Valuing a house - shooting from the hip

[moveright 0]

So, while I wrestle with the concept from one of my previous threads about what/how to compensate a realtor for terrific, timely CMA's.... Here's a question.

 

In the meantime, let me throw an idea/scenario your way. Let me know if it sounds reasonable.

 

Let's say I've got a seller who wants $279k for her house(true story). It's listed with an agent(the second one, first was fired or quit the listing) and has been sitting for a year on the market. Any goon could determine that the house just isn't worth $279k. BUT... What if my short offer were as follows:

 

Net purchase price: $251,100

monthly rent: $<mortgage payment> plus $200

 

Here's how I figured that. She wants $279k(obviously not a realistic price)

subtract 10% - that's 6% real estate commission, and 4% seller concessions, carrying costs, etc

 

That brings us to $251,100 (probably a normal price)

 

Then, if she accepts, I tack on $6,200 option consideration and you've got a house that's listed as rent to own $257,300 plus whatever rent credits, etc...

 

If this is notionally acceptable, wouldn't this type of math be useful on ALL deals for a short offer?

[MichaelC 160]

Unfortunately, there is no set formula as you describe. The question I ask myself everytome is this: if I price the property at $250K, will the market accept it? If not, there is no deal. I'll let the homeowner fight the market and then call me back two mortgage payments later.

[lhenley 8]

Work backwards:

 

Take the true market value, deduct the Option Consideration (your fee) and any rent credits, and that's the price you offer the seller.

 

Lynn (FL)

[moveright 0]

Beautiful. Thanks both of you.

 

I only have one concern. Most homeowners get caught up in the price their house is listed at. If it's listed at 250k, that means it's probably worth less than 225k. minus my fee and the rent credit, seems like most sellers would not like that.

 

BUT, I've never actually tried it before. and unlike last week, I am no longer speculating on what a seller will say. I will in fact try this and see the result before assuming any particular outcome.

 

I guess I just get caught up in the whole "the best part of a CA is that the homeowner usually gets what they want, full asking price" when in reality, that's not necessarily true.

 

Lynn, let me throw this at you. Is it unreasonable to start at FMV, and ADD the option money and credits? I only ask because it would be much easier to say "hey mr. seller, I know you want 250k but the reality is that 10% of that is not actually going to come to you anyhow, so we MUST deduct that to be fair, and accurate. so let's say 225k is what you would end up getting for the house". as opposed to "well, you are losing 10% from the realtor price, so right there you are at 225k, minus rent credits is 219k and minus my fee 5k is 214k."

 

 

remember, the seller "doesn't pay me, I make my money from the tenant/buyer", so that stands to reason that I would take the FAIR sale price of the house and ADD my fee on before marketing to the buyers. no?

 

I think working the rent credits in seems normal. I mean, it's money towards the house and the seller is getting paid anyhow so who cares? but the option fee? I feel like if I calculate the option fee into the net purchase price, there will be trouble.

 

Of course, as usual, I may be totally off base. In which case I need to be jarred back on track(if you all don't mind).

[lhenley 8]

Michael D,

 

IF you price the house too much over true value, it will be harder for the T/B to get financed. There will probably be an appraisal, and if it's alot lower than your sales price, then it makes you look bad.

 

If you show the seller what he'd NET from a Realtor sale (3% discounted offer price, 6% Realtor commission, 3-5% closing fees, repairs, etc.), that may be a good starting point.

 

Lynn (FL)

[<Steve> 82]

You can never read a seller's mind on what they "Need" not want. These are the three lines I use on every call.

 

So Mr. Seller do you have an idea what your house would appraise for or the market value?

 

Well my guess is around $279K

 

What is the lowest price you "Need" Mr. Seller? (and remember no commissions or closing cost)

 

Oh, well, I could maybe go $270K

 

You're kidding me right! Is that the Lowest You Can Go?!!! (the goal is to take the price response as if the seller is absolutly crazy. you now sit quite on the phone and don't say a word. let the seller squirm a bit. the silence is very uncomfortable. let the seller talk. you do not have to buy, yet the seller needs and wants to sell )

 

Well, Mr. Investor I could take $250K which is the balance of my mortgage. (got 'em)

 

Always let the seller say the number first and negotiate it down.

[moveright 0]

You're kidding me right! Is that the Lowest You Can Go?!!! (the goal is to take the price response as if the seller is absolutly crazy. you now sit quite on the phone and don't say a word. let the seller squirm a bit. the silence is very uncomfortable. let the seller talk. you do not have to buy, yet the seller needs and wants to sell )

 

 

LOL. I don't know if it's the fact that I am still groggy or what, but that really made me laugh. I'm still smiling actually. The part about sitting on the phone and not saying a word. It reminds me of someone teaching someone to be effective at hide and go seek. sounds great one way or the other. Thank you both for the replies! That does make sense about the appraisal issue. I wasn't looking at it that way. I guess I saw the Cooperative Assignment technique and sort of over-simplified it, thinking only of obtaining the option money and not focusing on consummating a rewarding deal for all parties. I would assume many newbies fall prey to that mind set.

 

So, in summary, in a CA, one of the benefits to the seller IS that they can usually get what they want for the house, they've just got to be cognizant about what they are really getting in the end, the NET price, and not be focused on the price Joe Realtor wants to list the house for, etc... I can't believe I'm up this early. It's not even six oclock!

[moveright 0]

If you show the seller what he'd NET from a Realtor sale (3% discounted offer price, 6% Realtor commission, 3-5% closing fees, repairs, etc.), that may be a good starting point.

 

Lynn (FL)

 

Sidenote/question:

 

I assume this conversation is not part of the initial dialogue with the seller. At least, I've not spoken about this to any sellers that have called me in the past few days. I suppose I just email them the Short Offer Letter and FAQ sheet, they see that the net sale price is a fair amount lower than what they had in mind or what their house is listed for currently, and they call me saying "mr. investor, how did you come up with that price?". At which point I break it down for them. right?

 

It might sound picky but I'm just trying to make sure I use a proven flow(exactly what works for you all) to make sure I'm not throwing leads away. i.e. a seller calls, I tell them what I do and some benefits, then send them the Short Offer Letter and never hear back from them.

[<Steve> 82]

You're kidding me right! Is that the Lowest You Can Go?!!! (the goal is to take the price response as if the seller is absolutly crazy. you now sit quite on the phone and don't say a word. let the seller squirm a bit. the silence is very uncomfortable. let the seller talk. you do not have to buy, yet the seller needs and wants to sell )

 

 

LOL. I don't know if it's the fact that I am still groggy or what, but that really made me laugh. I'm still smiling actually. The part about sitting on the phone and not saying a word. It reminds me of someone teaching someone to be effective at hide and go seek. sounds great one way or the other. Thank you both for the replies! That does make sense about the appraisal issue. I wasn't looking at it that way. I guess I saw the Cooperative Assignment technique and sort of over-simplified it, thinking only of obtaining the option money and not focusing on consummating a rewarding deal for all parties. I would assume many newbies fall prey to that mind set.

 

So, in summary, in a CA, one of the benefits to the seller IS that they can usually get what they want for the house, they've just got to be cognizant about what they are really getting in the end, the NET price, and not be focused on the price Joe Realtor wants to list the house for, etc... I can't believe I'm up this early. It's not even six oclock!

They get what they want "Need" for the house!

Reagrding the Short Offer, you follow up the next day to see if they received it and have any questions. And follow up again a few days or week later. Keep following up until you get a definate NO. Always leave the door open as some will call you back down the road and let you know they are ready to go.

[moveright 0]

You're kidding me right! Is that the Lowest You Can Go?!!! (the goal is to take the price response as if the seller is absolutly crazy. you now sit quite on the phone and don't say a word. let the seller squirm a bit. the silence is very uncomfortable. let the seller talk. you do not have to buy, yet the seller needs and wants to sell )

 

 

LOL. I don't know if it's the fact that I am still groggy or what, but that really made me laugh. I'm still smiling actually. The part about sitting on the phone and not saying a word. It reminds me of someone teaching someone to be effective at hide and go seek. sounds great one way or the other. Thank you both for the replies! That does make sense about the appraisal issue. I wasn't looking at it that way. I guess I saw the Cooperative Assignment technique and sort of over-simplified it, thinking only of obtaining the option money and not focusing on consummating a rewarding deal for all parties. I would assume many newbies fall prey to that mind set.

 

So, in summary, in a CA, one of the benefits to the seller IS that they can usually get what they want for the house, they've just got to be cognizant about what they are really getting in the end, the NET price, and not be focused on the price Joe Realtor wants to list the house for, etc... I can't believe I'm up this early. It's not even six oclock!

They get what they want "Need" for the house!

Reagrding the Short Offer, you follow up the next day to see if they received it and have any questions. And follow up again a few days or week later. Keep following up until you get a definate NO. Always leave the door open as some will call you back down the road and let you know they are ready to go.

 

 

Thanks!

 

I sent out two offers today. Basically I looked at zillow recently sold homes(I know it is not that accurate but the recently sold stuff is accurate by tax record), just to make sure we were in the ball park. Then I took their asking price, subtracted 10% and the 50% rent credits to get the net purchase price.

 

After that, I wanted to figure out a list price, so I added back in, the rent credits, and also an option fee. That was going to be my tenant/buyer list price. All the numbers seemed reasonable the way I had them worked out to.

 

reasonable math?

[lhenley 8]

Sounds good. Let us know how it turns out.

 

Lynn (FL)

[MichaelC 160]

reasonable math?

So far, so good. Be sure to follow up if you don't hear from the homeowner.

[moveright 0]

Sounds good. Let us know how it turns out.

 

Lynn (FL)

 

 

Not good (that seemed like the most appropriate emoticon although I'm not actually angry... does that even make sense? omg, my wife was right, I am crazy....)

 

It seems like my Short Offers are becoming LONG disappointments! What I'm experiencing is lots of ".I am not satisfied with the bottom line of the selling price of my home. I appreciate your proposal but am not ready to accept that price." that's an actual excerpt from an email that is stinking up my inbox as we speak.

 

Anyhow, one of the things that most attracted me to CA's was that it sounded like most prospects would become deals as opposed to the opposite. However, because I'm striking out quite often, I'm beginning to assume that it's ME or my offer and not the model. Here are a couple of my thoughts right off the top of my head...

 

1) The Short Offer almost feels like it leaves much to the seller's imagination -- What I mean is that they've got their house listed with an agent for $279k and my short offer letter stipulates a net amount of $241k. that's a HUGE difference, and it's also not really explained. Wonder if the sellers are thinking I'm crazy or something. My phone calls with them go terrifically. They are usually excited and interested and very happy to talk with me in general.

 

2) I'm not building enough value into my program -- Can anyone give me an example of how they explain to a seller that they are going to net more from this type of transaction than a realtor sale?

 

3) My numbers are just way off -- Is it possible that my numbers are just completely unrealistic? I love the non-adversarial demeanor of the CA, ESPECIALLY when you can tell the seller that you can get them a price they will like (or some equivalent wording) but then out of nowhere, I feel like I'm dropping a low-ball 'typical real estate investor' offer on them.

 

 

On a very, extremely slightly side note - I'm curious about what Pilot does in terms of a 'systematic' approach when it comes to this. I read a post of his a couple weeks back (the post was old than that) and he was emphasizing his 'system' ways. I can gather that since he markets exclusively to listed homes, there must be some sort of generic formula for that situation that fits 90% of the prospects. for example, a house is listed for $250k, so you take 6% off of that (the realtor commission) and then deduct the rent credits, then add in the option fee. That's just a formula I made up as I was typing this, but that's the general idea. Pilot, if you're out there and want to weigh in on that, it'd be greatly appreciated.

 

In the end, I know there is no 'one size fits all' approach to this sort of business however, based on everything I know about CA's, I've concluded that the error is in my procedures and nothing else.

[MichaelC 160]

Let's play with some numbers, shall we?

The homeowner is listed with the Realtor at $279K. Today's reality is that the house is not going to sell at $279K. In fact, if and when it sells, (not a given at all these days), it might actually fetch a price of, say, $259K. From that price the homeowner will pay a 6% commission to the Agency and maybe as much as 2% in closing costs. This leaves a true net at closing of around $238K. Does the homeowner realize this? If not, your weakness in this, Michael, is not educating them. Of course, those numbers are hypothetical but I think you get the point. And keep in mind most properties are sitting for months on end and even when an interested buyer is found they need to qualify. No easy task these days. Again, the homeowner needs an education about all of this. Hell, as recently as today another report was released showing a further erosion in the number of houses sold in May and that prices have declined yet again.

The biggest obstacle you are facing are unmotivated sellers and Agents with inflated asking prices for the purpose of obtaining listings.

[BEV! 0]

...This leaves a true net at closing of around $238K. Does the homeowner realize this? If not, your weakness in this, Michael, is not educating them.

The biggest obstacle you are facing are unmotivated sellers and Agents with inflated asking prices for the purpose of obtaining listings.

Admin, how are you?

I believe that the biggest obstacle here is "Uneducated" sellers as you can see above from what you wrote.

Once a seller is educated correctly, most of the time they become motivated.

Full price of a house is NOT what the house is worth, but what the seller gets after paying everything (net) which in this example is $238K.

And if Michael is offering a net of $241K through a CA, then based on this example, he is offering OVER full price for this house and the seller needs to know this.

 

BEV!