Made my first offer!

N/A N/A · 2008-08-03T10:54:50-07:00

Okay, so it's only been three days since I've become a real estate investor, but today I made my first offer! It's on a 2 unit in a small city in Maine. The asking price is $107K (no broker). The monthly rents are $1,250. I offered $73K, payable with a $3K down payment and the balance with a 5-year note at 10% interest. I even threw in a $2K prepayment penalty if I flip it within 5 years (which I would do). The seller said she would take it to her partner and get back to me. It seemed like a good deal to me. I would predict the asking price is already a good $10K below FMV. The seller is "motivated" and indicated this is the last of a series of properties they are selling. There is some finish work that needs doing, new windows, and some exterior paint. They have long-time tenants. I've decided that I would go up another $2K on the downpayment but that's it. Anything more, and I can't make it work. I don't have much cash to put on it. As it stands, even with a $5K downpayment, I would need to borrow money from my parents to pay it. So anyway, I have no idea what I'm doing, but all I can say is, it's quite a rush! I figure, it's good experience just to be talking to sellers and making offers. I've kind of figured out, you don't brains to be in this business, you just need BALLS!!

Michael Rossi

Real Estate Investor · OH · Member since 2008 · 4k+ posts · 1k+ votes

19y

I think you've got that backwards. "Just do it" may be good advice if you're buying tennis shoes, but it's a very poor way to start a real estate business. Having said that, IF you are right about the market value, then this sounds like a pretty good first deal IF you can flip it quickly.

However, if you end up holding it as a rental, you will lose a lot of money on this deal. A 5 year note of $70,000 at 10% will give you a payment of $1,487. When you consider that operating expenses are about 50% of gross rents, your monthly loss will be about $862 per month! For someone that has to borrow a $5,000 down payment, that could be a real problem.

Mike

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OP

Member since 2008 · 40 posts · 0 votes

19y

Mike--I've already thought of that (based on your formula!) I'm in kind of a unique situation as I happen to have a relatively high income with very low living expenses right now. I could afford to carry the loss for several months until it flips, if I had to. Also, I do have enough savings to pay the downpayment, I would just rather get it from my folks since I have a trip to San Francisco and the Napa Valley planned for next month! :D

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Matt H

Member since 2008 · 452 posts · 18 votes

19y

sarahheck.....Yes I believe your right in that this isn't rocket science but you just need backbone. But one thing, I wouldn't get a note at 10%. Just get a regular mortgage if you can at a low rate. That way the property should throw off a bit of cash. I don't think you'll lose money on it based on those numbers and if you get a regular mortgage for it. Besides as I've said time and time again, you can't get rich off one deal. You have to do lots of deals, so just get that first one out of the way, over and done with so you'll have some experience and the confidence of knowing how a deal is done. That way you can move on to bigger and bigger deals. I wouldn't hold it for 3 years though unless your market is appreciating above the national average. But if you're only making 5% per year then I'd try and flip it right away. Try to get your price though which might take you a little longer to sell, but still it won't take 3 years. Maybe 1 year and you'll have made several times what you put in which you can then use to find a bigger place to flip. And continue to do that leveraging your money over and over again. Because when it comes to flipping you could do many many flips in 3 years. By the end of flipping homes for 3 years you'll already have leveraged you money so many times that you could start shopping for an apartment building to buy and hold. But congrats man you're on your way.

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OP

Member since 2008 · 40 posts · 0 votes

19y

Thanks for the advice. My idea in offering the note at 10% was just to land the deal. It offers the seller a pretty good cash flow. Ideally I would be able to refinance it based on the equity and pay it off. I'm pretty skeptical that they will accept the offer though. If they do, I'm going to write into the contract that I have 10 days to do my due diligence and that I can back out of the deal if I don't like something.

This morning I've already been on the phone, talking to a broker who has another multiunit listing in the same city and basically just trying to get more information about the market.

As far as not having any brains, I actually think that I'm relatively intelligent (I went to a top tier eastern college, have a law degree and have been working in private practice doing high end estate planning and probate for 8 years) and going about this in a fairly reasonable way. All I was saying is, I think in order to be successful you've got to be willing to call people up and basically make them offers and talk to them. I think if you just sit around looking at ads and never do anything, you're not going to get anywhere. That is the point I was trying to make.

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N/A N/A

Member since 2008 · 141 posts · 1 vote

19y

sarah,

i don't think he was saying you don't have "brains," just to be careful. like everything in life, there's the golden mean -get your first deal out of the way as quickly as possible, but not so fast that you take a bath on it. some people will analyze it for so long that the property is off the market by the time they say yes. i missed out on a few like that. mikeoh's numbers seem a lot more conservative than what i've been looking for, which probably explains why he's been doing this for awhile, and why i'm a rookie.
as far as your note goes, it seems pretty high. 10k below fmv is like a 12% discount based on your #'s, but throw-in the repairs (if you pay to get it done, you could be looking at around 5k -off the wall guesstimate), and it's not much of a discount. if you can't sell it for a year, when you do and add in your negative cashflow + repairs + 2k flipping penalty = pretty good loss if you get stuck with it for awhile, and about break-even if you don't (not including possible vacancy or major repairs). if the loan was amortized on a 30yr schedule with a balloon in 5yrs, it would probably work out pretty good. if you could get a noo 30yr mortgage, you would probably do pretty well on cash flow. i know mikeoh says costs are 50% of gross, but i'm trying to get started with much smaller margins. i do almost all work the myself, so that helps, but if i was ever big enough to need help (employee or management co.), then i would definitely need a wider margin.
it definitely seems bad to go through all the work to break even or take a loss. the only time i would be willing to take a monthly loss is if i was positive of a large gain at the end (a few thousand doesn't seem worth all the trouble you'll endure while holding it.).
the standard is roughly 70% of arv - repairs. there's a good reason why the pro's have such a wide margin. i've been taking a monthly loss for about a year now (i stopped counting the months), and the only relief in sight is a tenant i'm about to take on in august. i wish my margins had been a little roomier. oh well...

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OP

Member since 2008 · 40 posts · 0 votes

19y

I think you guys are right about the note. I've been calling around to some local agents and I think there are a lot of other good properties on the market that would potentially make better deals, that don't require as much work. I'm actually setting myself up with a buyer's agent, someone I've worked with in the past who has experience with rentals.

I think my problem is that I've been really pessimistic about being able to get financing on my own. I've felt like the only way I can do it is to make some deal with a seller. I'm going to look into getting some 100% NOO financing. I've good income and excellent credit, so I feel like I should qualify for something?

Also my agent has steered me away from 2 units and said to focus on 3 and 4 units where the cashflow is much better.

I'm also looking into property management companies to help deal with the maintenance end of things.

I haven't heard back from the woman I made the first offer to, so I'm assuming she's going to say no. I'm not going to go any further on it at this point. But I'm still glad I did it, I've already learned from it (and learned from all of you!)

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Made my first offer!

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