Am I doing it wrong?

Question

I've been analyzing 10+ deals (SFR and Duplex) a day for about a month - mostly MLS, but I've also hooked up with a few of the wholesale firms in the area.  I've actually walked about 5 properties, but have only offered on 1... the offer was rejected.

I think I'm getting a pretty good idea of what it's going to take to get into a rental property, but like most of the BP community, I'm struggling to find a property that looks as though it will cash flow without putting more than 25% down (which isn't "true" cash flow).  I'm looking mostly at properties I can try to build equity into through rehab (hopefully to BRRRR).

Here are the details on the one I made an offer for:

Source: MLS 100+ days.  Property is vacant; Owner in a nursing home; kids trying to sell it

3 Beds, 2 baths, 1315 sqft

Original LP: 165k

Current LP: 155k

ARV: 170k+

Estimated Rehab: (moderate/high) $18/foot = 24k

It's in pretty rough shape.  It's very outdated; there's a garage conversion for half of a 2-car garage that was poorly executed; kitchen/bathrooms need new countertops, tubs, appliances; flooring basically throughout

Rents: 1300-1500 (trying to get to the higher end with my rehab==1450)

Monthly Expenses: 756

PM: 182

Taxes: 210

Vacancy: 112

Repairs/Maint: 70

CapEx: 70

Insurance: 112

Max Mortgage Payment: I used all these costs, with my hope to cash flow at least $100/month to back into what I should offer for the property (not considering CCR yet), with a 20% down payment.  This would allow me to have a maximum of a 90.7k note (offering 113k), so the P/I payment would be $544.

NOI: 1400-544-756 = $100/month

I offered 110k (which is roughly 75% of ARV-Rehab), and what I thought was pretty fair considering the work that would need to go into the rehab.  This would allow me to get into the property for a fair price, but also allow me to cash flow.  The offer was simply rejected.

From this analysis, do you guys think I'm doing something wrong or missing something, or am I following the right steps and just haven't found a good deal yet?

Joe Villeneuve · Answer

You're not doing a thing wrong...other than thinking you did something wrong.  Don't negotiate against yourself here.  The idea is the deal...not the property.  You ran your numbers in reverse (I'm impressed) to arrive at your max offer...and max mortgage (big thing many gloss over).  Don't rationalize (i.e..."maybe if..."), and raise  your offer to get the property.  You don't want the property...you want the DEAL.

The numbers don't lie.  Sometimes the best deal you make, are the ones you don't.

Account Closed · Answer

@Joe Villeneuve, @Adam Wright Thank you both for the words of encouragement!  Still working hard...

I am closing on a wholesale deal (my first deal) in the next couple of days!  I hope I don't screw things up.

Adam Wright · Answer

I don't think you did anything wrong.  It seemed to be a fair offer considering the rehab work.  I always tell my clients that you have to make deals where the numbers work and you don't know the seller's frame of mind until you make the offer.   In the current environment, which is slowly changing, you have to make an offer of 90% ARV for most sellers to consider it.  You should set your expectations that you will get rejected much more than accepted because of the seller's mindset that they will get what they want for the property.

We are seeing more and more sellers dropping their prices to find a buyer.  I personally think sellers will be more open to negotiation in the near future.  Just keep making offers based on your numbers and you will eventually get a property.  Good luck!