MLS Pricing too high, no room for profit.

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MLS Pricing too high, no room for profit.

Michael Kotylo
Southeast Michigan · Member since 2023 · 23 posts · 13 votes

I made an offer this weekend on a property that was priced too high to make a profit. Listed for 320k, with rental comps around $2500/mo, which would cashflow negatively ~$500/mo, no thanks! ARV was 400k on this and it was a 1972 time capsule. I offered $280k and everyone acted like I was stealing out of the collection plate at church. I didn't care, I'm not trying to please the world, I'm making a financial decision that will either reward or hinder me.

My offer would have negatively cashflowed -$1/mo, however the appreciation and equity would have made up for no cashflow so I was comfortable at my offer price. I don't see how anyone was going to make money on this one, so it must have been owner occupants making emotional decisions. 

Is anyone experiencing something similar?

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Russell BrazilBusiness Member
Moderator
Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
3y

Ive been hearing people with the same complaints for the entire 20 years Ive been in real estate.  Year after year, decade by decade goes by and they keep not buying because they keep saying the numbers dont make sense....sellers want too much money...I cant cash flow enough.

I keep buying year in and year out regardless of market conditions. You said the property would rent for $2500...Id pay $500k in my market for a property that rents for that in my market happily. 

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  • Bruce WoodruffPro Member
    Contractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes
    3y

    Some people are just like that. They may not be even taking cash flow into account. That is not everyone's go-to for analyzing properties....

    We recently made a lower-than-asking offer on a house (not an investment) and the sellers were insulted! They wouldn't even counter......go figure.....

    5Reply
  • Nathan GesnerBusiness Member
    Moderator
    Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
    3y
    Quote from @Michael Kotylo:

    Is anyone experiencing something similar?

    Uh...almost everyone in almost every corner of the country.

    The market went bananas after COVID and prices are unrealistic. Until the market settles for a while, you'll have a hard time finding deals. Those deals we found in 2018 may not appear again for another 5+ years. 

    We can complain all we want but it won't change things. I think the best thing to do is learn how to operate within the current situation or wait it out.
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  • Scott E.
    Contractor · Scottsdale, AZ · Member since 2010 · 2k+ posts · 3k+ votes
    3y

    Can't win if you don't play. This seller laughed at your $280k offer. But another seller with more motivation might have taken a $240k offer.

    Just keep going after them and making offers based on what makes sense for you, not based on what the property is listed for.

    7Reply
  • Russell BrazilBusiness Member
    Moderator
    Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
    3y

    Ive been hearing people with the same complaints for the entire 20 years Ive been in real estate.  Year after year, decade by decade goes by and they keep not buying because they keep saying the numbers dont make sense....sellers want too much money...I cant cash flow enough.

    I keep buying year in and year out regardless of market conditions. You said the property would rent for $2500...Id pay $500k in my market for a property that rents for that in my market happily. 

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  • Steve Vaughan
    Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
    3y

    I feel the same as @Russell Brazil . Buying in equity markets adjusts expectations as does buying in a low inventory,  mostly sellers market. Most have to find and create deals off-market. 

    An equity capture .5% deal for me is a go as long as my discount is 12%+. Smalls are balance sheet buys.  Multis for cash-flow.  

    You mentioned ARV, but not how much rehab to get there so the term is worthless. What is the comped FMV? How much below market value are you buying at?

    Lastly, have your offers appear they came from your calculator.  $280,000 has way too many zeroes.   Try $281,740 or something in the future @Michael Kotylo 

    5Reply
  • Simon Ashbaugh
    Realtor · Columbus Ohio, Cleveland Ohio · Member since 2022 · 849 posts · 830 votes
    3y
    Quote from @Michael Kotylo:

    I made an offer this weekend on a property that was priced too high to make a profit. Listed for 320k, with rental comps around $2500/mo, which would cashflow negatively ~$500/mo, no thanks! ARV was 400k on this and it was a 1972 time capsule. I offered $280k and everyone acted like I was stealing out of the collection plate at church. I didn't care, I'm not trying to please the world, I'm making a financial decision that will either reward or hinder me.

    My offer would have negatively cashflowed -$1/mo, however the appreciation and equity would have made up for no cashflow so I was comfortable at my offer price. I don't see how anyone was going to make money on this one, so it must have been owner occupants making emotional decisions. 

    Is anyone experiencing something similar?


     Maybe its just a bad deal for that market? In Columbus thats not terrible but were appreciating vary well. In Cleveland thats terrible but were a cashflow market. It all depends on the market its in. If cashflow is your goal find a different deal or change markets

    1Reply
  • Michael Kotylo
    OP
    Southeast Michigan · Member since 2023 · 23 posts · 13 votes
    3y
    Quote from @Russell Brazil:

    Ive been hearing people with the same complaints for the entire 20 years Ive been in real estate.  Year after year, decade by decade goes by and they keep not buying because they keep saying the numbers dont make sense....sellers want too much money...I cant cash flow enough.

    I keep buying year in and year out regardless of market conditions. You said the property would rent for $2500...Id pay $500k in my market for a property that rents for that in my market happily. 

    Thanks for your comment. Expenses would be $2,870, keep in mind. You would still buy this for 500k?  

    0Reply
  • Michael Kotylo
    OP
    Southeast Michigan · Member since 2023 · 23 posts · 13 votes
    3y
    Quote from @Steve Vaughan:

    I feel the same as @Russell Brazil . Buying in equity markets adjusts expectations as does buying in a low inventory,  mostly sellers market. Most have to find and create deals off-market. 

    An equity capture .5% deal for me is a go as long as my discount is 12%+. Smalls are balance sheet buys.  Multis for cash-flow.  

    You mentioned ARV, but not how much rehab to get there so the term is worthless. What is the comped FMV? How much below market value are you buying at?

    Lastly, have your offers appear they came from your calculator.  $280,000 has way too many zeroes.   Try $281,740 or something in the future @Michael Kotylo 

    The discount I was aiming for was almost exactly 12%. It made sense, there.  Some great points! Going to use the "less zeroes" tip for my next offer. Thanks for your comment.

    0Reply
  • Russell BrazilBusiness Member
    Moderator
    Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
    3y
    Quote from @Michael Kotylo:
    Quote from @Russell Brazil:

    Ive been hearing people with the same complaints for the entire 20 years Ive been in real estate.  Year after year, decade by decade goes by and they keep not buying because they keep saying the numbers dont make sense....sellers want too much money...I cant cash flow enough.

    I keep buying year in and year out regardless of market conditions. You said the property would rent for $2500...Id pay $500k in my market for a property that rents for that in my market happily. 


     Expenses would be $2,870, keep in mind. You would still buy this for 500k?  


     Absolutely. Properties in my market rent on a monthly basis for 0.5% of the properties value. If I look for something other than that, it doesnt exist. 

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  • Steve Vaughan
    Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
    3y
    Quote from @Michael Kotylo:
    Quote from @Steve Vaughan:

    I feel the same as @Russell Brazil . Buying in equity markets adjusts expectations as does buying in a low inventory,  mostly sellers market. Most have to find and create deals off-market. 

    An equity capture .5% deal for me is a go as long as my discount is 12%+. Smalls are balance sheet buys.  Multis for cash-flow.  

    You mentioned ARV, but not how much rehab to get there so the term is worthless. What is the comped FMV? How much below market value are you buying at?

    Lastly, have your offers appear they came from your calculator.  $280,000 has way too many zeroes.   Try $281,740 or something in the future @Michael Kotylo 


    The discount I was aiming for was almost exactly 12%. It made sense, there.  Some great points! Thanks for your comment.

    You're welcome. 
    To be clear, I don't mean 12% below asking on the MLS. I see your offer should've been $281,600 in that case. Would've been better received at that since it looks like you put thought into it.

    I do 12+% below actual fmv belly to belly with off-market sellers.  Because there are no commissions, I'm halfway there and they are more open to getting creative.  I can get them 94% of 30 day net close and all they have to do is carry 12% (or 10 or 20) on another property I own.  Imagine a discount and creativity...

    1Reply
  • Michael Kotylo
    OP
    Southeast Michigan · Member since 2023 · 23 posts · 13 votes
    3y
    Quote from @Scott E.:

    Can't win if you don't play. This seller laughed at your $280k offer. But another seller with more motivation might have taken a $240k offer.

    Just keep going after them and making offers based on what makes sense for you, not based on what the property is listed for.


    Just keep going after them and making offers based on what makes sense for you, not based on what the property is listed for.

    This. Along with making offers look like they came from a calculator. Thanks for your comment! Helps to keep everything in perspective. 

    Just keep going after them and making offers based on what makes sense for you, not based on what the property is listed for.


    0Reply
  • Account Closed
    Columbus, OH · Member since 2023 · 427 posts · 254 votes
    3y

    Many sellers are leveraging the market to get top dollar. Depending on property/location, some deals are just not for investors, rather families who will pay premiums. Stick to your numbers and get a deal done when the right one comes up. 

    4Reply
  • Chase Freund
    Real Estate Agent · Kansas City · Member since 2023 · 23 posts · 14 votes
    3y
    Quote from @Michael Kotylo:

    I made an offer this weekend on a property that was priced too high to make a profit. Listed for 320k, with rental comps around $2500/mo, which would cashflow negatively ~$500/mo, no thanks! ARV was 400k on this and it was a 1972 time capsule. I offered $280k and everyone acted like I was stealing out of the collection plate at church. I didn't care, I'm not trying to please the world, I'm making a financial decision that will either reward or hinder me.

    My offer would have negatively cashflowed -$1/mo, however the appreciation and equity would have made up for no cashflow so I was comfortable at my offer price. I don't see how anyone was going to make money on this one, so it must have been owner occupants making emotional decisions. 

    Is anyone experiencing something similar?


     Hi Michael, 

    The MLS is experiencing low supply with a high demand which is driving the price up and making the numbers almost too tight for investors to work with. Not to mention someone usually pays well over ask now a days to lock up the property.


    I recommend finding an investment real estate agent in the market you are looking to invest in. These agents (like myself) will be able to provide off market deals at a much more affordable price than on the MLS. Plus these deals are usually bought at the listing price at the time you decide to buy the property, so there are no bidding wars that drive the property outside of profitable numbers. Reach out if you'd like to hear more on off market property vs MLS listed property.

    1Reply
  • Curtis Farnham
    New to Real Estate · Fallbrook, CA · Member since 2023 · 8 posts · 4 votes
    3y

    Hey, another software guy!! That's my bread-and-butter too. I've been reading the literature on REI intensely for the past few months, looking to get away from that. A few points:

    First, from all I see and hear, this is one of the toughest housing economies for cashflowing deals in a very long time. Many, many zipcodes all over the country are like this. I'm in southern California, and this was true even before Covid. I've been looking for months, and I can't find anything that will cashflow locally. It's making me strongly look at investing out-of-state.

    Second, not every seller will be interested in your offer, and you might need to adjust your expectations. Experienced investors I've heard from say that they only get 1 out of 10 offers accepted. 

    Third, how are you educating yourself on deal-finding? Are you reading books? There's a ton of literature on this subject. I love Audible.com because there's a huge number of relevant titles and I can listen while driving in the car or doing mundane stuff around the house. It's a great way to make better use of the time. For evaluating different deals, especially for BRRRR and buy-and-hold, look at Internal Rate of Return (IRR) calculations. I made a calculator for this in Excel, using BP's BRRRR calculator as my inspiration and to know what input parameters to factor in. IRR is excellent for understanding complex series of cash inflows and outflows over time. You probably want to aim for an IRR that's a fair amount better than simply sticking your money in the stock market. I'm aiming for 15% at a bare minimum.

    1Reply
  • Quincy Lockett
    South Holland, IL · Member since 2017 · 376 posts · 432 votes
    3y

    @Russell Brazil

    THANK YOU!!!!!

    0Reply
  • Michael Kotylo
    OP
    Southeast Michigan · Member since 2023 · 23 posts · 13 votes
    3y
    Quote from @Curtis Farnham:

    Hey, another software guy!! That's my bread-and-butter too. I've been reading the literature on REI intensely for the past few months, looking to get away from that. A few points:

    First, from all I see and hear, this is one of the toughest housing economies for cashflowing deals in a very long time. Many, many zipcodes all over the country are like this. I'm in southern California, and this was true even before Covid. I've been looking for months, and I can't find anything that will cashflow locally. It's making me strongly look at investing out-of-state.

    Second, not every seller will be interested in your offer, and you might need to adjust your expectations. Experienced investors I've heard from say that they only get 1 out of 10 offers accepted. 

    Third, how are you educating yourself on deal-finding? Are you reading books? There's a ton of literature on this subject. I love Audible.com because there's a huge number of relevant titles and I can listen while driving in the car or doing mundane stuff around the house. It's a great way to make better use of the time. For evaluating different deals, especially for BRRRR and buy-and-hold, look at Internal Rate of Return (IRR) calculations. I made a calculator for this in Excel, using BP's BRRRR calculator as my inspiration and to know what input parameters to factor in. IRR is excellent for understanding complex series of cash inflows and outflows over time. You probably want to aim for an IRR that's a fair amount better than simply sticking your money in the stock market. I'm aiming for 15% at a bare minimum.

    Probably reading too much, also! I read the BRRRR book and I'm currently re-reading The book on investing with low and no money down. I've been tuned into this subject for years. I think I'm close to actually getting my first deal. I'm okay with it not cashflowing for the first year, as I plan to live in it while rehabbing in that first year. After that I want to rent it out and move on, so if it doesn't cash flow for 5 years at the current rental rate, that's a deal breaker. I've heard from some investors not to account for Capex, maintenance, and vacancy, and that's insane. I always factor those percentages into my numbers. 

    I'd be interested to chat more with you about what you're looking for in your first deal, feel free to DM me.
    0Reply
  • Craig Janet
    Member since 2019 · 223 posts · 261 votes
    3y

    This seems to be a reoccurring post every couple of days. In most markets the price of homes and expenses have outpaced the increases in rent. This is making deals very hard to find. The increase in interest rates is also making other investments like bonds and CDs more attractive.

    3Reply
  • V.G JasonPro Member
    Investor · Member since 2022 · 3k+ posts · 3k+ votes
    3y

    What happens when interest rates go down?

    When will inventory rise?

    What's the cost to build next door an equivalent property?

    What's the alternative investment wise?

    0Reply
  • Curtis Farnham
    New to Real Estate · Fallbrook, CA · Member since 2023 · 8 posts · 4 votes
    3y

    Yay for house hacking! Sounds like you're doing good as far as education goes. I'll DM you to connect more.

    Agreed, ignoring capex, maintenance, and vacancy doesn't sound like a recipe for success. Were those investors going for appreciation rather than cashflow? I've thought long and hard about this tradeoff, due to the area I live in. That's what has kept me from putting in any offers. While the IRR would be decent on the couple of local properties I nearly offered on (assuming my assumptions would hold over time), it would mean being underwater for all-in cashflow by anywhere from $800-$1600/month in the beginning, and taking 5-10 years to turn positive. While my monthly cashflow from my employer is more than enough to cover this, I can't scale up like that.

    The factor that breaks this appreciation-vs-cashflow debate is ask this: Why does it have to be one or the other? Why not both? It might take investing outside of one's local area, but there are markets even in the current economy that have both.

    0Reply
  • Simon W.Business Member
    Real Estate Consultant · Lehigh Valley PA & New York City · Member since 2013 · 1k+ posts · 668 votes
    3y
    Quote from @Michael Kotylo:
    Quote from @Russell Brazil:

    Ive been hearing people with the same complaints for the entire 20 years Ive been in real estate.  Year after year, decade by decade goes by and they keep not buying because they keep saying the numbers dont make sense....sellers want too much money...I cant cash flow enough.

    I keep buying year in and year out regardless of market conditions. You said the property would rent for $2500...Id pay $500k in my market for a property that rents for that in my market happily. 

    Thanks for your comment. Expenses would be $2,870, keep in mind. You would still buy this for 500k?  


    How are you coming up with this number?

    $2500/mo rent but expenses would be more? How?

    What is the amount are you financing?

    Your numbers aren't making sense.

    How many units are in this property? You plan to live in one, did you account that you might have to "pay" rent and that's why your cash flow is so negative?

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  • Andrew SyriosPro Member
    Moderator
    Residential Real Estate Investor · Kansas City, MO · Member since 2014 · 10k+ posts · 5k+ votes
    3y

    It's very difficult to find good deals on the MLS. Back when there were tons of REOs it wasn't so hard. And it's still possible, but quite rare these days

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  • Michael Kotylo
    OP
    Southeast Michigan · Member since 2023 · 23 posts · 13 votes
    3y
    Quote from @Craig Janet:

    This seems to be a reoccurring post every couple of days. In most markets the price of homes and expenses have outpaced the increases in rent. This is making deals very hard to find. The increase in interest rates is also making other investments like bonds and CDs more attractive.


    Don't forget HYSA (High yield savings accounts) I know many people earning +$500/mo from these. This post was not meant as a complaint, I'm just looking for other views and perspectives. Perhaps a small amount of venting, but you all have been really helpful. Especially the idea to play with the numbers of the offer a bit, I'll incorporate that into the next offer. Also reaffirming to always run your numbers and offer what makes sense to you. I don't think it's impossible to get a deal, but it's a numbers game. I've made 3 offers so far, and attempted contacting one off market lead. I'll just keep making offers until something lands. Thanks again, everyone!

    1Reply
  • Michael Kotylo
    OP
    Southeast Michigan · Member since 2023 · 23 posts · 13 votes
    3y
    Quote from @Simon W.:
    Quote from @Michael Kotylo:
    Quote from @Russell Brazil:

    Ive been hearing people with the same complaints for the entire 20 years Ive been in real estate.  Year after year, decade by decade goes by and they keep not buying because they keep saying the numbers dont make sense....sellers want too much money...I cant cash flow enough.

    I keep buying year in and year out regardless of market conditions. You said the property would rent for $2500...Id pay $500k in my market for a property that rents for that in my market happily. 

    Thanks for your comment. Expenses would be $2,870, keep in mind. You would still buy this for 500k?  


    How are you coming up with this number?

    $2500/mo rent but expenses would be more? How?

    What is the amount are you financing?

    Your numbers aren't making sense.

    How many units are in this property? You plan to live in one, did you account that you might have to "pay" rent and that's why your cash flow is so negative?

    This is at 280k, with 5% down conventional. 5% down because I want to preserve capital.
    SFH, not multi-unit.
    0Reply
  • Simon W.Business Member
    Real Estate Consultant · Lehigh Valley PA & New York City · Member since 2013 · 1k+ posts · 668 votes
    3y

    Mortgage shouldn't count towards your expense.

    You aren't cash flowing because your down payment is too low and you are going to get hit with mortgage insurance.

    Income $2500/mo or $30,000/year

    Expenses $584+$75+$397 = $1056/month or $12,672/year

    Net Profit $17,328.

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  • Mike Dymski
    Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
    3y
    Quote from @Michael Kotylo:

    This is not a market problem, it's a deal flow problem.  Make 100 offers.  Real estate investing should be called "real estate sourcing".  Keep at it and good luck!

    4Reply
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