Getting my ducks in a row for my first deal!

16 Replies

All the hype on where to make the most money and find the best deals seems to be you have to find them off market. This being said, I have been trying just about every option possible outside the MLS to find a duplex up to a quadplex in the Pittsburgh area for me to house hack for my first deal.

Turns out I may of found the perfect property for me. Stumbled upon a duplex that is very dated but over all in good shape, and owned by an older widow who is getting tired of dealing with the turn over of tenants and is strongly considering selling within the next couple months. 

I communicate with her often, and after her showing me the property she wanted me to make her an offer...as this is my first deal and the first rule of negotiating is never make the first offer, I replied I needed to do a little more research and asked her if she had any idea what she was looking to get out of the property. Clearly she knows the first rule as well, because she said she had a range in mind but wanted to know what my research showed first...

This is where I'm stuck at, since it is off market as well as being my first deal, do I need to bring an agent on board?? What about inspections/appraisals? Since I plan on living in the one unit for a while do I still apply the 50% rule or the 2% rule when running numbers? I have contractors in my family as well as me being a Civil Engineer myself, so my plan for financing would be an FHA 203K loan, renovate/modernize the 3 bedroom/1 bath asap so I can get it turned over and get it rented, then live in the 1 bedroom/1 bath and renovate that myself while I live there.

I have already been pre-approved for a conventional mortgage, but this was back in my rookie days when I was looking on the sites like Zillow for multifamily properties. So my next step is to talk to banks about the 203k loan now, but will they make me get an agent regardless? Are there any steps I'm missing? As I said I'm working on getting my ducks in a row with trying to minimize all mistakes with my first deal, so any advice helps!

Thanks!

Derrick

Hello @Derrick Lubomski and welcome to BP. BP is a great place to start for new real estate investors. It has everything you need. Not only can you network with other investors, you can also watch, learn and listen by watching the free online educational videos, listening to BP's podcast in itunes, and learning by taking the free courses in BP. You came to the right place.

You need to run the numbers first to make sure it will cash flow. Do this at different purchase prices and see how it effects your numbers and then you'll know what you're comfortable paying. Definitely look at comps also because as you know prices differ greatly around Pittsburgh depending on the area. Don't over pay and don't be afraid to start low on your offer. Good luck!

@Derrick Lubomski You would be wise to have someone on your side, such as an agent, especially on your first deal. They can in turn help you with all of your questions you have asked in this forum. Thanks, Gary

Like @Bill E. said, you do need to run the numbers to see if cash flow suits you. Also you need comps to come up with some number of value. Really the comps come first and then the cash flow. Some neighborhoods don't cash flow well, but that doesn't mean the property isn't worth what the comps say.

From there share the numbers with the seller, making adjustments for condition. Then when it comes to offers I would offer the full amount on terms or a discount amount in cash.

@Derrick Lubomski , you are absolutely on the right track! House-hacking is an excellent way to get into the game of real estate. I agree, Pittsburgh is HIGHLY competitive when it comes to regular MLS listed properties, so off-market deals (although hard to come by) are hugely important when you want a good return on your investment.

To get back to your questions, I would say it is not totally necessary to have an agent in this situation. Although it may be helpful to have one to ask about that specific market (aka run the comps to see what the ARV of your prospective property would be) other than that and helping you get the paperwork settled in closing the deal (which title companies will handle), they will not be hugely of value to you. Keep in mind, that an agent when you are a buyer will get paid from the seller, not from you. In that respect, it would make sense having one to walk you through the process of your first deal because you are not necessarily paying for one out of your pocket.

In terms of financing, I would try for the 203K loan first due to the low interest rate, yet banks make it tough to get approve nowadays and need to know literally everything about you in order to get approved. I'd give it a shot first, but if that doesn't work I'd try a hard money lender to finance your deal and rehab cost and then refinance out with a traditional bank loan after it is rented.

Anyways, I wish you the best of luck with your first deal! If you decide to jump back into buying more property I actually source off-market deals for investors in the Pittsburgh market now, so I'd love to open up the floor for a conversation to see if I could help. Shoot me a private message here on BP if you're interested in learning more.

Best,

Darren

@Bill E. @Jay Belcher Thanks for the input guys. I have been using the Bigger Pockets calculator and have an idea what I would like to pay for it. However when running comps what I want to pay is a lot lower then what I've seen 4/2 houses going for in the area. I know come in low with my offer, but I'm afraid it may insult the owner and turn her away, then again you never know until you try. 

Ideally my game plan is to acquire this duplex, renovate it, rent the 3 bedroom then live in the 1 bedroom for years to come, since I would then have the experience of this one under my belt as well as some equity built, I would use that as leverage to private lenders and start using the BRRR technique to acquire more properties. So since I intend to live in this one for a while, do I count what I could be getting in rent for my unit towards the numbers? If so, my monthly rent would be around 1.2% of what my max I would like to pay for this property would be. Making this a good investment?

Some subscribe to the kick the seller with a super low offer concept and it can work but it will also piss off some people. I understand why people do it, but I prefer to say "Hey here's what the comps are showing, and I can pay that under the right terms. But if you need all cash it's got to be substantially lower. I'm an investor and I don't pay retail."

I would count the fair market rent of your part of the duplex in the evaluation. The 1.2% thing could make it a good deal or not. Those kind of evaluations are very neighborhood specific - you can get 2% some places - even more. Other factors to consider:  is it desirable to renters, how much maintenance will be needed, how much cash out of pocket are you, and on and on.

@Darren Mancuso Thanks for the reply, and you are right when it comes to being a hard task when it comes to finding off market deals in the area so I believe I truly lucked out with this one. 

Your points on having an agent walk me through the process are why I was considering acquiring one, though I'm not sure the seller will be thrilled if she has to pay the agents commission and realize she could just list it and potentially get more for the property. 

I'd definitely be interested in learning about some of the properties you have in Pittsburgh though, shooting you a pm now!

Originally posted by @Derrick Lubomski :

@Bill E. @Jay Belcher Thanks for the input guys. I have been using the Bigger Pockets calculator and have an idea what I would like to pay for it. However when running comps what I want to pay is a lot lower then what I've seen 4/2 houses going for in the area. I know come in low with my offer, but I'm afraid it may insult the owner and turn her away, then again you never know until you try. 

Ideally my game plan is to acquire this duplex, renovate it, rent the 3 bedroom then live in the 1 bedroom for years to come, since I would then have the experience of this one under my belt as well as some equity built, I would use that as leverage to private lenders and start using the BRRR technique to acquire more properties. So since I intend to live in this one for a while, do I count what I could be getting in rent for my unit towards the numbers? If so, my monthly rent would be around 1.2% of what my max I would like to pay for this property would be. Making this a good investment?

 Hey Derrick,

Awesome to see you up and chasing deals down. You'll never know if it's a low offer to the seller until you've fully understood them. What's it worth to them? Did she take pride in her house when you were looking around with her? Was it the house that her and her late husband bought together? There's no right or wrong because she could have some emotion tied to this house but you don't, you're in it to make the numbers work and if it doesn't you're not buying it.

Now when it comes down to the numbers I wouldn't like a duplex only performing 1.2% if both units were considered. I'm not familiar with the Pittsburgh market but, a SFH in a pretty nice area I invest in, I can do about 1.4%-1.6% with a light rehab included with my purchase price (not at the point where I can buy houses that need gut rehabs). My expectation for a Residential Multi would be closer to 2% especially in your case because you'll have about 75% of the actual performance for a while if you live in it. Proportionally that sounds like it would only do about 0.9% just renting out the 3/1, if you didn't account for the rehab cost in that denominator you'll be at an even lower %. You could also factor in the amount of rent you'd have to pay if you didn't buy the duplex too..but, again it really all boils down to what your goals are.

Good luck in the deal! Hope you'll find the answer you're looking for in BP.

@Derrick Lubomski , you have done the hard part and the most important part and that is finding the property.  You don't need an agent and you don't want one.  Here is why.  

1. If you bring in an agent it will cost YOU! A minimum of 3%. Now inexperience people on this board will tell you that the seller pays the fee.....you don't. Hogwash! If I find a property on the MLS and I don't have a realtor, I negotiate 3% off the sale price from the get go. No one is hurt, realtor still gets their normal cut and seller gets what was expected. 3% less offer with only one realtor is like a full price offer. Money is money! Nothing is for FREE! Nothing. How about this, you give her an offer and you tell her I'm bringing in a realtor to represent me and you have to pay him/her 3%. That would piss me off but I would say no problem but I'm adding 3% to the price to sell to you. Now who paid for the realtor?????

2.  Bringing in a realtor may compound your issue.  Does the realtor tell your seller "your selling too low", is your realtor savvy enough to convince your seller it is in her interest to sell to you and at your price.  

3. Without a realtor your seller will feel like she is saving money and would be willing to work with you on price.  If that is not the case, she would go and get a realtor to sell her property.  She is not naive, she knows dealing direct will save in fees, but most like her don't realize that they could sell for more.  Off market deals generally benefit the buyer...take advantage of that, bringing in a realtor, even just one is a beginning to losing that advantage.

4.  I get it, a realtor gives you a peace of mind, especially on your first deal. It will cost you, no problem, but you seem to be a cut above, so go to some real estate meetings, search out a mentor in Pittsburg that has experience in duplex investing that can help walk you through the process. 

5.  Run your numbers, go look at rentals being advertised to see how they would compare to the one your buying.  You can use Zillow to run comps in the area on previous sales.  Go to open houses in the neighborhood and talk to the realtor showing the house.  Get info on what houses are selling for

or

Go get you a realtor and pay 3% more or possibly lose the deal.......Your choice.  BTW my expertise is in duplex investing, I'm not a realtor, and I have no conflict of interest in telling you this.  I would especially expect a Pittsburg realtor to tell you to use a realtor, its what they do, it is in their best interest that you use one.  

Remember you did the hardest part of investing.........finding the deal!  Now do research, research, research and if the numbers work do it.   

BTW my father grew up in Turtle Creek just outside Pittsburg.  He joined the military and ended up in Texas where I live now.  Still have relatives back there, and I think Pittsburg is a great area with good value in real estate.

@Lionel Li Thanks for the input. The Pittsburgh market is full of many different neighborhoods, some have hit their peak from what I've seen in property values, and some seem to be steadily increasing as they become the "next hip spot" to live. This particular duplex is in one of the next up and coming neighborhoods, and have seen property values increase almost 10% in the past year. Now from just listening to pod cast I don't intend to count on appreciation in my numbers because it's never a guarantee, especially if we are approaching the peak of the bubble, but if I figure what my max mortgage would be including rehab cost, I would roughly break even on what I could charge for rent for the 3 bedroom. So I would live there for free, but all expenses/taxes would come out of my pocket. For being 25 I'm in a decent financial position with my engineering position, so this sounds like a great idea to me. However this is also my first deal and I am a little emotionally attached to the property now because it has a yard and a garage for me to store all my tools and toys. Should I be looking for something that'll do better then 1.2%? It can definitely be possible, however just may not be a house that I personally would want to live in for years to come. Thanks!

@Joe Scaparra All great points, this is exactly why I had turned to bigger pockets. I didn't even think about bringing up the idea of saving 3% to the seller, which I can definitely see as being a strong negotiating point. 

I have ran some comps, as well as I have a friend who works in property management and just acquired their real estate license so he ran a few comps for me as well so I have a decent idea of what I want to pay now. Just need to talk to a few banks for and and get preapproved to get this process rolling!

@Derrick Lubomski , all the above points are great ones.  It needs to cash flow in order for it to be a great investment.  An agent will cost money, but of course it won't cost you anything, it will cost the seller at closing unless the structure the deal for the buyer to pay agent's fees.  There are tons of young agents on this website that would love to build a relationship with an up and coming investor.  Reach out to a couple for assistance only.  There are plenty that would love to help out.

I think one thing you should consider that hasn't been mentioned is the emotion that will accompany the deal.  There is emotion on your part which you have already alluded to.  There will also be emotion on the seller's part.  She does not want to be taken advantage of.  You are absolutely able to make a low offer based on condition etc.... but when you do make that offer explain to her exactly why you are at that price.  The physical upgrades, the rent return, etc....Additionally, offer to make her a part of the renovation process.  Tell her you will send her pictures of the progress, offer to allow her to tour the property when you are finished renovating, etc.... Just yesterday I was looking online at the first investment property I ever purchased, wondering what it looked like today.  

It sounds like you have a good dialogue with the seller and you don't want to ruin that, because that could kill the deal.  Just be open and honest throughout.  Good luck!!

Different mkts differnt numbers.  Dont get hung up to much on calculators.  You might get 5% rent rule in inner city Detroit for all i Know.....lol.

If its a deal go for the KILL shot.  Time is always of the essence in deals. While you learn the owner may learn she doesnt want to give it away....so to speak.......lol.

@Derrick Lubomski if you send me some details or PM me I can go over the property and within 5 minutes or so especially if you have pictures I can help you analyze it. Glad to help

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