How much to offer?

[sidinz]

Is there any rule of thumb when working out what to offer on a run-down property?


I've got my eye on one that's in a bit of a mess. The RV is $200K and I reckon when loved up, it will be worth around $330K. It's pretty much uninhabitable right now but with about $40K spent, will come up a treat.

I haven't had a lot of experience of making offers when there's no set price. Don't want to p!ss the vendor off to the point when they won't countersign, but also want to get the best bargain I can, given the work it needs.

Do the gurus work to a formula, or is it pretty much gut instinct on pitching that first offer?

[jimO]

that 40k could turn into 80k

[Meehole]

Is it a HNZ house?

[Damap]

No instinct involved you need to know what will work for you.
I have to guess some numbers but using your basis of 330K renovated. If you are flipping it then you work backwards from there.
330,000
Less minimum profit margin, say 50K
Less selling costs say 15K
Less reno cost 40K
LEss acquisition and holding costs, insurance blah blah say 10K

You want to pay no more than 330 -50 -15 -40 -10 = 215K
So I without knowing the location etc I would start at maybe 150K knowing I can go to 215K

HOWEVER if it is a buy and hold rental then there are 2 numbers you need in your own rules.
1. Minimum equity at purchase
2. Minimum yield

This may mean you can pay more depending on your rules.

[Bryanw]

Damap, Can you enlarge on what you mean by "Minimum equity at purchase"?

[sidinz]

that 40k could turn into 80k

No, but it is an older place, so would have been solidly built. It would be a buy and hold.

[Meehole]

No, but it is an older place, so would have been solidly built. It would be a buy and hold.

HNZ houses are solidly built but they have major issues with their foundations at present due to the construction of the ring foundations back in the day. Not a cheap repair especially when they have a brick veneer cladding that needs to be retained in situ or replaced.

[Damap]

Damap, Can you enlarge on what you mean by "Minimum equity at purchase"?

Well any investor should have a "rule" about how much equity there is in a property when you buy it. In the "good old days" the common rule was minimum of 20% below ARV, (after renovated value). This meant as soon as renovations were complete you could refinance your deposit back out.
So in the above example of 330K ARV and 40K reno you need your final all in cost to be 20% below 330K = 264K less reno of 40 so your maximum buy price would be 224K.

In Auckland currently 10% is more realistic but you can get 15 to 20% below if you hunt hard enough.

[Nick G]

If there is $130K upside in it for $40K spend then I would secure the property first at $180-200K with a long DD and then pay for a builder to go through and fully price up your renovations, drugs test, confirm your end valuation, the lot. If he comes back and says it's an $80K spend then you go to the vendor with a list of issues and try to agree on a figure, although $50K profit is not bad, you will be able to refinance most of your reno and deposit costs back out.

Then if the property is uninhabitable you go with a long settlement and early access for your builder so by the time you settle on your loan the work is almost done and your holding costs are negligible. That's a great card to play if you're $10K apart on the price because you can recover much of that difference AND you have a happy vendor who is onside.

We talked a bit about this stuff at a seminar in Auckland last week. The best negotiation is one where everyone walks away happy:
- the seller got a fair price for the property as it stood
- you got a great price for what you will create
- the selling agent has a happy client who will tell their friends and that agent will work with you again (this is where your next profitable reno comes from)
- builder has a month of work booked
- the neighbours are going to have a vastly improved street by the sounds of it.

[sidinz]

Then if the property is uninhabitable you go with a long settlement and early access for your builder so by the time you settle on your loan the work is almost done and your holding costs are negligible. That's a great card to play if you're $10K apart on the price because you can recover much of that difference AND you have a happy vendor who is onside.

I would have loved to be able to do that and in fact am doing something similar with another property - it is vacant so I put a clause in the S & P that allows me access to get started once it goes unconditional.

Unfortunately it is not possible with the property in question as it's not actually vacant. The vendor's son lives there and has various mental issues. He's why the house is in the state it's in. While for all intents and purposes it's uninhabitable (certainly unrentable) it's amazing how some people can live.

Access is already limited due to him and his problems - the REA can only hold open homes at a certain, agreed time that can't change and no viewings outside of that time can take place. I think it will even be tricky getting access during the unconditional period for measurements/quotes, so there's no way that any actual work can be done.

[Damap]

Just make a lower offer then.

[sidinz]

So I offered $170K (was originally thinking of 160) and the vendor got pissy and to make a point, counter-signed at $270K.

[Damap]

Now you know the starting point, carry on negotiating :-).

[sidinz]

Both agents know that he's being a dick and that $270K is in La-la land. Apparently his dog had just died and so my insulting-low offer was the last straw.

I was warned, when I first said to offer $150K, that he was one of those vendors who, when presented with an offer he considered ridiculous, would stalk off in high dudgeon rather than counter-sign. That's why I bumped it up to $170K. So at least he's still in the game.

This agent previously guided me to increase an offer slightly (yeah, I know they do this typically for their own ends) which saw me being the one selected for counter-signing from a multi-offer situation. So she's earned some trust. She seems to think that he won't accept less than $200K.