What to offer on a distressed property: the formula, with worked examples

The formula: how to calculate an offer on a distressed property

Every number in this guide comes from one formula and two checks.

Offer = as-is value x (1 - scenario discount), raised if needed to clear the seller's floor, and lowered if needed to stay at or under your ceiling.

If the floor is above the ceiling, there is no offer. The four inputs:

• As-is value: what the house is worth today, in its current condition, from sold comparable sales or a consistent automated estimate.
• Scenario discount: the start bid and likely close the seller's situation supports, from the discount table below.
• Seller's floor: mortgage payoff plus other liens plus the seller's closing costs. Below it, nobody can sign.
• Your ceiling: the most you can pay for your exit, from the 70 percent rule for a flip, or a maximum allowable offer that also takes out your fee when you wholesale.

How to calculate what to offer, step by step

Run these six steps on every property, in this order, before you contact the owner.

1. 1

   Estimate the as-is value

   Use sold comparable sales in similar condition, or a consistent automated estimate. Never start from the after-repair value, the assessed value or an old asking price.

2. 2

   Name the scenario and pick the band

   Match the owner's documented situation to a row in the discount table: auction, tax delinquency, pre-foreclosure, inheritance, vacancy or absentee. Use the band for the strongest signal and treat the others as support.

3. 3

   Estimate the seller's floor

   Add the recorded mortgages, any arrears and fees, back taxes, HOA liens and judgments, then 1 to 3 percent of the price for the seller's closing costs on a direct cash sale.

4. 4

   Calculate your ceiling

   For a flip, 70 percent of the after-repair value minus repairs. For a wholesale, subtract your fee too. For a rental, the price at which rent still covers debt, taxes, insurance, repairs and vacancy.

5. 5

   Compare and see which limit binds

   If the model's likely close sits between the floor and the ceiling, use it. If it is below the floor, raise the offer to clear the floor. If it is above the ceiling, offer at or under the ceiling. If the floor is above the ceiling, pass.

6. 6

   Verify before anyone signs

   Replace estimates with the county record and the lender's payoff statement. Re-run the numbers whenever the record changes, such as a new sale date or added tax penalties.

Step 1: which value do you start from?

Start from the as-is value, not the after-repair value (ARV). ARV belongs in your ceiling, because it is what you sell for after the work. Discounting from it counts the repairs twice and overpays. Our guide to ARV covers how to estimate it from renovated comps.

Example: a house worth $280,000 as-is and $330,000 after a $40,000 renovation. Forty percent under the as-is value is $168,000. Forty percent under the ARV is $198,000, which is $30,000 more for the same house. Automated estimates are imperfect, but consistency is what a pricing system needs: use the same source on every property so your discounts mean the same thing.

Step 2: how much under value to offer, by situation

The situation sets the discount, and the bands are tighter than folklore suggests. LowBaller's model targets start bids around 40 to 50 percent under estimated value on hard distress, like a scheduled auction or deep tax delinquency, with likely closes around 35 to 45 percent under. Softer situations, like an absentee owner with high equity, sit around 15 to 30 percent under. The rows in between are illustrative planning ranges.

When a property has two or more signals, use the band for the strongest one and let the others support the top of it. For how these percentages compare with listed homes, see what percentage is a lowball offer.

Step 3: cap the offer at the seller's equity

Compute the seller's floor: mortgage payoff + other liens + closing costs. The payoff is more than the loan balance. In pre-foreclosure it adds missed payments, late fees and legal costs, and it grows every month. Seller closing costs on a direct cash sale typically run 1 to 3 percent of the price; as a rough rule of thumb, budget 3 to 5 percent when you also expect cure costs or title problems. Your offer must clear the total.

Example: an estimated value of $640,000 with an auction scheduled. The model band puts the start bid 45 percent under, at $352,000, and the likely close 40 percent under, at $384,000. The owner owes $190,000 plus about $14,000 of arrears and fees. With 4 percent for closing and cure costs ($15,360 on $384,000), the floor is about $219,360. The likely close clears it, and the owner walks away with about $164,640 instead of risking the auction.

Now give the same house a $450,000 loan balance. With the same arrears and costs, the floor is about $483,000, so the deepest offer that clears the debt is about 25 percent under value, not 40. The equity cap binds and the auction band no longer applies. An offer that leaves the owner 10 percent of value ($64,000) lands near $550,000, about 14 percent under. No motivated seller can accept a check that does not cover the loan.

Step 4: the 70% rule vs the equity cap, side by side

The equity cap tells you what the seller can accept. The 70 percent rule tells you what you can pay: 70 percent of the after-repair value minus repairs. You need both, and whichever one binds wins.

The four deals below use the same house: $280,000 as-is, $330,000 after repairs, $40,000 of work. Your 70 percent rule ceiling is $231,000 minus $40,000, or $191,000, in every case. Only the seller's situation and debt change. Seller closing costs are set at 2 percent of the price.

Deal A is the easy case: the model's numbers work as they are, and the owner nets about $46,640. In deal B the seller is fine and you are the constraint. A soft situation supports 15 to 30 percent under, your flip math needs 32 percent, so price it as a rental or log the owner and wait for the situation to change. In deal D, no cash price works for both of you.

Deal C is where the equity cap overrides the model. The offer rises to about $186,000, roughly 34 percent under value, just short of the 35 to 45 percent band, and the owner keeps about $10,300. That is thin for both sides. A deal this thin would not appear on LowBaller's paid list, which only shows a house when the likely price clears the open loan and leaves the owner at least 10 percent of the value.

Step 5: what if the numbers do not work?

If the equity cap pushes the price above what your exit supports, the discipline is walking, not stretching. Raising your ceiling to save a deal you like just moves the loss to closing day.

When the floor is above your ceiling, three paths remain. A short sale, where the lender agrees to take less than it is owed, which means long timelines and uncertain approval; see how to make an offer on a short sale. Creative terms, such as seller financing, where the price works because the payments do; rules vary by state, so use a local real estate attorney. Or a pass, which is usually right: log the owner and move to the next high-equity lead.

When your ceiling binds instead, as in a soft situation like deal B, the fix is time. Pressure on the record changes on a schedule: a notice of default, a sale date, another year of unpaid taxes. Follow up monthly and re-run the formula whenever the record changes.

Run the formula on real properties

The free lowball offer calculator runs the first half of this formula. Enter an estimated value, the owner's situation and their equity, and it returns a start bid and a likely close, capped so they still clear a typical mortgage at that equity. Then compare its likely close with your own ceiling.

On LowBaller's paid list, every property already carries a suggested start bid and likely close capped at the owner's estimated mortgage and closing costs, and owners who owe more than the house is worth are not shown. To see how many motivated sellers are near you first, run the free market scan, about 2 minutes with no card. When the number works, deliver it with the steps in how to make a lowball offer.