So I listened to a podcast today and one if the nuggets I got from it was post what you're doing even while it's going on. Hence I'm putting it out there. Even though this is in the success stories for him it does not mean I'm not open to suggestions. Also I'll warn you that you got to read the whole thing to let the story reveal itself.
We we are in the middle of renovating a duplex, but that's not stopping us from looking at other deals. We found a four Plex on the MLS that was in need of a full renovation. The property is been listed for over a year and a half . The seller attempted to list it then draw the place then upped the price then drop the price again then up the price over the course of 2013/14. Which turned out to be invaluable information to my wife and I.
We contacted a friend who is an agent to represent us in the transaction. After seeing it and meeting with a few contractors on 2 separate occasions. We decided to put in an offer! I before I had met with the contractors I was doing some estimating of the repairs on my own listening to podcasts doing form searches and going off the knowledge that I already had. J Scott wrote an article on how to estimate rehab cost and how to determine the max purchase price that I found helpful. I also read a forum discussion on how to value a four Plex that I thought was very helpful in determining what I would offer on the place. Ultimately I use the method suggested in the forum of valuing it similar to a commercial property because there are many fourplexes that have sold recently in the neighborhood.
The formula is : property value = NOI/cap rate
Because The building is completely vacant and needs a rehab I don't know what the expenses are or will be except the taxes and I can estimate insurance but I just use the 50% rule to come away with my NOI .
Area rentals for a two bedroom one bathroom range anywhere from 600 to 1200. It's one of those neighborhoods with diverse housing and a really nice neighborhood on one side and a transitioning neighborhood on the other. This house is right on the edge of the really nice neighborhood. The downside is if it were going to be a four Plex there's really no room for parking above of four small cars. So my wife and I agreed that we couldn't go off of an expected rental income of $900 per unit. Also I use loopnet to see if what I could expect for cap rate. It seems 7% is average.
$900 x 4 units = $3600 (monthly gross income )
$3600/ 2 (50% rule) = $1800 (net monthly)
$1800 x 12 (months) = $21,600
$21,600 / .07 (7% cap rate) =$ 308,571
So after I was comfortable with the valuation of 308 I estimated the repairs to be at least $20 a square foot plus all the mechanical and electrical etc. the building is 3800 sq.ft. So I thought the the repairs would be in the hundred thousand dollar range.
The seller was asking $160,000. So I thought with repairs at 100,000 being all in at 260,000 I might still be good with a down payment. Then I thought but this should not treat this like a flip and use the 70% rule just in case I want to refinance and be below the 70% LTV even with the down payment.
308 x .7 = 215
So that lead me to lowering my purchase price accordingly $115,000 is the if I'm max being conservative.
A couple days later I met with a couple contractors to solidify the estimated repair numbers. I got it all in around $30-$35 a square foot or $25-30,000 per unit. So that's about $120,000 .
I already knew I wouldn't build to get a conventional mortgage on it because of the condition it was in. My options are cash or seller finance. So we made him two offers :
1.$85,000 in cash or
2. $115,000 seller financing over 30 yrs at 7% int. balloon payment at 10yrs. No payments until construction was completed or in 6 months which ever came first. 10% dwn pyt
He countered our offer at $125,000 at 4% $65,000 dwn with the same terms. Or $115,000 cash.
We then countered back with $125,000 pp same terms $50,000 dwn.
We are waiting to hear from the seller.
Update: I learned from my time as realestate agent in NYC that the number one thing that kills a deal is time. So with said the seller went with another offer that came in today. I feel sheepish. Mostly because I didn't tell my agent to put an expiration on the counter offer. A lesson I will never forget.
Can't win them all. Hats off on the creativity. There's always another deal.
In my opinion.....
You made a mistake. I hate the haggling on deals, I set a price, I see the counteroffer and I walk or bite. I don't go round the houses on terms. I either want it, or not. I just don't play games, and when a seller is offering a 33% discount of what he wanted, he won't either. And I hate to say this, you argued over $15k down payment, yet in the original counter offer the guy dropped the interest rate from 7% to 4% and put the price up. I've no idea of the specifics of financing the extra $10k for a 3% reduction in interest, but there really cannot have been much in it.
Some people like the chase of a deal, many don't. I've had people start haggling with me, I've got better things to do.
The second problem was that the moment you declined the counter offer - this property was immediately put under contract with someone else.
The original price was $160k, you are offering round the $120k mark - what you did was educate the sellers agent that the seller would entertain offers around the $120k mark. More specifically, that he would accept $115k cash.
Once the sellers agent knew that there was a new amount on the table ($115k), the sellers agent phoned up all his investor friends and used your calculations to sell it to them.
The sellers agent had ZERO interest in you the moment a $120k price was defined, he had people on the line ready to take that property, and his commission just went from 3% to 6% as he got both buying and sellers commission.
You did all the legwork, you got greedy over a minor amount, the deal walked away.
I hate losing. Play to win.
Unfortunately I think you're absolutely correct and it was unfortunately a great learning experience. I wish I had taken the counter offer however I was concerned about paying off debt is well so holding onto a little bit more cash may have clouded my judgment. But I also think that not putting a timestamp on the second counter offer shot me in the foot as well. I hope this can help someone else.
We're nursing a bruised ego after not making a phone call. What a mistake. House was picked up by a wholesaler, who immediately turned it for a $3k profit. I tried to crash the party, failed, but at least I ruined the wholesalers day.
He told me with some excitement that he had made $3k on the deal. I dryly told him that if he had come to me, he'd have made $20k. That'll teach him not to market properly.
Thanks for sharing, we can all learn from this. Best of luck in finding your next deal.
Adrian Chu, Adrian Chu & Associates | Horizon Real Estate | [email protected] | 2064075452 | WA Agent # 107768, WA Lender # MLO-920749
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