In 2021, I searched in vain to find my next fixer-upper at a reasonable wholesale price. I found numerous houses but they were all on the MLS listed at grossly over-market retail prices. So, I out of frustration with an insane house market I can't change, I just decided to give up and quit looking. This was 3 months ago.

Fast forward to last Friday night. I am at my only vacancy on my knees re-caulking the bathtub and I hear a knock at the front door. I was hesitate to answer the front door since it was dark and I did not have my Glock with me. I answered the door anyway and there was a man standing there who says he owns the vacant house across street and he wants to know if I would be interested in buying it. I told him that I would buy any house in this great C+ hood if the price was right.

The following day, this man gives me a tour of the inside of his house and it is real mess inside but that is normal for the houses I buy. What got my attention though was this house was a large 4 bedroom /1 bath house which is twice the sq. footage of houses I normally buy. (My humble abode 2/1 across the street is only 750 sq. feet but this house is at least 1,500 sq. ft.). So, I am thinking this guy is going to want an arm and a leg for this house even though it is a dump inside and needs at $25K in repairs.

Yesterday, he calls me and gives me his 'official asking price' which is $35K and I agree to pay all closing costs. Even though this price is reasonable, I am still going to make a counter-offer which is the real purpose of me making this post. What should my counter-offer be?

Here are some additional details. Owner here is very motivated to sell me his house. This house has sat vacant for 2 years and it has a $25K 1st mortgage (remaining principal) and $3,500 2nd mortgage. So, there is a $28,500 debt load here the owner is making monthly payments on and wants relief from. Now, the owner is motivated but not broke or desperate here, but he is in the mood to get this monkey off his back.

Sid or Ken - How would you all proceed here? Just pay the $35K and not counter at all? My gut says this house is only worth $30K

in its current condition. And I would like to have a $5K buffer here.

With an ARV of $60K,...this house would flip for $100K. With an additional bathroom added, this house would flip for $149,500.

Roy,

I am not Ken or Sid but I would let him know at 35 with a ARV of 60 this isn't a killer deal.....but I would ask him how much they would need down to sell the place.

If he is giving financing, especially when you spring the zero percent offer then it becomes much better. The conversation goes something like him saying he will need $10,000 now. You let him know that you can afford to give him $500 a month until the remaining $25,000 is paid off with the first payment coming after you invest $25,000 into the place.

Not a bad a find......but your ratios will be slim if you have to go to the bank. So you need to sell him on this deal has to work for both sides.

I just did a deal where I paid $45,000 for the place put in $28,900 into the place and will list the place this week for over $134,000. The seller would not finance since they are in a nursing home. So the deals are out there- its just so much harder to find them

Ray in PA,

I asked for Sid and Ken because they have extensive experience in Class C hoods just like I do. This is not my first rodeo by any means and but I still would like hear how Ken and Sid would handle this seller if they were doing this deal. This is a deal that just 'fell into my lap' without any effort on my part. On Wednesday afternoon, my handyman will go inside the crawlspace and check the 'bone structure' of this house. This house could be a real pig in disguise and the crawlspace will tell the tale here. I have seen crawlspaces that hold 6 inches rain water and that can a deal breaker. It is raining now.

Roy,

I'm confused by this line: "With an ARV of $60K,...this house would flip for $100K".

Help me understand the following-

1) What would the house sell for TODAY, on the MLS, with zero fix up, 1 minute after you buy it?

2) What would the house sell for, on the MLS, after $25K in repairs?

I'll work on your question once I know those details.

Btw, You used the phrase " they were all on the MLS listed at grossly over-market retail prices". Are you positive they are over-market, or are they listed for more than you are accustomed to paying? Keep in mind, most places have at least DOUBLED in priced or more in the past 12-18 months. The days of your $5K shacks have probably passed into the dustbin of history. I saw a burn-out with over 50% fire and smoke damage a week ago sell for $30,000. I sold a similar house in a nearby hood 5 years ago for $8,000. It is what it is. Prices are higher. We have to adjust our expectations. So the key is can you make money off this house, and I won't know until I know the answer to the questions above.

Sid,

Your question #1: In today's insane market: $35 -$45K.

Question #2: After $25K repairs: $75-$100K (still 4/1)

This house is just begging to have a 2nd bath added. With a 2nd bath added to create a true master bedroom (+$5K), house would list on the MLS at $129-$149K.

Like my 2/1 house across the street, this house was also originally built as a 2/1 back in the early 70's. Then someone built not 1 but 2 major additions to this house making it the 4/1 it is now. Each one of these additions measures 12 x 25 feet and one of these rooms needs to be converted into a master bedroom/master bath which would create the full potential for flipping.

As a rental only, without the 2nd bath, house would rent for $900.00/month. In C hoods like this, 4 figure rents do not exist (not yet at least).

Roy, okay, thanks that helps much!

If the guy needs $35,000 for this house, then for me it's a hard pass for a traditional purchase. But, he only owed $28,500 (1st and 2nd) total. How far down can you get him?

Some things to consider....

Plumbing may be shot. Frozen pipes, dried out/cracked gaskets and seals, drains plugged with dead bugs. Water intrusion. The general musty / dusty smell of an unlived in, older house.

The Seller needs relief, yes. But that doesn't mean you overpay. While the market is higher than ever right now, I would still not pay anything other than 80% max price to market. So we need to tighten up your understanding of your local market. You call it "insane." I respond "Compared to what?"

Insanity is in the eye of the beholder. You say $35,000 is insane. So what is "sane" and where are the "sane" sellers? If everyone is insane and all prices are insane....by definition, what is sane / insane has changed.

Look at it this way: 3/2/2 nice homes in nice hoods sold for $45,000 when I was a kid. Today those same homes are over $250,000. That's not insanity: that's inflation.

I can't give you advice on the fix and flip scenario because that is not my area of expertise. I know you do your own work, and I'm guessing that the $25K repair budget is materials only, not including the cost of your labor. What would the costs be to fix it if you hired it done? Keep in mind you do not work for free, so if your "profit" would be totally eaten up by labor costs than by definition you are buying yourself a contracting job, not an investment. I only deal in the world of investment property. I would caution, though, that with most contracting jobs at least you don't have the risk of tearing into the wall of a house you own only to find out it's going to be $10,000-$15,000 more because of hidden issues: the homeowner bears that risk.

How long will the work take, and how much dead capital will you have tied up in the house? How much will you pay in utilities, etc while no rent is coming in? These and other "carrying costs" are usually minor (3% of less of the total project), but should be included.

Bottom line: don't work for free. Be sure to value your labor and carrying costs properly so you can fairly evaluate the deal.

Here's a thought to consider.

Since you need to do quite a bit of fix up work on the inside anyway, what about thinking of this as a future duplex?

You could configure it into 2 2 bed 1 bath houses.

If you would be getting $900/month as a 4/1, what would two 2 1s bring?

Sid,

You gave me way more information than I was expecting there. I am now trying to figure out if I am sane or insane in doing this deal,..LOL.

First of all, I only gave out the flipping information so to give you and Ken an idea of the full potential this house 'could have' if the house was rehabbed with a flip in mind which means adding a 2nd bath here.

However, like you I have never considered myself a flipper and my real intention with this 4/1 house is for a rental house only. Normally, I prefer to buy houses where I can get a 2% rent to value ratio. However, with this house I may have to settle for 1.5 ratio instead which is not the end of the world. ARV=$60,000 that rents for $900.00/month. (My 2/1 across the street will rent for $750.00 for comparison).

Again seller is asking $35K with me paying an unknown amount for closing cost. I want to get him down to $30K which pays off his debts and should cover the closing costs if we use my attorney.

All I need from you right now is a good reason and/or B.S. excuse I can give the seller as to why he should reduce his asking price down to my comfort zone price of $30K. I could plead poverty but I am not sure he would buy that one. Any others?

Renne,

Thanks for the tip on creating a duplex which could be done. If I become the owner here, I will give the duplex idea some more thought. That will require splitting the house down the middle and adding a firewall in-between the two new units.

Ken,

My attorney charges $150.00/hour and with most closings that are cash deals only, total closing cost (including filing fees etc.) are usually around $500.00. With inflation, that could be $600.00 now. Now, my attorney always does an in-depth Title Search which can go back 20-30 years. If he finds something odd or unresolved in researching the seller's title, this can create a legal bottleneck which can increase the legal fees to solve the bottleneck. With past RE deal closings my attorney has located old unpaid bank liens that the seller claimed they knew nothing about. In other times, my attorney has called me and told me the seller's title to his property is a total fricking mess and it will take x number of legal fee hours to find a resolution. I walked away from a deal where the legal fees to fix someone else's screwed up title was more than I was willing to pay.

Don't take this the wrong way, please, but I don't not give BS excuses as part of how I do business. I believe in treating people ethically, the same way I would want to be treated.

So to that end, I would keep it honest and straightforward, "Mr. Seller, I do this as a business, and I have to have a profit margin on this deal that makes sense. I'm not going to low ball you, but here's the number I'm at for this deal to work for me (insert Roy's price). I hope that works because if not I'm not going to be able to do this deal today."

Then if he refuses, wish him all the best and walk away. Walk away power is intense. I am right now selling a commercial property where I've used walk away power twice. The first time, I got the Buyer to raise their purchase offer $25,000 after they said they were at their "top dollar." Then after their inspections, they asked for $20,500 cashiers check at closing to cover issues they found. I responded, "No can do." They accepts the offer as is, no repairs.

So on that deal, walk away power saved me / earned me $45,500. I didn't lie, fuss, or B.S. I just said, "this is what I need and this is what I will/won't do."

Sid,

You gave me good reason and not a B.S. excuse. I do appreciate that. However, I have done over 25 RE deals and I can't think of one deal where a seller has been totally honest with me in giving me details about their house or giving me honest answers when the money discussion began. Sometimes I feel the need to give sellers a taste of their own medicine. Besides, how many LL's do you know who are completely honest with their own applicants or tenants? There is B.S. everywhere you look in this business.

The seller of this 4/1 house first told me he owed $20K on his 1st mortgage and when I asked to see his monthly statement, he then confessed the actual number was $25K and I still have not seen the monthly statement yet. Then I asked him, 'Are there any other liens on this house"? 'Oh well, kind of sort of',...there is this small $3,500 loan (could be a payday type loan) he took out on the house for something. This seller comes across as 'good Christian type' and he wants me to believe he is being honest with me, however, I have already caught him in one lie and I am sure more B.S. is coming.

Ken,

I have already pull of the property tax information and his property tax is on the high side. County tax appraisers are assessing his house at $60,000 when it needs to be at least 1/2 that amount. According to the seller, he claims he paid $52,000 for the house when he bought it in 2002.

If you want to limit your exposure to BS (and keep in mind some people truly don't know numbers off the top of their head and just SWAG it)... you can make the offer like so:

"Purchase price subject to confirmation of Seller's liens on the property totaling $X. If total is more than $Y dollars higher or lower, Buyer may renegotiate purchase price or cancel this contract."

EZ Cheesy!

When the title search comes back, you should know to whom debts are owed and can contact them for pay off statements. If he was spouting rubbish, tell him to lower the contract price or cancel the deal. Let him know up front you will be verifying the balances due, so now is the time to be honest or the deal will be canceled.

Or you can just not worry about what he tells you he owes and make your determination based on your criteria. I've never been a fan of the "what do you owe on this" strategy. I know some folks use that to try to get Sellers to tacitly admit their bottom dollar, but in the end the deal is either worth $X to me or it isn't. The only time it would be of great importance is if you're doing a "Subject To" purchase, and I don't think that's the situation here.

Btw, yes, a lot of people lie in this business. I understand that and tell the truth anyway.

Roy, you are over thinking this deal. If the numbers work, buy it.

You are letting his asking price dictate what you will make as a counter offer. If there is money on the table buy it.

Dave,

I over think every deal I do. It is the only way I know to keep me from losing my shirt and going broke in this crazy business. In all honesty, I will not know if the 'numbers work' here until after this house is bought and fixed up to where I can rent it out. All of my numbers here used for repairs are nothing more than just but ROUGH ESTIMATES. Two years ago, I did a very similar house that I had estimated $25K for repairs and then Covid hit, lumber prices went haywire, I could not hire laborers due to all of the free stimulus money being handed out, and I ended up spending $40K instead of $25K.

The only thing I have any direct control over is the selling price. The lower the selling price, the lower my overall risks are. This is the reason I need at least a $5K buffer here.

Hmmmmm

Buying without knowing a clear exit strategy has bit me on my bottom before. If I am not clear, it is hard for me to structure up transaction to suit my needs.

You must have overcome that somehow. I do like what Dave & Sisco said though - maybe whole sale it.

You have mentioned in the past that your properties cash flow well, so I would be structuring it subject to and buy and holding it.

Ray in PA,

I am a buy and hold type investor, always have been. The reason for this is because the real money in my business is made in renting long term and not selling for small change (flipping) in the short term. The few properties I have sold (after 10 years of renting) have been ones where the management of those properties had become more headache than they were worth. My exist strategy is simple. List the house on the MLS and sell it. Why are you making a big deal over an exist strategy?

Hey Roy, wanna see insane?

Roy,

Bird in the hand.

Got any better leads?

A mistake I made recently was not keeping up with how much prices had increased. Sure I knew all the talk but when I actually studied sales I was way behind.

Also, my strategy has changed. I’m not focused on ROI. I want long term holders, better condition, easy to rent.

Brad20K,

Ken, Sid, et.al

Thanks for the update Roy.

Renne,

Roy, sorry for the late response.

No one has ever even asked. They are very different homes and should someone ask, we would tell them that when that home should become available, we will look at the market to determine its price.

We also offer lots of customizations for extra rent so even if two homes were identical (which they are not), people might be paying a different amount of money.

Even if both homes were 3 bed and 2 bath, 1 might offer a larger yard, 1 has lawncare included, 1 wanted the appliance upgrade package, etc.

Roy, we have four pretty much identical townhouses in a row and the rents vary quite a bit. Depends on when the tenant moved in - long-term is paying less the most recent. No one blinks an eye.