Maximum Affordable Offer
Read recently about a supposed rehabbers rule of thumb called MAO (maximum affordable offer). This was defined as ARV - costs X %70. In other words, a 30% profit margin.
Is that realistc? Does it depend on a heavy dose of sweat equity?
My CPA and CFP both give me the semi-amused, tongue-in-cheek looks usually reserved for the truly delusional when I mention these kind of profit margins.
Wont it be fun to prove them wrong. The deals are out there, more than you can imagine right now. And no they dont all require fix up to make that margin, and yes deals at 50% are out there but not for your cpa and the other guy, for them retail is thier life.
Actually this fomula only gives you about a 20% profit margin. With the other 10% being holding costs, sales costs, and a hedge factor. I know how you feel with your CPA and CFP, unless they are doing this they won't understand. A friend of mine who is a realtor was going to make an offer for me on a junker but at the last minute decided not to because she felt it was unethical. So these so called professionals live life in a box. Don't waste your time explaining it to them. It will only fraustrate you.
One of my favorite deals came from a self important cfp he did not know you could buy homes for 30% under market, and he was so sharp he sold his investment property to me. I tried not to smile when I got the assignment check for $42K. Now I know they *cfp*are not all like this but thought it made a fun story. <IMG SRC="images/forum/smilies/icon_rolleyes.gif"> [ Edited by rickomarsh on Date 12/15/2003 ]
perfecto,
You live in Colorado as do I.
I'm going to give you an early Christmas gift: a grain of salt, so that you are prepared to use it in regard to what you read here.
From experience I can tell you that HUD homes consistantly sell for about a 10% discount. You can check the historical winning bid statistics yourself on that one on http://www.firstpreston.com.
I have yet to see a REO sell for more than a 15%-20% discount.
However, I have only been doing this a short time and I am believe there are better deals out there, however you will see a lot of posts here that won't apply to this market. Just my opinion.
I respect your post The-Rehabinator but dont let your experience or lack of, frame your expectation. <IMG SRC="images/forum/smilies/icon_frown.gif"> [ Edited by rickomarsh on Date 12/14/2003 ]
Thanks Rick, I'm trying to keep a positive mental attitude.
I'm a raw newbie at this (no deals yet), but the house I looked at yesterday was an REO with after repaired value of about $110K. It only needed $5-10K of work at most (the repair part I'm not a newbie at). Listing price was only $55K, which my realtor friend thought was crazy. The bank accepted one of the 5 offers they had on the table yesterday (I don't know price) after 1 day on the market. So, IF we assume the offered price was anywhere in the neighborhood of listing price, say $65K, this one had the kind of margin talked about.
In my experience, the discounts to CURRENT list price that The-Rehabinator mentions are correct. I have purchased at larger discounts, but again, I think his numbers are generally correct. Of course, the list price will continue to fall until the owner starts getting offers. Rarely will a lender take a low ball offer that is 50% or so of list. Why should they? If they are not getting any offers at $100k, it would make much more sense for them to try $75k than to take an offer for $50k. If you offer $50k, they automatically know that there is a market for the property at that level or higher. I bought one REO at 33% of the original list price after it sat on the market for close to a year. When I bought it they accepted an offer that was 30% below the current list price which was half what they originally were asking. When you talk about buying from an individual, all of these formulas go out the window.
MAO is a term that we investors use here on the east coast. The formula originally posted was correct. And these types of returns can be found under the right market conditions! Don't broadcast your formula too......it will only frustrate you to hear the flak! Just do it and prove them wrong!
If you're looking for PROPERTIES those are dreamers numbers. If your looking for MOTIVATED SELLERS then 30% is the MINIMUM margin you should settle for for most deals (wholesale, Short sale, rehabs)
And by the way, sweat equity is not necessary.
[ Edited by hibby76 on Date 12/17/2003 ][ Edited by hibby76 on Date 12/17/2003 ]
So hibby is it safe to safe that in our part of the country that HUD and banks that own foreclosed property aren't motivated sellers?
HUD and banks are totally motivated sellers depending how you want to define motivated. HUD and banks will get rid of properties for $1 if they have to. They will sell their properties no matter what. The catch is that they will gradually lower prices until they sell. They generally don't give huge discounts off of list. As I mentioned above, this doesn't mean you can't get great deals from them. It's just that you have to keep a close eye on the property you want and have a price in mind that you are willing to pay. When the property gets within 30% or so of that price start making offers. The drawback is that someone will often buy the property at a higher price before it gets down to what you want. Thats just the way it goes.
I have purchased a HUD and I think that it had been on the market about 4 months when I got it. In my area it seems that not too many people are aware of HUD or FHA forclosures and the Realtors don't push them (Unfortunate for them because the commission is double). I got a nice deal for 52K that they originally wanted 62K for. When it went down to 55K I made my offer. It was old property by then so they took the offer. maybe I could have gone lower but I felt that at that price it would go. We put $3000.00 into it and it sold 3 months after purchse for $73,500. After all expenses we ended up with about 13K. Put money in both of our Roth IRA's that year and purchased another property with the rest of it. our average gain after fix-ups has been about $10,000 on each one. My current project is probasbly only going to net about $6k which is close to a failure. (well not really). This one needed new gas furnace and electric update besides the usual updates of countertops, carpet etc. But overall, I'd say that it's been pretty good!
I know you all look down on what is called sweat equity. But if you are as we say engaged in the work yourself, your mark ups will be greater and in most instances the work will be better and the materials not out of Home Depot, well not all of them.
If you have the skills to put in a new heater, or tear out an old floor furnace and install something that can blow a little air, you are way ahead cost wise.
There is as you know a modern trend to open houses up creating what is now called the Great Room. To do this you for some perverse reason always have to remove a bearing wall and install proper supporting structure. If you can do this and do it well, you can work closer then your competitors. Also putting your own imprint on a fixup is always a pleasure. No not while you are doing it. After.
cutting Dove Tails free hand NOT Lucius
[ Edited by Lufos on Date 12/20/2003 ]