How We Come Up With Our Offer

How Do We Come Up With Our Offer?
Video Transcription

Hey there! My name is Brandon Barnes with B&M Homes. One of the things that we get asked all the time is how do we come up with our offer? A lot of people think we just pull this magical number from the air or we don’t know what we’re doing! Today, I want to do a breakdown on my dry erase board to show you how we come up with an offer to buy your house. If you don’t mind hanging out with me for a few minutes, I’ll talk about different scenarios and how it happens. I’m going to literally show you a math problem for a house that we will be buying here in Charleston, South Carolina.

The first thing that we’re going to start with is what’s called the ARV. This stands for “After Repaired Value.” How we calculate this number is by using the same information that realtors use by finding out what houses are selling for in the surrounding area. We also want to know what kind of condition those particular homes are in. For example, Do they have granite countertops? Do they have hardwood floors? What’s the age of the roof? What’s the age of the air conditioner? etc. With this information we will create a comp that reflects what the house is worth in the current market. An average house here in Charleston is around $300,000. So what that means is when we buy your house for cash and we do all the work to it to get it up to today’s standards, the house would be worth this if we sold it on the MLS, or multiple listing services.

Once we’re in your house with you we’re going to agree upon a renovation budget. Now, this is probably the hardest thing that we’re going to go through in the house buying process. The price is generally pretty easy. The timeframe, the scenario is pretty easy, but one of the hardest things is the renovation costs. And the reason why is when you renovate a house, you want to use general contractors to get your work done. When you’re selling your house and home inspections are done, they’re going to want to see that permits were used and things were done by licensed professionals. This means your cousin down the street can’t be the person who does the work for you. This is generally where we have a little bit of difference in numbers and this is what we have to talk through and come to an understanding.

In this scenario, we’ll just use $50,000 for the renovation. Within that number, we’re adding a new roof, a new air conditioner, new plumbing and new electrical because it’s an older model house here in Charleston and then we’re doing a complete update on the interior bathrooms, kitchens, etc.

Now we’re going to have to factor in selling costs. We have to sell it with a realtor or a realtor on our team and so we’re going to do the same things that anybody else would do. We’re going to have realtor fees associated, we’re going to have closing costs associated, we’re going to have all those things that just go with selling your house on the multiple listing service after we have flipped it. And so what’s going to happen is you’re going to have realtor fees. And generally, they’re going to run you anywhere from six to 7% of what the house actually sells for. And I think one of the going rates in Charleston right now is 7%, so we’ll come up here and that’s going to be a total of $21,000. So whether you sell it to us or you sell it to a realtor, somebody’s going to pay this, and I don’t think that you want to be the person that has to pay this and deal with it.

Closing Cost? Yep we are going to pay them for you. We’re going to handle the attorneys, we’re going to handle any abstract work that needs to be done, we’re going to by title work, we’re going to take care of all that for you. The general kind of closing cost for buying a house with cash in Charleston is about 1,500 to $2,000 depending on how much work needs to be done. so we’ll label this A to B, and so the $2,000.

The second thing that we’re going to have to factor into this is what are the closing costs going to be for selling a house the second time? And so what I mean by that is when we fix the house and we get it to the ARV of $300,000 and we pay our realtor $21,000 to sell us the house, we then are going to have to concede some closing costs to the end buyer. And what they’re doing is generally, what’s happening is they’re going to have to bring as much money to the table as they can to get financed for it so they don’t have any of the money for the legal fees, mortgages, documentation and all those things. And so they ask you as a seller for help on that. Again, you don’t have to give seller closing costs, but it makes selling your process a lot easier on the MLS, and so it’s something to look forward to when you’re going to sell your house.

So what we’re going to do here is we’re going to call these closing cost B to C and the average is going to be almost 2% of the selling of your house. So in this scenario, we’re looking at almost $6,000 that it’s going to take to sell this house. And that’s going to be title work, that’s going to be mortgage origination docs and all those other kind of things that are going to have to be done. Obviously, this can be negotiated through your realtor and so some of these fees could change based on the scenario of the house and how many people are truly offering on the property.

So the next thing that we’re going to look at is we’re going to look at holding costs for the house. And so this is a big one that people don’t think about when it comes to selling their house. So as we own the property, we are going to have to pay taxes and insurance and utilities and all of those things throughout the time of owning the house, the same thing that you have to pay while owning the house. A lot of times, when we talk about price, people were like, well, if I wait six months, I’ll make an extra $10,000. Well, what they don’t think about is they have to pay taxes the entire time, insurance the entire time, all the power bills the entire time and then potentially, they may not make $10,000. So at the end of the day, that extra six months that they waited, they’ve washed out and made the same amount of money based on what they’ve spent.

And so for us as a company, what we do is we factor in $1,000 a month for every month that we’re going to hold it and our average is six months per property. And that gives us time to renovate it, get it to where we need to get it, list it on this multiple listing service and then sell it. And the closing timeframe for selling your house on the multiple listing service can be anywhere from 30 to 90 days. And so what these are called, these are called holding costs. And so six months is going to be another $6,000. So we’re going to factor that in there. And then, so at the end of the day, we all know this is true and we do have to discuss profit for doing the deal, and so that’s something that we factor in at the very end now. The last thing that I forgot to mention in this piece right here is there’s one other holding cost that’s factored into this and this is probably the biggest cost of the entire process of buying a house, and that’s the private money that we use to buy houses.

So one of the thing that allows us flexibility in buying as many houses as we can and moving as fast as you want us to move, because sometimes, we have to buy houses as quickly as seven days and you can’t use banks for that is we use what’s called OPM, other people’s money. And so we have private investors that we reach out to and we give them preferred returns on their investment that’s backed by real estate and then they put up the money for us to buy houses cash. It’s a really fascinating thing and it helps people leverage the 401(k)s and IRAs for that right there.

So let’s say, in this scenario, they lent us 10% on this, so we’ll call it OPM and then 10%. And so they lend us 10% on the purchase price, we don’t actually know what this number is yet and we’ll come back to that in just a minute. So what’s going to happen is that is all the factors that come into selling your house when it comes to real estate. So either you as the homeowner could do it or us as the investor can do it. And so what we’re going to do here is we’re simply going to do a math problem and we’re going to deduct everything out of it, and then it’s going to come to a baseline on how we make an offer for your property.

So out of here, we have 300,000 and we’re going to minus 50, which puts us at 250, then we’re going to minus 21, which is going to put us at 229, then we’re going to have another 2,000, which is 227, another 6,000, which is 221 and another 6,000, which is $215,000, and we still have to factor this in right here. So $215,000 at the end of the day is what we’re going to have into this property when it’s all said and done. So then, the things that we have to talk about here is we do have to talk about the other people’s money on what they’ve lent us and then what we actually buy your house for.

And so this is where we want to sit here and craft our solution to make the most sense for you as a homeowner. And so at the end of the day, we are a business and we do have to do this for profit and I know it’s not something that’s fun to talk about, but I do want to be completely open and frank about it is it is something that we do, we do have to do here to feed our families and do all those other things.

And so the last thing that we need to talk about here is profit. And so I know profit’s one of those words that we don’t want to boast about and nobody wants to give anything away, nobody wants to do any of that, but at the end of the day, every single person wants to make a profit on something that they’re doing. And so that’s kind of the last factor that we come into this. And so for us as a business, we’re looking to make anywhere from 10 to 15% of the return on the house. And so in this scenario for selling a house for $300,000, our goal is to make 10% of the value of the house. And I’m just going to be completely transparent because our goal is to make sure that through this entire process, we’re transparent with you and provide you the best feedback as possible.

So what we’re going to come down here is we’re going to factor out profit. And so we’re going to factor $30,000, and so that’s going to lead us to $185,000. And so that right there minus what the investor lends us is what we’re going to offer you for your house. And so if we come here and the investors are going to offer us $185,000 cash to lend us and they’re going to get, let’s say, a 10% return on this, then that means in one year, they’re going to make $18,500. Well, in this scenario, we’re holding it for six months, as we generally do, so you would take that and divide it in half, and so you would have $9,250. So my private investor, my other people’s money would make $9,250 on this deal just using their IRA or self-directed accounts that they have. And so what that’s going to do is it’s going to, ultimately, we’ll subtract this from that and it’s going to give us our purchase price of $175,750. And so that is how we come up with the offer for your house.

It’s 100% calculated for math, and the goal for that is our math to line up with the solution that you’re looking for, for your property so that we can go together and buy your house. And so if you think about this, all these factors, renovation, realtor fees, closing costs, holding costs, somebody’s going to have to pay those when you sell your house. And so it’s either can be used as a seller or it can be us as an investor and we can take it off your hands for you and you don’t have to wait the six months to potentially make more or break even at the end of the day.

I hope this video is helpful. If you’re interested in us making an offer on your house and talking some more about a local house here in Charleston you’re looking to sell, reach out to us at B&M Homes and we look forward to helping you.

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