So I have been searching around and I found a nice little 4-plex around my area. I didn't talk to an agent or anything yet, but thanks to zwillow I saw that it was purchased in 2013 for $152,000 and comps are $280,000+ range. I looked up what its rents are and it says $600-ish a unit. I did the calculations and this doesn't even break .4 on the 2% rule. It would cashflow $120 a month. Obviously not a good deal at it's listing price. But it has been sitting for 200+ days now. I'm not sure if the seller is just waiting for an unsuspecting buyer to make his payday or what?
So whats a good way to ask for a price that would work for me? I haven't done the math yet, but I would guess I would need to get it for a least $300,000 or less for it to work at all.
@Tyson Bumgarner Easy answer. Run your numbers and come up with a price that works for you. Contact an agent and tell them you want to put in an offer. Then see what happens. No harm in offering any price you think is reasonable. What can they do if is too low? Turn it down, no worse than if you don't make your offer, right?
@Walt Payne Thanks for the advice! I have never made an offer before and in my mind I think that if I lowball someone that they will get upset and react poorly for some reason.
But you're right. I'll keep plugging in some numbers and see what I can come up with. Assuming they didn't put $100,000 into renovations, they could still see a profit with whatever I can offer.
I swear I just heard on one of the BP podcast someone was saying that you need to do the spaghetti test; keep making offers and see what sticks.
@Tyson Bumgarner I like to find a number that works for me, and offer just under that. I don't try to lowball necessarily, though I also don't let that stop me. And when I say a number that works, I guess that might be defined as lowball by some, lol. After that, find out what their response is, but don't go up too much chasing a deal, because then it will reach a point where it is a deal, but not for you.
You seem to be thinking about this in the "direct marketing" type vein, where you're sitting with a seller trying to come to an agreement. When you're making an MLS offer it's most often essentially a nameless faceless type of situation.
Just some hints to see what their motivation level is: have there been ANY price drops in the past 200 days or however many days it's been on the market? If so, how much? It's one little tiny glimpse into seller's motivation. Also, is the property vacant or are their tenants? What condition is the property in? (or to the best of your ability to judge). The problem with investment properties is sometimes seller's really aren't terribly motivated to sell, because since they are collecting rent each month (assuming there are tenants in there) then it's not a huge deal if they don't sell for their asking price.
That being said, sometimes I tell my investors: what's the worst that can happen? They either berate the agent for bringing them a lowball offer (which definitely happens!) or they don't dignify it with a response. Or possibly they come back with something you can work with, because they've become weary and want to unload.
You are exactly right. You don't know enough yet.
Did he pay 152K for a run down empty building, renovate it and fill it up with market rents? If so, the seller is probably looking for his payday, and be willing to wait for the right buyer, particularly if its running smoothly. Some buyers are just looking to place their cash into an asset that will do better than bonds. The building you describe should return 4-5% on a cash purchase, depending on where they settle. If its turn-key and full, that can be a pretty attractive long term investment today.
That said, there are a lot of reasons I can think of that someone with a 200 day old listing and an 84% margin might be willing to look at a lower offer. I can also think of several why you want to be duly diligent on the purchase side.
I'd find out what I could about the building and the circumstances, talk to some tenants, call the property manager, if there is one, get the sellers story and the P&L - not the proforma, then make the offer you are comfortable with.
As has been said, what does he really have into it and what is it really worth today. I used to have an investor that liked to buy, make a few cosmetic adjustments, and then put it on the market for a ridiculous price, hoping to find the sucker. The property would cash flow so no need to sell, he just wanted to throw his line out there in hopes someone would give him a great price and a very good payday. And it didn't cost him anything, the broker was putting out the money and effort to try and sell it, I sold him a few but never ever took one of his offers list to heart, it would be like trying to sell $20 dollar bills for $40.
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