What investors are looking for in offers

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 not meet these parameters. It doesn’t hurt to strike up a conversation with people on your buyer’s list to get an idea of ​​what each person is looking for. That way, you will have more confidence when finding wholesale offers because you know which investors would be most interested in that offer. In fact, a quick call to the investor or investors that you think would be interested in the deal BEFORE you put it under contract can result in a time saver in the end as you may sometimes find that it is not quite the deal. what you thought it was.

So, let’s go to what real estate investors are looking for in the offers. They usually look for one or more of the following:

Below the market price

In the simplest form, investors want to buy a home for less than what 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 value after repair (ARV) minus what the house needs for repairs. This is often called the Ugly House Maximum Allowable Offer (MAO) Formula or the Ugly MAO in investor lingo.

To explain that formula with an example, if you had a house that was worth $ 100,000 if it was in good shape (that’s the value after repair, ARV for short), and you need $ 15,000 in repairs to make it worth the ARV, then the most an investor must pay for that house is $ 55,000. Here’s how I calculated that:

• 70% of 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 to pay. “Many investors want even better deals than being on the edge of that formula, especially in the soft real estate markets.

It is also important to note that if an investor wants to buy at that price and you need to make a wholesale rate, you must put the home under contract for LESS than that amount. The less Sufficiently below the price for which the investor will buy it 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 from your wholesaling business.

Investors who buy on the basis that they are below current market value are often senior, more restorative investors or investors who will quickly change the property.

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 it’s a solid formula, one formula they often use is that if the rental on the property covers the entire mortgage payment, taxes, and insurance, then the investor has a positive cash flow. You should consider reading additional articles on net operating income for a much better look at what I think is 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 for a home.

Let’s take a look at an over-simplified example, so you can understand the basics on 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 for this property was $ 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 can calculate the maximum. payment you could pay with a financial calculator. With this figure, you can determine the most you can afford for the house with that payment. Here’s how to calculate the maximum payment:

• Rent – Tax – Insurance = Maximum loan payment
• $ 1,000 – $ 75 – $ 50 = Maximum loan payment
• $ 875 = Maximum loan payment

Enter the following into your financial calculator and solve for PV (the loan amount in our case):

• N = 360 (is 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 solve this number).

So, using this example, the most your investor could pay to have AMAZING cash flow (and many investors want to earn $ 100, $ 200, or more per month in cash flow) would be roughly $ 131,000. To wholesale the property and make a wholesale fee, you would need to get it under contract for less than that.

I want to emphasize that the above example is an oversimplification and that there is much more about buying cash flow properties that you will want to learn about.

Owner financing

Some investors are looking for investment opportunities where they do not need to borrow money from a hard money lender or a bank to buy the property. They want to buy properties where a part, or preferably all, of the money to buy the house comes from the equity that 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 buy his property.

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 homeowner financing can look like, but here is an example:

You agree to buy a home for $ 100,000. The seller agrees to accept $ 80,000 in cash (that is, you get 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 of the remaining $ 20,000. Of course, you will need to negotiate the interest rate (if applicable), the amount of the monthly payment, 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 homeowner financing is buying homes “subject” to existing financing, in which the buyer agrees to make payments on the seller’s original mortgage, often without the lender’s permission. A discussion of “Subject to” is beyond the scope of this article.

Other real estate investors often offer homeowner financing to attract buyers who cannot or cannot go to a bank for a loan. Private sellers who are not experienced real estate investors rarely offer direct financing to the owner. To obtain owner financing from private sellers, you almost always need to apply and negotiate. In other words, if someone advertises owner financing, they are probably investors and their chances of selling the deal wholesales are low. To obtain homeowner financing agreements, you will need to demonstrate, through your ability to sell and negotiate, what the benefits to the seller would be of selling your home and accepting payments rather than simply obtaining a lump sum.

The more the better

Lastly, it is important to remember that investors are looking for one or more of the above criteria. If you can get positive cash flow, below market price 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 under-market, positive cash flow, and / or owner financing. . This is why you often hear real estate investors talk about finding motivated sellers. It is the seller’s challenge that is sparking your motivation and your home purchase offer must meet your challenge in order for your property to be worth selling at a discount, with positive cash flow, and / or with owner financing.