Made My First Offer!......And Got Laughed At :( (With Numbers)

46 Replies

Hello all,

My name is Franky Davis and I am relatively new to real estate investing and a newish member to BiggerPockets. Let me start with a little about me. I'm currently an orthopedic surgery resident (year 3 of 5) and have had an interest in the small business world and real estate as long as I can remember. I had a landscaping business in college, have dabbled with multiple online business opportunities throughout my educational career, and have continued to read and read about real estate investing. However, medicine was a big draw to my humanitarian side and would provide me with some job security. 

Over the past year, my interest has really peaked. I have listened to 80+ episodes of the podcast, read multiple books, and begun scanning my local market of Chattanooga, TN for deals that would be possible for my wife and I (Special Ed Teacher). This has been a tough search due to our financial situation with my student loan burden and relatively low resident salary. However, I have stayed persistent and some non traditional financing options have gradually presented themselves.

Recently, I came across a deal that I thought had some potential. It was a subtle craigslist post in my local market for "A 4 Duplex Package Deal". This was originally listed at $275,000. I thought, "Hmm...that sounds interesting". Upon further investigation, I discovered that these were currently 100% occupied, C-class properties near the downtown Chattanooga area in C class neighborhoods. "Ok, let's see who's listing them." 

I figured this would be another local agent listing for a big investor that was trying to dump the properties for cash to move into larger commercial investments. However, when I reached out, it was a personal seller. I thought, "Perfect, this will give me some wiggle room to make a deal!" So, I reached out. After several hours, a very nice, early 60's engineer responded. I thanked him for the response and began a general inquiry about the properties. He said he purchased them in 2012-2013, and they stayed rented. 7 of the units rented for $450 and the 8th rented for $375. He had data on the taxes and insurance. But, he didn't have alot of information on the major cap ex info like roof age, HVAC, etc. Regardless, I pushed on.

My next move was to figure out what this guys motivation was. I asked him what he owed or if they were paid in full. He responded quickly that he had paid cash and owed nothing. "Sweet!" I thought. "This'll definitely give me some room to work". He said he was hoping to retire and move to Florida where he owned a condo with his wife. So, he was just testing the market to see if he could make a sale. "That is my window!" I thought. 

So I gently proposed some seller financing. He said he preferred cash but would be open. I began to try to harness some of my "how to win friends and influence people" dogma and told him that I could possibly provide him with a completely passive income stream that would allow him to move to Florida without any of the active burden that landlording required. Upon hearing that, he said "Propose your deal and I will consider it". I couldn't believe it! So I got to work.

Over the next 4-6 hours, I began researching comps as well as comp rents. My offer was no money down (I know not ideal), 6% interest rate, 30 year amortization with a 5 year balloon. The tentative numbers are as follows.

So, my goals were to attain between the 1.5% and the 2% rule. This property was listed at $275,000 (1.29%). Also, when calculating my expenses using the 50% rule, that gave me $1775 to cover my debt service ($1229.08). So, my decision to come in low was for multiple reasons: 1) These were C properties in C neighborhoods. 2) There was definitely a lack of maintenance based on the pictures and the google street views. 3) These rent rolls/expenses were a pro forma so I couldn't guarantee that they were on the mark. Therefore, I came in at $205,000 with a 5 year balloon at 6%. 

And as the TITLE SAYS!!!! He didn't even consider it for a second. So, I tucked my tail pretty ashamed and have been re-evaluating my numbers ever since. I tried to calculate everything conservatively and make an offer that was low hoping he would counter and still leave me with some wiggle room to make money. However, I definitely feel as if I overestimated his motivation and desire to move to Florida. I thought maybe this deal would feel like his ticket out. And lastly, I may have given too much importance to the above stated "Rules" that I've learned about. However, I think my offer definitely would've set me up very well to start my real estate journey. Plus, I think it would've provided me with an opportunity to really improve these properties for these people living there. And, possibly, raise the rent if the properties deserved it. 

So in closing, I'm excited to have submitted my first offer! I've been blown away by the quality of this forum and the quality of the podcasts. I would love to hear from you more seasoned folks as to how I could've handled this better. I am still running the numbers in my head and may reach back out to him after this has cooled off a little bit. I can't wait to get some feedback. 

Cheers from my family of 3 in Chattanooga!

Franky Davis

@Franky Davis Great job making that first offer, that’s awesome! If you’re not getting laughed at and occasionally cussed at, your leaving money on the table! 😁 Some of my best deals have been crazy low ball offers and they’ve been accepted. I once bought a house for 11k which I rent out for $850/month! Keep making offers!!

 Chattanooga is really strong right now. It is a seller's market, so there is no reason for the seller to take below full price. You need to either revise your offer, or go find something else. Good deals are hard to find in this market.

@Franky Davis What was his exact reaction? What part did he not like? Overall price, no down payment (which is a tough sell), percentage, balloon term, amortization? And is it a dead deal? Sure seems like a little coffee and bantering about some numbers could be good. You appear to have some room to move up a bit. Maybe invite him to coffee in a week? Nothing ventured, nothing gained.

Hey Franky!

Congratulations for taking the time to educate yourself and then follow up with action! :) 

I wouldn't sweat it. The seller told you flat out he's not motivated to sell, he is "testing the market." It's good that you had the opportunity to speak directly to the seller, just make sure you're listening to what they have to say. It seems like you were so eager to make an offer and get a deal that you overlooked the seller's motivations. The instructors I follow generally advise you to ask the seller who has just denied your offer to invite them to counter. "Ok, you won't accept this offer. What will you do?" That puts the ball in their court. They will tell you if they're motivated to make some kind of deal or not. 

And don't worry too much if this particular seller is a stickler, there will be plenty more opportunity where that came from. Keep making offers and negotiating in good faith and you will get one accepted. The market is still fairly hot in most areas from what I can tell so creative deals may be harder to come by when so many people are flush with cash. But be persistent.

(Also your image of the numbers isn't showing up for me, but you seem smart and you clearly did your homework) 

Best of luck to you! 

Agree with @Anthony Dooley - you've got to read the market first before trying to read the seller.  The southeast in general is still very much a sellers market.  Expecting him to drop 70k off asking price, in this market, will likely be viewed quite poorly.  In addition, at that low of an offer, he likely won't return your phone calls if you want to negotiate further.  That said, don't let that deter you from future offers on properties - but definitely get a feel for the market first, and then do your assessment on the seller and property.  

Your numbers are right.  They always are, and always will be, because they are based on what you need.  Getting the property is not what's important.  What's important, and always will be, is getting the deal...big difference.

Your numbers are based on getting the deal.

Redo your numbers would be based on getting the property.

Sometimes the best deals you make are the properties you don't get.

Don't negotiate against yourself.

Don't be embarrassed! Of course, that's easy to say I'm intimidated and slightly embarrassed with every offer.   I've made 8 offers in the last month. I've used two realtors to help me. 7 offers were declined and 1 was accepted. Now I have to close, cross your fingers. 

Stick with your numbers. The price their selling it for isn't necessarily what the property is worth. It may be worth more, less, or right on the mark. Offer what the property is worth to you unless they're asking less!

I do not look at the 1% or 2% rules. I look at the ROI, CAP rate, and my cash flow. I am using equity form another property and the seller is paying my closing costs. My ROI, in this case, will technically amazing. I still have to make sure the property has a nice CAP rate and cash flow, I do not want to use the equity of another property and miss an opportunity down the road.

I really appreciate all of the positive feedback. I think I ran the numbers well and maybe was a little bit too conservative but that's ok. I'm going to let some time pass and perhaps reach back out to him in several weeks to see if there is any more discussion to be had. Here is an updated image of the financials (tentative). Sorry for the initial post not showing up.

Good work. As @Joe Villeneuve and others say, getting a "no" doesn't mean that you made a mistake. It just means that your needs and theirs do not match up. Other people who have more experience with rehabs may make more aggressive offers than I do. That's fine. I just have to make enough offers that someone says "yes."

If you have never owned a rental to start out with renters that only pay 375 to 450 a month is a huge risk.. that's the bottom of the tenant pool.. and very tough to manage tons of turn over tons of drama.

I would not recommend this type of property for a first investment. 

regardless of your negotiations with the seller … no money down low ball for a performing property rarely if ever works.. works if half were vacant or something or burnt out landlord.. but hey you tried.. 

@Franky Davis congrats one pulling the trigger. I think you didn't ask enough questions. IMO you need to find out what he really wants. It sounds like he is open to receiving monthly payments. So ask him what he wants. Or.... Just offer him full price but make the terms work for you and real simple. I would offer him 1k a month until the full price is paid. If that works for him, then that works for you. He gets his full price (feeds ego) and you get some meat on the bone for you.

Brian that is a very interesting idea. I’ll definitely pick his brain for that. His response was that my offer was $100k too low for seller financing which I think was interesting. I’ll reach back out to him and see if there are any other options.

to pay over market just because you get zero down owner finance for C class is a HUGE mistake.

Yea I wouldn’t do that. I think rekindling a conversation wouldn’t be a bad idea at some point. Who knows...maybe he wants to retire to Florida more than he realizes.

I was a bit shocked at how low a price you offered when I got to it, but that's just me. I usually come in at about 91%  of reasonable asking price for SF. But I like solid B assets and hoods.

Either way, there were way too many zeros in your price. At least make the offer look like you did a detailed analysis and it came from your calculator. Especially since you did!

First off I think you did things right.  I always low ball offer properties.  Sometimes it works sometimes not.  I have bought three properties in the last two years for a total investment of $65000.  Now I was able to command a better price because I paid in cash and all three were desperate to sell.  The three properties include a 2br, 1.5 bath condo in an A+ neighborhood, a duplex and a single family home in a C neighborhood.

Originally posted by @Bill Pate :

First off I think you did things right.  I always low ball offer properties.  Sometimes it works sometimes not.  I have bought three properties in the last two years for a total investment of $65000.  Now I was able to command a better price because I paid in cash and all three were desperate to sell.  The three properties include a 2br, 1.5 bath condo in an A+ neighborhood, a duplex and a single family home in a C neighborhood.

 got to love OHIO.. your paying what we use for Earnest money deposits and you get a whole house  LOL

@Jay Hinrichs yeah I realized what a buying opportunity it was when we tried to sell.  I told my wife I was going to flip the situation around and start buying because we can't be the only people in this situation.  Of the seven properties we bought strictly as a rental the most I paid for one is $28k and the least was $13k.  We live near Cleveland, so it's one of the cheapest markets in the country.  The job market here for non-skilled workers isn't the greatest.  If you're a skilled worker though it's great.  We have three condos, four single family homes, and a duplex.

If you're looking for seller financing, and you can make a deal happen with ZERO out of your pocket and STILL be cash flow positive, why wouldn't you?  Even if you're only making $1 per month, you're owning an appreciating asset at zero cost (tenants paying on your behalf).

Now Jay made a valid point about this probably being a tough one from a management perspective (difficult tenants likely) BUT if its your first property and you're looking to learn from it, and its close enough for you to self manage easily... I say raise the price and make the deal work.  

Just make sure you're prepared to handle repairs and a new roof wont cause you to break the bank.

I know this forum pushes 1000 low balls to find the needle in the haystack and if thats your thing more power to you.  I'm perfectly happy to pay full ask when full ask is reasonable AND that leaves me with the numbers i'm happy with for the value add I can create.  I liked @Brian Cardwell s idea.  It sounds like he's focused on monthly cash flow AND the selling price.  Maybe get creative and offer $1000 / month for 300 months with no interest.  You'd actually be saving money with the interest AND he might feel like he's getting a great deal at 300k.

Yep that is what I was saying . I just wouldn't mention anything about the interest. Don't make an issue if it's not there already.

you're asking for basically a conventional loan status without the hassle of getting. 30 year amorts with no skin in the game? you have to think about it from his point of view. if you default, he gets back a property he doesn't want and misses out on all that rental cashflow  and instead gets some measly little 30 year payments. and he's already in his 60s, you're not considering that he probably would want a lump payment in his age vs. an annuity.

most investors who do seller financing don't do it for a long term, they do it so that the buyer can refinance from a bigger institution.

Put more down, do a 3-5 year loan on a 25-30 year amort and you'll probably have a better chance

Originally posted by @Mike V. :

If you're looking for seller financing, and you can make a deal happen with ZERO out of your pocket and STILL be cash flow positive, why wouldn't you?  Even if you're only making $1 per month, you're owning an appreciating asset at zero cost (tenants paying on your behalf).

Now Jay made a valid point about this probably being a tough one from a management perspective (difficult tenants likely) BUT if its your first property and you're looking to learn from it, and its close enough for you to self manage easily... I say raise the price and make the deal work.  

Just make sure you're prepared to handle repairs and a new roof wont cause you to break the bank.

I know this forum pushes 1000 low balls to find the needle in the haystack and if thats your thing more power to you.  I'm perfectly happy to pay full ask when full ask is reasonable AND that leaves me with the numbers i'm happy with for the value add I can create.  I liked @Brian Cardwell s idea.  It sounds like he's focused on monthly cash flow AND the selling price.  Maybe get creative and offer $1000 / month for 300 months with no interest.  You'd actually be saving money with the interest AND he might feel like he's getting a great deal at 300k.

 Mike ONLY way these types of properties go up in value is if your lucky enough to buy in path of progress and they regentrify or rents go up substantially the locals will only buy them at the 2% rule or there abouts.. there is no up side and cap ex will kill this deal.. you simply cant buy these kind of assets with no positive cash flow you will go negative in a hurry.. 

Originally posted by @Franky Davis :

Yea I wouldn’t do that. I think rekindling a conversation wouldn’t be a bad idea at some point. Who knows...maybe he wants to retire to Florida more than he realizes.

 His motivation might go higher after the first cold snap...just saying.