Making an Offer - How much?

Question

Scenario - Orange County Condo selling for $340k. Worth probably $380k-$400k
Short sale.
Motivated seller
VERY desirable neighborhood

How much in percentage do you normally offer?
Like 5% lower? 10%?

Does $315k sound reasonable in the time of market we are in? This is my first purchase ever. I'm just a little nervous and I want to price myself right.

Jon Holdman · Answer

Yes, its a lot.  Yes, that's reality.  Yes, you might be lucky some years and do better.  But, you may do worse some years. It doesn't take much, like a major HOA assessment or tenant damage to amount to thousands of dollars.   Or a tenant that stops paying and takes six months to evict. Then the $200/month loss is $1000/month.  Yes, HOA dues are a piece of that 50%.

Please do some searching and reading on "50% rule".

Jon

RICARDO RUIZ · Answer

will do....thanks

RICARDO RUIZ · Answer

Is this where renting a condo has some + since usually home owners association dues pays for this ?  Well I guess this makes it much more difficult to get cash flow doesn't it :crying:  .... Especially here in Southern California..  8)   .....Actuually fifty percent sounds like alot....That means that ,for example, on a rental that brings in 1500 per months that 750 of that should be set aside for expenses ?

Jon Holdman · Answer

Yep, Adam is correct. On average, half the rent you collect will go to expenses.  Some may get paid every month, like taxes and insurance that are included with your mortgage payment, maybe some utilities if some remain in the owners name.  Some are pretty frequent, but perhaps not every month.  Routine maintenance, landscaping, snow removal, rent collection, bookkeeping, pest control.  Some are occasional but larger. Vacancies, make ready between tenants, advertising and screening to fill the vacancy.  Taxes and Insurance can be like this if you pay them yourself.  These will happen, so you better plan for them.  Then, there are the real killers.  New roof, furnace, drain line, eviction, major tenant damage, or any number of large, unpredictable expenses.  If you own one rental for a few years, you may avoid all of these.  You, you might get hit with two or three.  If you own 10 rentals for many years, you'll hit one of them pretty frequently.

None of that's to say rentals are bad.  They're just going to be painful if you think the T&I included in your mortgage payment is the total of your expenses.

Jon

Adam Anderson · Answer

No one month's rent per month. Most months you will not have that many expenses, but throw in one new roof, new carpet, or one of the many other things can go wrong and you can see how the average per month can go up pretty quick. Take your monthly rent multiply by %50.  Subtract out your mortgage payment and that is the cash flow you will have a month.  The %50 s taking into account turnover, repairs, maintenance, legal fees, management fees, and many other things I am sure I am forgetting. This is only a guide, it could be more and could be less but most people under estimate their expenses. Do a search for the %50 rule and you will see many posts on this.

RICARDO RUIZ · Answer

Sorry to go off topic but I have a question

O.k I'm new to all this so please forgive the newby question....I followed Wheatie until he to to usual expense rule...  How do you come up with usual expensed = 50 %.  Fifty percent of what ? One months rent per year ?

N/A N/A · Answer

Jon-
Well put, I couldn't agree more.  The voice of reason can be disappointing but hopefully you will save Serenity from some major frustration in the future.

Jon Holdman · Answer

Hmmm.  What rent do you expect?  At $315,000 and 20% down, I would expect your P&I payment to be $1600.  With the usual expenses = 50% of rent rule of thumb, you would need rent of $2800/month to be at a $200/month loss.  I'm guessing you expected rent is less than that.

Honestly, I would never invest today assuming long term appreciation.  Especially in California, where you've seen huge runups.  My guess is this would have been worth $150K (or less) in 1999.  If I were going to try to buy it, I'd figure 3% inflation to the $150K number and only buy if I could get it for about $187K. I may be totally wrong, but I predict this will be worth $200K at some point in the next five years.

Jon

Jon Holdman · Answer

What are you going to do with it?  How are you paying for it?

Jon

Tom Wood · Answer

Your offer will depend on your exit strategy.  What are you going to do with it?  For example, if you are going to flip it, you need holding costs, repair (if any), etc.  You should make offers based on your criteria and not try and figure out what they will take.