Anatomy of an Offer

"Failure cannot cope with persistence" - JackHu, Richdad.com

I saw the above quote in the Rich Dad message forums and thought it was awesome. REI is a numbers game, first and foremost. Failures will far outweigh successes in this industry, but persistence is the key to winning the game.

Before going into the details of one of my most recent deals, I thought I would add a couple of disclaimers upfront:

Disclaimer #1: Every offer/deal is different. I don't care if the deal was acquired the same way, financed the same way, closed the same way, and finalized the same way - every deal is different. A deal is analogous to a snowflake. They may all, look, feel, taste, and smell the same, but they are all unique.

Disclaimer #2: While I have submitted several offers, and have many deals still pending, I have yet to do a successful deal yet. I figure it's only a matter of time with the frequency and volume of my offers, but I haven't had one go all the way through the complete cycle yet.

What I hope to accomplish by this post is a general viewpoint of how I analyze a deal. As I said in the 1st disclaimer, no deal is the same, but a lot of them may undergo the same conditions. Using one particular case, I will hope to show how I found the deal, how I arrived at an offer price, and how I submitted it. So let's get started ...

Find the Deal
Finding a deal isn't too hard - it's just knowing where to look. This particular property was found on the MLS. Now, I am not a RE agent (i.e., Realtor®), so I don't have access to the MLS. I also don't have a relative or friend who is a Realtor®. So how do I get daily listings from the MLS that fit my criteria? I became proactive.

In an earlier blog entry, I showed how I found my RE agent. Short story is I submitted several inquiries on property comps on a free web site. The web site would route my inquiry to a local RE agent, who would then send me an email with comp sales for the subject property. I did this twice, and noticed both times my results were from the same RE agent. A lightbulb went off in my head, and I decided to write an email to this agent, telling her who I was, what I was seeking, and how our relatoinship could blossom to be a win-win situation for us both (the actual email used content similar to Bronchick's RE agent fax letter). And a realtionship was born. I had actually tried this before with another agent but they pretty much ignored my response, so I blew them off as well.

Now that I had my RE agent, I just told her what I was looking for and where. BOOM! Now I get daily listings from her every morning at 4am. Since the lstings are in HTML format, I needed a program to convert the format into a CSV (commo-seperated) file, so I could import the data in a spreadsheet and do all kinds of nice things with it. Being a software engineer, I whipped one up in a matter of minutes. Now it takes me only a few mouse clicks, and I have my daily listings in a spreadsheet. It seems the listings are the same with each agent (at least in mygeneral area), so I may tweek my program more and offer it commercially later (het, more passive income!).

So, now I get daily listings, but what is it I'm looking for exactly? Here is where things start to get a little hazy. I generally look for homes that say "as-is", or "foreclosure", or "fixer-upper", or a miriad of terms first, but I actually look at all the homes and use my 6th sense to weed out potential properties. For example, I will generally look at homes with a low Price-per-SF more than others, but not always.

Research the Deal
Now that I have a list of properties, the next step I do is get on my county clerk's web site and do a makeshift title search. I look to see who owned it during the last tax period and start a paper trial. I'll look for the original deed and deed amount, and work myself up to the current time. I'll hypothesize what the loan balance is currently to guage if this property is worth it (if selling by owner or private seller), or what the lender's obligation is (if it's a HUD/VA/REO foreclosure). Armed with that information, I then decide whether to persue the property or not. For example, it may have an IRS lien that could severely cripple the deal.

So, I have a list of potential properties. What's next? The next step is to pay a visit to the property to asses it's condition first hand. Generally, the listings come with a picutre (or slideshow), but pictures can often be deceiving and don't always tell the whole story. If the property looks like an EXCELLENT candidate (not excellent condition, necessarily, but an exccelent deal all-aound), I'll ask my agent to tour the property with me. If it's a property that is on the cusp, I'll just drive out myself and assess the outside and from what I can see by peeking inside.

Arriving at a Price
As gurus always tell you, you must know the After Repair Value (ARV) of a property. This is the upmost importance. Comps are the lifeblood of a deal. For instance, if you make an offer based on tax assessed values, you may or may not get burned in the end. I know assessed property values in my area vary not only from neighborhood to neighborhood, but literaly from house to house. One house may have an owner that protested his value and the tax office dropped it, while his neighbor has never complained. They may be the same exact floorplan, but be $1,000's different in assesed values. Another thing gurus tell you is to get comps from several different sources, and that's what I do. I relay several sources: (1) my agent, (2) my knowledge of the area, (3) current market prices, and (4) online comps. Generally, they will all be in the same area.

A general rule of thumb all RE investors teach is the 70%ARV-Repairs calculation. This is one of those guages everyone should use when pricing properties for an offer. I use it as a guage, but not necessarily as my end offer price. It really all depends on several criteria, such as exit strategy, financing, taxing jurisdictions (yeah, I go that far), and so on. Even then, I ALWAYS tweek the end results depending on the property itself, area appreciation, area expansion, neighborhood conditions, and so on - a lot of "gut feeling" type of stuff.

For this particular example property, here are the figures I arrived at ...

Type: Bank REO
Description: 2002, 3/2, 1751sf
List Price: $114,500
Repairs: $1,000
ARV Price: $131,000
Financing: 100% financed @8%
Hold Costs: $990/mo
Offer Price: $78,000

Exit Strategy: I would either repair and resell this property, or repair and L/O it. Either way, I figured my pricing based on seeing a profit of $10,000 after 6 months of holding. I also always figure in at least a 5% drop in price so the property can move quicker. This is a judgement call, though. If houses are moving quickly I'll adjust the figure downward. If it's a slow-moving area, I'll adjust the figure upward. (You see how a lot of this stuff is knowing the area and not just numbers?)

Now, the $78,000 figure would actually mean a profit of almost $27,000 after 6 months. Why the difference? Again, it's a judgement call, but I like to make my first offer less than my MAO (maximum allowable offer). In this case, I could buy the property for about $95,000 and still see a profit of $10k in 6 months. But as gurus always say, "Always ask for less than you are willing to spend." For one, you just may get it! But, also, it gives you room to negotiate. Yeah, a lot of times your first offer will mean no offer in the end, but like I said earlier - it's a numbers game.

Financing
Make sure to always get your financing in order before you start making any deals. In many instances, the seller (a bank, the government) will require a prequalification letter before even accepting an offer. So it's better to have all your financing available upfront. Can't get a prequal letter from a loan officer because of bad credit, etc.? Find a hard money lender (HML) or private money lender (PNL) to get one for you. A lot of times, financing is the barrier to all newbie's REI careers. This is the thing that stops them cold in the process. Always get your financing in place before anything else, and this won't become a problem later on.

Submitting the Offer
In this particular case, I gave my offer price to my agent and she wrote-up the contract, I signed it, and she submitted it. Nothing could be more painless. I never heard anything for over a week, so I inquired about it. After my agent talked with the listing agent several times, the bank finally countered my offer at $108,500. I asked my agent to resubmit a counter for me at $86,000. This would put my 6 month profit at almost $19k. Unfortunately, the bank said they would not lower their offer of $108,500 - yet. They want to test the waters first. No big deal. Never get emotionallly caught-up in any one deal. Just make your offers, and move on to the next one. Again, it's a numbers game. If you stare too closely at one property, several others will fly by you. Just make the offer, and move on. If your countered, reassess your position, counter (or decline), and move on.

I hope this brief overview of making a deal helps someone out there. I have picked up a lot of knowledge in my short 6 month REI career, but I am still learning myself.