Most everybody struggles with this question early in their career, so let me try to simplify it. Here is how I determine what my initial offer should be to the bank. First off, I determine what full retail value of the house is. Next, I determine what I can sell the house for quickly (30 day sales price). Next I determine what I want to buy the house for (meaning, what price I want to pay for the house). Next, I determine where I need the BPO to come in at so I can buy the house at my price. Then I simply back the number down from there. When I get my number, I back down another $10,000 to $15,000 for negotiating room. To make it easier, here’s an example. I have a house that is worth $120,000 full retail. This property needs some work, so I can sell it in it’s “as-is” condition very quickly for $80,000. I want to buy this property for $65,000, so my initial offer to the lender will be $51,067. Always make your offer an odd number that makes it look as though a lot of thought went into the calculation. This figure of $51,067 is a good place to start, it gives me plenty of negotiating room, and I know I can get the property sold if the bank takes my offer. This was an actual deal for me. I ended up getting the house for $59,081 and put it on the MLS at $79,000. I got 4 offers in 48 hours and got the property under contract to a cash buyer at $74,000. I actually had a buyer at $81,000, but they wanted me to pay a few closing costs and they wanted to use conventional financing. I’d rather take an investor willing to pay cash with no inspections necessary, the whole “bird in the hand” thing.
Here’s another example. If a house will sell full retail for $220,000, and the 30 day sales price is $199,000, then I would back down my offer by $30,000 for profit, and another $15,000 for negotiating room. This puts my initial offer at $155,000.
If what I just told you still doesn’t make sense, then just start at about 60% of the principle balance of the loan, and if the number makes you laugh, then increase or decrease it until you stop laughing. The more of these you do, the more sense it will make.
