Should a pre-foreclosure offer be capped by rent numbers or resale numbers

Question

Running a batch of notice-of-default leads in a single county to both a rent-based ceiling and a resale-based ceiling often produces a striking gap. At a conservative gross yield floor with realistic reserve assumptions, only a small fraction of leads pencil on rents, while a much larger share pencil on resale, and some of those resale deals do get bought quickly by active buyers in that market. The case for using rents as the ceiling on a first offer is that if the resale market softens between contract and listing, or the repair scope opens up mid-project, the investor still owns something that covers its own costs and can wait out a bad exit window. The case for using resale as the ceiling is that pre-foreclosure is a timed situation, with a fixed auction date driving urgency, and an offer capped by conservative rent numbers is often the low bid on a lead multiple buyers have already mailed. The practical tension is that a hold an investor had to talk themselves into tends to become an unwanted second job rather than a clean asset, especially if it sits far from where they can manage it easily. For an investor without appetite for active management, setting the ceiling with rent numbers and accepting a lower win rate is generally the more disciplined approach, even in a competitive pre-foreclosure market, since it protects against being forced to operate a rental they never wanted.

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 says 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 pattern that shows up around ten or eleven doors is that the properties bought on resale logic and then kept become the ones with the worst turn costs, because nobody underwrote them as rentals, so nobody priced the mechanicals for a ten year hold. It also depends on the market. In some states you cannot see recorded sale prices at all, so your resale comps are agent data, which is fine, and it is a softer input than a signed lease.

Should a pre-foreclosure offer be capped by rent numbers or resale numbers

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