Underwriting a default lead to rent numbers keeps killing deals my whole area is buying

Question

I pulled 14 notice-of-default leads in one county over five weeks and ran every one twice, once to a rent number and once to a resale number. On rents, at a 7.9 percent gross yield floor and my reserve assumptions, two of the 14 penciled. On resale, nine did. Two of those nine were bought by people I know, one closed at a price I'd have paid.

So I'm stuck on which number should set the ceiling on a first offer. The case for rents as the ceiling is that if the resale market softens between contract and listing, or the repair scope opens up, you still own something that pays for itself and you can wait. The case for resale as the ceiling is that pre-foreclosure is a timed window, the seller has a fixed auction date, and if you show up with a rent-based offer you are the low bid on a lead five other people have mailed.

The counter to my own worry is that a hold you had to talk yourself into is how people end up with a rental 200 miles away that eats every Saturday. I don't want a second job, which is why I care about this more than a flipper would.

What number is actually setting your max offer on these.

joe_delgado5 · Answer

Resale sets my max, and I'll say the ugly part out loud: I have never once been able to make a rent-based offer competitive on a lead with real equity and 30 days on the clock. On thin margins the only thing that keeps me alive is being the first credible number the seller hears.

Where you're right, marlow, is the fallback. Twice I have had to keep something I meant to move, and both times the rent covered the note and about nothing else. That's not a hold, that's a hostage situation. So I don't call resale-with-a-hold-fallback a strategy anymore, I call it the risk I'm taking, and I size my deposit and my diligence spend to match.

If you genuinely won't operate a rental, your ceiling is your ceiling. You'll close fewer of these and the ones you close will be the ones nobody else mailed.

brandonlee36 · Answer

Rent number as the floor, resale as the upside, and the gap is the deal. Nine of 14 penciling on resale mostly tells me your ARV comps are more optimistic than your rent comps, which is normal because rents get verified by a tenant paying or not paying and ARVs get verified by a stranger's mood on a Tuesday.

The thing that broke for me at eleven doors was that the two properties I bought on resale logic and kept are still the two with the worst turn costs, because I never underwrote them as rentals so I never priced the mechanicals for a ten year hold. Also depends on the market: in some states you can't even see recorded sale prices, so your resale comps are agent data, which is fine, and it is a softer input than a signed lease.

Underwriting a default lead to rent numbers keeps killing deals my whole area is buying

2 replies