In this article, I’ll take some time to go over what many real estate investors look for in offers. You should realize that while I am covering what MOST real estate investors are looking for, there are real estate investors who have very focused interests and may fall outside of these parameters. It doesn’t hurt to strike up a conversation with people on your buyer list to get an idea of what each person is looking for. That way, you’ll be more confident when finding wholesale deals because you know which investors would be most interested in that deal. In fact, a quick call to the investor(s) you think would be interested in the deal BEFORE they sign you up can prove to be a time saver in the end, as you may, on occasion, discover that it’s not exactly the deal you thought. what was it.
So let’s see what real estate investors look for in offers. They tend to look for one or more of the following:
Below market price
In the simplest form, investors want to buy a house for less than it is currently worth. They want to get a discount. The higher the discount the better, but in many markets the formula for buying homes at a discount is that the most an investor can pay for a home is:
70% of the after repair value (ARV) less what the house needs in repairs. This is often called the ugly house maximum allowable offer (MAO) formula or the ugly MAO in investor parlance.
To explain that formula with an example, if you had a home that was worth $100,000 if it was in good shape (that’s value after repair, ARV for short), and it needed $15,000 in repairs to make it worth the ARV, then the most an investor must pay for that house is $55,000. This is how I calculated it:
- 70% of the ARV – Cost of Repairs = MAO
- 70% of $100,000 – $15,000 = MAO
- $70,000 – $15,000 = MAO
- $55,000 = MAO
Notice the sentence above “most investors should many investors want even better deals than being on the brink of that formula, especially in soft real estate markets.
It is also important to keep in mind that if an investor wants to buy at that price and needs to make a wholesale rate, they must contract the house for LESS than that amount. How much less? Enough below the price the investor will buy from you to pay for your marketing expenses and your wholesale fee. So the answer to how much less is how much money you want to make in your wholesale business.
Investors who buy on the basis of getting it below current market value are often top-fix investors or investors who will quickly turn the property around.
positive cash flow
Investors who intend to buy the property and hold it for rent are often more concerned with buying properties where the income from the property makes sense based on the price they are paying and the financing they can obtain.
While I don’t think this is a strong formula, one formula they often use is that if the rent on the property covers the full mortgage payment, taxes, and insurance, then the investor has positive cash flow. You should consider reading additional articles on net operating income to get a much better analysis of what I believe to be positive cash flow.
So if you use that formula and a financial calculator that you can get for around $25, you can figure out the most an investor can afford to pay for a house.
Let’s take a look at an overly simplified example, so you can understand the basics of how to do this calculation.
For this example, the house has property taxes of $75 per month and an insurance payment of $50 per month.
If you knew that the rent on this property is $1,000 per month and that, by calling a local mortgage broker, the current interest rate an investor could get on a loan on this property would be 7%, then you could calculate the payment maximum you could afford with a financial calculator. Using this figure, you can determine the most you can pay for the house with that payment. This is how the maximum payout is calculated:
- Rent – Taxes – Insurance = Maximum Loan Payment
- $1,000 – $75 – $50 = Maximum Loan Payment
- $875 = Maximum Loan Payment
Enter the following into your financial calculator and calculate the PV (the amount of the loan in our case):
- N = 360 (that’s for a 30-year loan)
- PMT = – $875 (the maximum loan payment)
- I/Y = 7% (the quote we got from the Lender)
Maximum loan amount = approximately $131,423 (you need a financial calculator to work out this number).
So with this example, the most your investor could pay to have BREAK-EVEN cash flow (and many investors want to earn $100, $200 or more per month in cash flow), would be around $131,000. In order to wholesale the property and charge a wholesale fee, you must hire it for less than that.
I want to emphasize that the example above is an oversimplification and that there is much more to buying cash flow property that you will want to learn.
owner financing
Some investors are looking for investment opportunities where they don’t need to borrow money from a hard money lender or bank to purchase the property. They want to buy properties where some, or preferably all, of the money to buy the house comes from the equity the owner already has in the property. Another way of looking at this is that the owner is willing to accept payments rather than just a lump sum to purchase the property from him.
You may be looking for properties where the seller can finance all or part of the down payment or where the seller can finance the entire purchase. There are many variations on what owner financing can look like, but here’s an example:
You agree to buy a house for $100,000. The seller agrees to accept $80,000 in cash (that is, you take out a new loan from a bank for $80,000 and the seller receives that amount in cash from the bank) and will then accept payments on the remaining $20,000. Of course, you will need to negotiate the interest rate (if any), the monthly payment amount, and the term (number of payments) of how the $20,000 will be paid to the seller.
Another relatively common, but hotly debated, method of owner financing is the purchase of homes “tied” to existing financing, in which the buyer agrees to make payments on the original mortgage from the seller, often without the lender’s permission. A discussion of “Subject To” is beyond the scope of this article.
Other real estate investors often offer owner financing to attract buyers who won’t or can’t go to a bank for a loan. Rarely do private sellers who are not experienced real estate investors offer direct financing to the owner. To get owner financing from private sellers, you almost always have to apply and negotiate it. In other words, if someone advertises owner financing, they are probably investors and your chances of wholesale the deal are low. To obtain financing offers from the owner, you will need to show, through the owner’s ability to sell and negotiate, what the benefits would be for the seller to sell their home and accept payments instead of just receiving a lump sum.
the more the better
Finally, it is important to remember that investors are looking for one or more of the above criteria. If you can get cash flow positive, below market rate and owner financing, that’s even better and the deal is likely to be more desirable to real estate investors.
While investors tend to focus on finding deals that meet the above three criteria, the seller’s motivation is often what dictates their ability to obtain a below-market price, positive cash flow, and/or owner financing. . That’s why you often hear real estate investors talk about finding motivated sellers. It is the seller’s challenge that is causing the seller’s motivation and your home purchase offer must meet their challenge to make it worthwhile to sell your property at a discount, cash flow positive and/or with owner financing.