What should an offer be before it’s insulting

Starting Out
7yFollow

What should an offer be before it’s insulting

Cole Black
Rental Property Investor · Markdale Ontario · Member since 2019 · 94 posts · 12 votes

Ok so I listened to Brandon’s podcast on buying multi family houses. I was using the rental calculator having properties amortized over 30 years. My main goal is cash flow however most properties using the 50% were generating a negative cash flow of sometimes 100s of dollars. I see two options for increasing that “forgive me I am new” I can either send in a lower offer. The best deal I could find was $189,000 to generate a positive cash flow of say $150 I would have to offer around $150,000 or raise the rent that my tenants pay. What is the better option? Would I insult the seller offering $39,000 lower? Would I irritate my tenants raising the rent after they have been there a while. I am sure that I will have to spend many more nights looking for a deal that will be worth it I am just curious on what you guys and girls have to say!

1Reply
42 views

Most Popular Reply

Kris L.
San Antonio, TX · Member since 2019 · 930 posts · 836 votes
7y

It always depends.  Some sellers might be insulted at 150 offered on 189.  Oh well, then you don’t buy from them right now.  Perhaps if it sits at 189 for a few weeks, 150 will look better then.  Or maybe they will sell it to someone else for 175 or 180 before that happens, but it’s not something you can control.  Long story short, don’t pay more than the numbers that work for you.

12Reply
See this reply in the discussion

29 Replies

Jump to latestLatest
  • Kris L.
    San Antonio, TX · Member since 2019 · 930 posts · 836 votes
    7y

    It always depends.  Some sellers might be insulted at 150 offered on 189.  Oh well, then you don’t buy from them right now.  Perhaps if it sits at 189 for a few weeks, 150 will look better then.  Or maybe they will sell it to someone else for 175 or 180 before that happens, but it’s not something you can control.  Long story short, don’t pay more than the numbers that work for you.

    12Reply
  • Cole Black
    OP
    Rental Property Investor · Markdale Ontario · Member since 2019 · 94 posts · 12 votes
    7y

    @Kris L.

    Thanks for the reply Kris. That is a good point!

    0Reply
  • Karl B.
    Rental Property Investor · Erie, PA · Member since 2015 · 1k+ posts · 2k+ votes
    7y

    When I make offers I tell a realtor, "As long as the offer is over 70% of asking the seller shouldn't be insulted." 

    Sometimes they are. Oh, well. 

    And although I rarely offer under 70% of asking I have done so and have had offers accepted.

    There's no set insult number as it's all a matter of the seller's demeanor/opinion so offer what feels right. 

    1Reply
  • Jonathan W.
    Los Angeles, CA · Member since 2019 · 512 posts · 301 votes
    7y

    @Cole Black we were doing a 1031 exchange. We made an offer on the house I thought was pretty low and almost a waste of time. Some could’ve found it insulting...maybe...

    Either way, that house has been on the market for many many days and is now listed near where our offer was!!!!

    It really depends. Remember offense is taken, not given

    4Reply
  • Max T.
    Investor · Philadelphia, PA · Member since 2015 · 3k+ posts · 3k+ votes
    7y

    You will strike out on a lot of offers like that. But once and a while you will hit the right seller for it.

    0Reply
  • Kenneth GarrettPro Member
    Investor · Florida Panhandle/Illinois · Member since 2016 · 4k+ posts · 3k+ votes
    7y

    @Cole Black

    The only number that matters is your number.  I disregard what they are asking for the property.  The only number that matters is my number.  If the math works buy it.  I have made low offers had then accepted right away.  Darn it I offered to much.  Others were rejected with no counter.  Don’t worry about hurting someone’s feelings or insulting them it’s just business.  

    Raising rents on existing tenants can depend on what the market rent is.  If there under market rent certainly you can raise rent.  I might do it over 2-3 years to bring it up.  I like to make improvements to the property as I raise rents as a new owner it seems to show the tenant justification for the change.  Don’t have to, but I try to keep the properties in good condition less calls in the future.  Be careful on how high you raise rents as vacancies may occur and you have to able to absorb the vacancies.

    Good Luck.

    1Reply
  • Matthew Paul
    Severna Park, MD · Member since 2013 · 7k+ posts · 7k+ votes
    7y

    The insulting offer is only a starting point to open an negotiation .  You have opened a line of communication . Sure a real lowball offer can turn off a seller . You will never know .

    Try selling something on facebook market place . You list a car for $4000 and you get offers for $1500 

    0Reply
  • Nick Rutkowski
    Rental Property Investor · Ithaca, NY · Member since 2015 · 1k+ posts · 1k+ votes
    7y

    @Cole Black

    Offer what you think is a fair offer. I’d also would look at your terms offered with your deal. Maybe you buy “as is” and no contingencies. This could make your deal look favorable too.

    1Reply
  • Frank Wong
    Real Estate Broker · Bay Area · Member since 2018 · 1k+ posts · 3k+ votes
    7y

    Hi Cole,

    First.  How much are you putting down to make this work?  You should be calculating it at 30% down and base your cash flow off those numbers.  A common mistake with investors is running their calculations with 5-15% down and saying it won't cash flow.  

    If the property is truly worth $39k less based on its market value then no it's not insulting. The seller has it overpriced. This does happen sometimes sellers throw out a number and have it listed because they want that number.  If the house is at the correct market value then yes it is insulting. DOM matter.  If it's been 30 days or less you will probably get rejected. If the listing is 60+ days then you may have a shot maybe not $39k less maybe you settle with $20-25k off.

    The seller and buyer have to agree to a price to make it work and throwing out a low number just because that's what you want is not a strategy for success. Just make sure you have facts and reasoning behind your offer. 

    1Reply
  • Mindy JensenPro Member
    BiggerPockets Money Podcast Host · Longmont, CO · Member since 2014 · 7k+ posts · 10k+ votes
    7y

    I just heard back from the sellers on a 90% offer I made for a property marked "MOTIVATED SELLERS - BRING ALL OFFERS"

    They said "Our property is clearly not for you. Good luck in your search."

    On a property with HUGE DOM for the market, and a weird house on top of that.

    So it just depends on the seller. 

    [email protected]Podcast Guest on Show #261
    BiggerPockets
    3Reply
  • Matt M.
    Specialist · Easton, PA · Member since 2018 · 1k+ posts · 2k+ votes
    7y

    @Cole Black

    Don’t be afraid to insult. The worst they can say is no.

    My primary residence was listed at $219,900. Great solid house but very dated. Needed tons of cosmetics. My offer was $150,000 with my reasons why. Back and forth for a few days, we settled at $187,500 with them contributing $10k to my closing costs. Win win! I took a shot and won. Good luck!

    1Reply
  • Account Closed
    Rental Property Investor · Sacramento, CA · Member since 2015 · 1k+ posts · 893 votes
    7y

    @Cole Black don't don't DON'T pay 150k for a property that only cash flows $150 a month. If it's that weak of a cash flower, even at a 40k discount, it's not not a strong market or asset for rental property investing in this phase of the market.

    $150 is never going to be enough to cover the incidental stuff that happens outside of your pro-forma expenses. Even if you don't have any incidental expenses.. $1800 a year is not worth owning property at that price point. UNLESS, of course, this property has room for substantial rent increases. 


    Other options are a different type of asset, a different market, or just waiting for better times.

    0Reply
  • Joe SplitrockPro Member
    Moderator
    Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
    7y

    @Cole Black asking price is not necessarily equal to market value. I purchased a house in 2016 for $149K and I paid $100 over asking price. I made the offer the day it was listed. That property was worth $160K the day I closed and $190K right now. 

    It is not about offending people. If the property is fairly priced to market and comparable properties are selling at that price, nobody would consider an offer 20% below. They won't even counter offer. If you are expecting to sell within 2-5% of asking, how do you counter an offer 20% below? I would just tell the buyer to come back with a reasonable offer. 

    I have had that experience on Facebook where you list something like a car for $4000 and someone offers you $1500. I just respond, "haha" and block the fool. There is no negotiating with unreasonable people.

    Back in 2010, it was not like this. You could offer crazy low and people took it. It is just a different market today. Maybe not everywhere, but most places are just hot and even crap sells fast for high prices. 

    Too many newbies want to get into house hacking because they heard about it on a podcast, haha. Demand drives up prices.

    1Reply
  • Cole Black
    OP
    Rental Property Investor · Markdale Ontario · Member since 2019 · 94 posts · 12 votes
    7y

    @Elliott Elkhoury

    Hey Elliott, even if the $150 is using the 50% rule? What sort of cash flow do you aim for when evaluating a property?

    0Reply
  • Cole Black
    OP
    Rental Property Investor · Markdale Ontario · Member since 2019 · 94 posts · 12 votes
    7y

    @Joe Splitrock

    Do you see prices dropping in the near future? In your market atleast?

    0Reply
  • Kyle M.
    Investor · Easton, PA · Member since 2019 · 46 posts · 19 votes
    7y

    @Matt Michaelson what towns do you invest in? I saw your profile said Easton- I am also local to the Lehigh Valley and am currently looking at multi family properties across the valley. I am new to the site and to investing in RE.

    Do you do a lot of contract work for investors in the LV?

    0Reply
  • Anthony Rosa
    Rental Property Investor · New York City · Member since 2019 · 703 posts · 538 votes
    7y

    For a cash flow of net $150/month i would offer them even less or look at other properties. Or, live in one unit and rent the other (house hack).  For an appreciating property i may consider it? Think about it.  If you need a new boiler/furnace after the 3rd month you would go out of pocket around $3500.  It would take you 2 years to break even on net cash flow and hope there is no vacancies or other heavy expenses to set you back even further.  

    Whats the % return on your cash on cash investment?  You should always have a minimum return % that you are satisfied with to consider buying it for cash flow.
     

    Always check on how long has the property been on the market. Sometimes its on the market for a while because the price is too high or there is an underlying condition...Check out the place and ask questions.  any work needed? what work was already done?? Roof, windows, boiler?? 

    I've always waited about 1 year before raising the rents.  Also check on the tenants current lease terms because you may have to honor it.

    0Reply
  • Bill Plymouth
    Real Estate Agent · Philadelphia, PA · Member since 2018 · 416 posts · 396 votes
    7y

    The worst thing that can happen is that you get told “no”.  Don’t overpay as a courtesy.  Investment is a business.  Your rentals are your product.  If you overpay when purchasing the product, your profit will me affected.  I’d rather get rejected or get my offer called “insulting” than lose money every month because I was afraid my offer was to low.  You’ll get hundreds of offers rejected.  Each time you stay firm on your numbers you make money.  

    0Reply
  • Chris C.
    Raleigh, NC · Member since 2017 · 347 posts · 94 votes
    7y
    Originally posted by @Frank Wong:

    Hi Cole,

    First.  How much are you putting down to make this work?  You should be calculating it at 30% down and base your cash flow off those numbers.  A common mistake with investors is running their calculations with 5-15% down and saying it won't cash flow.  

    If the property is truly worth $39k less based on its market value then no it's not insulting. The seller has it overpriced. This does happen sometimes sellers throw out a number and have it listed because they want that number.  If the house is at the correct market value then yes it is insulting. DOM matter.  If it's been 30 days or less you will probably get rejected. If the listing is 60+ days then you may have a shot maybe not $39k less maybe you settle with $20-25k off.

    The seller and buyer have to agree to a price to make it work and throwing out a low number just because that's what you want is not a strategy for success. Just make sure you have facts and reasoning behind your offer. 

     30% down can make it look like a good return when its not especially if you may not have 30% to actually put down

    For example 150k with an expense ratio of 47.88.. COC of .5%. This becomes a negative COC of -6.78% COC just by changing it to a 5% down.

    Alternatively. 110k with 45.44% expense ratio has a COC of 4.5% at 30% down. At 5% down the COC drops to 2.42

    0Reply
  • Joe SplitrockPro Member
    Moderator
    Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
    7y
    Originally posted by @Cole Black:

    @Joe Splitrock

    Do you see prices dropping in the near future? In your market atleast?

    No I don't see prices dropping. Maybe the annual increase percentage may reduce, but I don't see negative price movement. I thought properties were overpriced three years ago and today I would pay asking price if someone listed at 2016 prices and it would be a good deal. That is because we have had 6% appreciation for three years.

    People mistakenly believe the best way to make money in real estate buying low. Buying early is the best way to make money in real estate. Even better if you can buy low and buy early, but if the choice is buy low or don't buy, then you are completely missing out.

    1Reply
  • Eric Schultz
    Investor · San Diego, CA · Member since 2016 · 265 posts · 305 votes
    7y
    Cole Black As long as you can show the listing agent qualified math on how you arrived at your offer price, it is what it is. Just telling them you made a “rule of thumb” approach isn’t serious enough. Most properties are meant to be owner-occupied and the rest are meant to be rentals. It’s just a numbers game given current market conditions.
    0Reply
  • Steve Vaughan
    Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
    7y

    Today I'm offering 97% of asking for a property that's been on the market for 2 days.  All cash, as-is but with the right to inspect.

    Cash-flow? Break-even (after factoring 7% ROE as a min). Equity? $60k.  

    There are other factors to consider besides cash--flow.  

    And the 50% rule is for people with a PM.  PMs run 16% ish the first year.  Not saying you shouldn't factor in some costs for your time, but my singles average closer to 38% expenses. 50% is very comservative / high on a solid single-fam.

    1Reply
  • Account Closed
    Rental Property Investor · Sacramento, CA · Member since 2015 · 1k+ posts · 893 votes
    7y

    @Cole Black there are quite a few things I factor in. At $150 the profits are too small to really be worth the money invested, the effort, and the potential incidents that may exceed the 50% expense ratio you're budgeting for. Overall I would say 50% is very conservative for sure, and I budget less over the lifespan of ownership... just understand that a lot of those expenses may occur earlier, when you first buy a property. As you stabilize it and maintain it well your expenses and amount of surprises will be reduced.

    I would say aim for a property at that has at least a 10% cap rate after using your standard pro forma (mine has a 5% vacancy and 10% maintenance on well maintained property as an average estimate), unless it has major rent upside. Your subject property at 150k would have to generate 15k a year NET to be a 10 cap. that's $1250 a month net before making any mortgage payments. After mortgage you're looking at about 500-600 depending on the loan. That's triple the cash flow you're expecting to earn here, so shoot higher!

    Is this property a small multifamily? If not, maybe try your luck with that type of asset. Maybe try a different market.

    You're fighting an uphill battle if you have to offer 20% below market on every single deal just to barely cash flow. You're not going to have a lot of offers accepted, and when you do you're still not going to make enough money. These are signs that you should adjust your strategy a bit! This is a good thing! 

    0Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free