:17:09:

Ok, you need to work out ALL the numbers:

ARV Sales Price: 200K
Repairs: 20K
Loan Bal: 125K

That’s 145K, but wait, there is more…

Costs to ACQUIRE the property and hold it during rehab for 6 months: 10K?
Costs to SELL the Property Retail, includes Realtor fees, I use 10% 20K?

Now you are at $175K, equity is now 25K. Guess what, that is also YOUR PROFIT. So, how much of your profit do you wish to give away? My rule of thumb is about 20% MAX, in this case, 5K is about the most. Plus, I would not do this deal unless I felt I would make about 20K.

Always look at ALL the numbers. Don’t forget to include Acquisition costs, Holding costs and Selling Costs. Big mistake newbies make, and it will make you broke.

Dutch
OKHomesavers

Re: How much do you pay? - Posted by Killer Joe

Posted by Killer Joe on April 27, 2006 at 21:45:57:

Joe,

I follow you so far…

So how do you present the deal to the ‘new buyer’, and do a lot of these fall by the wayside? Thanks.

KJ

Re: How much do you pay? - Posted by David (Los Angeles)

Posted by David (Los Angeles) on April 27, 2006 at 08:10:06:

I assume there’s ALWAYS an “absolute best deal” the seller will make, so actually following this advice would mean you sign up every house for which you can find the owner, and then shop it around to see if you got a deal, which is clearly absurd.

The equity in the house does matter.

The fix-up costs do matter.

How much the property is worth clearly matters.

If the property is worth $200K, and the owner will take $500K, it isn’t a deal.

“MAO – not now, not ever” is just silly. Do you try to buy for less than MAO? Always. But first you DO need to know what your MAO is, because buying everything for “the best price you can negotiate” is quickly going to make you a laughingstock among the buyers you’re attempting to flip to.

Re: How much do you pay for owners - Posted by Jack

Posted by Jack on April 25, 2006 at 16:50:41:

Dutch. Good advice. You seem to be quite prolific in good advice lately on this site. Comming from OK myself, I find it a rather depressed R.E. market. From where did you get your knowledge and training? Was it in the OK market?

Re: How much do you pay for owners - Posted by vk60546

Posted by vk60546 on April 25, 2006 at 11:23:46:

hi Dutch,

Thanks for the feedback. Let me ask, does the 20% or 20K min. rule apply in all price ranges? I want to create win-win business transactions, and don’t want to shortchange myself or the seller.

I’m with Joe on this one - Posted by DaveD (WI)

Posted by DaveD (WI) on April 28, 2006 at 10:48:21:

Actually, you are the one being silly here.

While Joe dwells on the bare essence of the deal, you are complicating yourself with the MAO, equity, fixup etc. All very important… to you.

Irrelevant to the seller. Not his problem. Couldn’t care less. So what is his problem?

Find his problem. Fix the problem, finding a way to make a buck for yourself in the process.

  1. Would 500 bucks help you get down the road?

  2. If I were able to get your electric turned back on to save your freezer full of venison, could we get the rest of this house thing sorted out?

  3. Can I rent a moving truck for you?

Those are three questions that deal with the sellers problem. Until the problem is handled, the rest of the story hardly matters. You see, he has to say YES before there can even be a deal.

The problem may be huge, or only perceived as huge by the seller. Same difference to the seller. The solution may be relatively simple as well.

Think of a knotted shoelace. Tug on the right end and the whole thing unravels nicely. Tug on the wrong end, and you have just made things worse. Same shoe, same lace, same pull. Wrong technique. Bad result. Interesting, huh?

Re: How much do you pay? - Posted by Joe Kaiser

Posted by Joe Kaiser on April 27, 2006 at 14:26:41:

Can’t we assume we all have enough common sense to know a $200k
house isn’t worth $500k?

Deals are based entirely on what the seller will take and never on what
the property is worth, with no regard for fix up or equity or MAO, and
I’m taking for granted you have half a brain here.

Joe

Re: How much do you pay for owners - Posted by dutch

Posted by dutch on April 25, 2006 at 17:31:15:

OJT, yes, here in Oklahoma. I don’t find the market depressed at all. How long since you have been here? I just talked to a CA investor, he and his partner are flying in next week with a but-load of cash to buy properties here. They just bailed out of PHX and Las Vegas and Texas.

Thanks for the kind words.

Dutch
OKHomesavers

Re: How much do you pay for owners - Posted by dutch

Posted by dutch on April 25, 2006 at 12:10:19:

No, of course not. Difficult to make 20K on a 30-40K house. That said, you must always weigh the risks and effort involved in a project and set a minimum profit range accordingly. For a fast flip with little or no cash out of pocket, I’ve been known to take as little as 5K.

Dutch
OKHomesavers

Re: How much do you pay? - Posted by David (Los Angeles)

Posted by David (Los Angeles) on April 29, 2006 at 16:23:55:

I do have half a brain, maybe even a smidge more, and what you say just doesn’t make sense. You say “we all have enough common sense to know a $200k house isn’t worth $500k”, then contradict yourself by saying the deal isn’t based on what the property is worth.

Sounds like guruspeak to me – "Renounce all worldly thoughts of property value, fix-up costs, equity, or how much your prospective buyer will be willing to pay.
Now let us chant … waddledasellatake … waddledasellatake … "

Re: How much do you pay? - Posted by Joe Kaiser

Posted by Joe Kaiser on April 29, 2006 at 21:42:24:

Today my partner met with a seller to discuss two commericial lots he
wants to sell and says will take 1.9 mil for.

What’s your next move?

Joe

Re: How much do you pay? - Posted by David (Los Angeles)

Posted by David (Los Angeles) on April 29, 2006 at 23:22:07:

My next move would be to pass the lead along to an investor I know in Pasadena who deals in commercial real estate. I know absolutely nothing about commercial property.

What’s your next move? Without having any idea of what the property is worth, are you still overpaying if the seller agrees to take $1.5 million? $1.1 million? Or should you jump on it at $1.9 million, before the word gets out that it’s available at that price, because there are people standing in line who would pay much more?

Re: How much do you pay? - Posted by Joe Kaiser

Posted by Joe Kaiser on April 30, 2006 at 24:02:40:

What do you suppose is more important your buddy knows at this
point, what the property is worth or whether or not $1.9 is the seller’s
bottom number?

I have no idea what it’s worth, btw. Don’t even want to know. What it’s
worth has no bearing on what I’m doing at the moment.

joe

Re: How much do you pay? - Posted by David (Los Angeles)

Posted by David (Los Angeles) on April 30, 2006 at 11:39:07:

If the property is worth $5 million to my buddy, and the seller owns it free and clear, does he really care whether $1.9 is the bottom number?

OTOH, if the property costs $5 million per year to own, and you negotiate him down to “I’ll pay you $1.9 million to take it”, you’ve just wasted a lot of time negotiating that a little time doing due diligence might have saved.

If the “best price” you negotiate is routinely more than a retail buyer is willing to pay, your reputation among sellers will suffer, as you tie up property after property and then fail to close. Your reputation among investors will also suffer, as you offer them property after overpriced property, which they invariably pass on after only cursory due diligence (“cursory” because they’re cursing you for wasting their time doing the due diligence they think YOU should have done).

Maybe you’ve been doing this long enough that you know a bargain without plugging the numbers into a spreadsheet, but I’ll bet that’s not how you operated when you were just starting out. Anyone who’s so green that he’s asking CREonline what he should offer will (IMO) only get himself into trouble attempting to emulate your method.