Realistic offers on homes for sale?

Question

hello everyone,

New to bigger pockets and new to the REI market. I've been reading countless websites, columns, forums/ etc. and couldn't be more excited. Quick background to my situation is my wife and I own a home (well she owns it, nothing in my name due to credit at the time) and our neighbors house went up sale a few months ago. The house has many updates and as far As I know is move in ready tomorrow. I feel it's the perfect house to start my REI. My strategy will be the buy and hold and rent out my future properties. The house went up for sale 3 months ago and they were asking 90k. They've had 2 price drops since then and only are asking 75k now. This makes me feel they are desperate to sell (I believe the woman had held issues and her daughters are selling) and I'm wondering what type of offer would be appropriate in this situation? Obviously the lowest deal is the best but I don't want to insult them with an unrealistic deal and lose them off the bat. Their zestimate is currently right about their asking price.

So how low would be too low an offer? This is assuming they pay all closing cost so

Mike Higgins · Answer

If they dropped their asking price to $75k why would I offer more? Even with them paying closing costs. Aren't I the one in the position to try and haggle seeing as they're dropping the price quickly to try and sell?

Engelo Rumora · Answer

Thanks Mike,

Check out one of my recent blogs.

It stirred controversy with many "fluffy" investors lol - https://www.biggerpockets.com/renewsblog/strategy-ten-deals-month/

I hope you find it useful.

Much success

Ryan Pyle · Answer

@Mike Higgins, I think your idea is sound. No, you aren't getting a great deal, but if you are comfortable with the property and feel like it will increase in value over the years, it will end up being a great chunk of equity that you can use to springboard into larger investments. It sounds to me like you aren't looking to replace your job with real estate investing anytime soon, so this strategy is a good path of least resistance to building a great long term wealth base.

I would recommend managing this house yourself, especially if it's right next door. Managing SFR's is not very time consuming once they are rented. Think about it, when you rented, how often did you call your landlord? They key is to very carefully screen your tenants and make sure you know exactly who you are handing the keys to. Who you put in that house will determine how well things work for you.

Lastly, I have been investing full time in Toledo since 2005. I know the area well and have made every mistake in the book (but I'm still standing). I'm happy to share my experience with you. Please feel free to direct message me.

Tyler Weaver · Answer

@Mike Higgins You do not have to actually hire a property manager.  It is important that you buy with the understanding that at some point during holding this property you may want to hire one, and you want your property to cash flow if you have one in place.

The 50% rule is a guess.  On specific deals you can get actual numbers for insurance, taxes, and do better at guessing maintenance based off of how old the systems are and how much square footage of carpet, paint, how big the kitchen is for when it needs new cabinets etc.

Thomas S. · Answer

It's a bad investment at that price with payments at $750. IT will defiantly have negative cash flow. First thing you need to do is plan on a 30 year mortgage on a rental. Second consider expenses at 50% of rental income minus your debt repayment and then make sure you have a minimum $100/ month positive cash flow. Hopefully more.

Base your offer price on those numbers. If it is too low for you to make that offer then as a investor you walk away. If you plan on owning more you had best learn how to start. Buying poorly the first time usually kills new investors. This one looks like a poor start.

Your business approach is doomed for failure. Buying a negative cash flow property because your W2 is good is not investing. Additionally having high equity in a rental kills the cash flow and turns a investment into a liability. Ideally you want a rental financed to the maximum amount that produces positive cash flow and spread the cash to as many units as you can. Paying off rentals is hording cash not investing it. You want to create a income stream not a inheritance for your kids.

Mike Higgins · Answer

@Engelo Rumora Thanks for the advice. As I've dug deeper in to books they're stating exactly what you just said. I believe it was the 100/10/3/1 pyramid. 100 homes that fit your criteria, 10 worth checking out, 3 you make an offer on and then 1 accepted. Realizing how many opportunities there really are out there so not to get stuck up on 1 house that's not a guaranteed home run.

Engelo Rumora · Answer

Hey Mike,

Toledo is full of distressed assets in great areas that you can buy dirt cheap and make a tonne of profit on.

"I don't want to insult them with an unrealistic deal and lose them off the bat"

Don't let Letting emotions get in the way of business/real estate investing as it can cost you and your loved ones.

Help yourself first and then worry about helping others.

Plus, you can always find another deal around the corner as there are plenty of them even if you loose out on this one.

Just my 0.2 Aussie cents

Much success

Mike Higgins · Answer

hey @Ryan Pyle I sent you a colleague request with a long note but it didn't send with the note. Please send me a DM  I would love to ask you a few questions especially considering you're in the same area. I appreciate your post though I had those exact same words to a lot of naysayers. I've never called a landlord before and I know a lot of people the same way. So I figured the right tenant and strong home letting them pay off my equities and one day turning them in to straight cash flow with no  debt would be a good idea. Again, please send me a DM would love to talk.

Mike Higgins · Answer

Appreciate the advice from both of you. I'm going purely off what I've read so far in The Millionaire Real Estate Investor by Gary Keller. @Thomas S. from what I've read it's telling me to do just the opposite in terms of paying off the rental. I'm not looking for any cash flow for profit but more so to have in turn for repairs or vacancies. As far as vacancies are concerned speaking to a few realtors I know in the area they said i shouldn't worry too much about vacancies in Toledo if it's a well kept up house. @Tyler Weaver I was using $900 on the conservative end. I had not yet heard of the 50/50 rule but I'll definitely start doing calculations around that. Again I appreciate both your inputs I have a lot to learn. Also I haven't looked in to a specific property manager yet but from what I've seen a base pay is usually 10% monthly rent.

Tyler Weaver · Answer

@Mike Higgins The ratio between rent and income seems a bit low from what I know about the Toledo market.  Is this in a really good neighborhood?

If for rough math you use the 50% rule with a 15% mortgage, it will be tight.  That rule says that you will have 50% for expenses: repairs, tax, insurance, etc.  Then have 50% left over for debt service, and profits.

Or the more precise way of doing the math, if you add in vacancy, repairs, and capital expenditures, and property management you will likely be above $900. If you are looking to get 15-20 properties, I would highly recommend calculating for property management.  Perhaps you have to move for a career, travel, have a few years where you do not have time to manage the properties.  There needs to be enough cash in the deals for you to hire that out otherwise you will likely be forced to sell at an inopportune time.

Realistic offers on homes for sale?

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