Off-Market Deal - Looking for some guidance and opinion

22 Replies

Hey BP,

Thanks for taking the time to read.   Newbie here with only two properties, primary and one accidental rental.   

Just got off the phone with an owner looking to sell his mothers place.   Knowing she was moving I asked about an off-market deal.   After talking briefly on the phone with him, I got some good information and my first thought was to bring it here to discuss with investors more seasoned than I.   

I am in the Portland, OR market and finding deals here that pencil out is extremely difficult.   I knew that in order to find anything I needed to look off-market.  The house is a 3 bed 2 bath - 1,550 sq.ft.  Local comps are selling for $325,000-$350,000.   As mentioned, she was in the house for 40 years with minimal upkeep in the last 10-15 years maybe.   The owner's son told me they owned cats for many years, and it would need new carpets, paint, and curtains.  I imagine it would need some real TLC in the kitchen with renter level upgrades, and probably the bathrooms as well.   

I asked flat out what they were looking/hoping to get, and he said if the house were in the tip-top shape they'd like $400,000, but given the condition, they'd go as low as $340,000.   I told him I didn't want to make a low-ball offer and upset him without seeing it, but reminded him I'd be using this for an investment and I need it to pencil out.  I'll be taking a look at it tomorrow and making an offer.   I was thinking there might be at least $20,000-$40,000 needed in repairs and updates (pulled that number from the sky really... thinking kitchen, bathrooms, carpets, windows(?) and paint, plus maybe the roof and some lawn care).  Without seeing inside, I was thinking $250,000 was my starting point.   

Here are some plus sides - We are in a highly desirable area with 70/30 owners to renters.  I live 5 houses down and therefore want the rental to remain highly valued.   Rents are about $2,000 in this neighborhood for a 3bd/2bth house.   We are adjacent to the top-rated public elementary school in the state.   Walking and biking distance to shopping and dining.  One mile to the highway onramps (minimal noise - buffered from the beautiful old growth Oregon white oaks).       

I guess my first question is this, how do I begin to assess the value of the work needed as a noob.   I'm handy (currently replacing my own windows)  I can do some light stuff, but run my own company fulltime and don't have a ton of time, will hire a lot out.   And, finally, going off the advice of a lot of the podcasts, if you feel a little bad about your offer, it's probably just right.  Is that good advice?    

Secondly, I can finance one of two ways. Take out my own HELOC for the down payment and finance through the bank, or possibly secure hard lending for a quick loan to secure the property, then sell my condo rental and pay off or down the hard money LTV and refinance with a conventional loan. Any thoughts on this?

Thanks in advance!   

@Anthony Varela lot going on in this post. First off I would never rent a 400k house for $2000 a month. That's never ever going to pencil very well. Sorta like renting a roll royce for the price of a Volkswagen wagon. My 120k houses rent for 1200 a month. (That's 1% per month). If your trying to make cash flow this one isn't going to do that very well. Secondly renters that can pay 3,000 or 4000 a month (1%) if you could get that will be transient or have poor credit or some such reason for not buying a house. This could cause lots of vacancy's. This type of house would serve better as some sort of value add or appreciation gain than it ever will as a rental. It's pretty spendy for a long term hold as well. I don't gamble on appreciation so if I was doing it I would look at it as more of a flip. It would be tough to try BRRRR as the rent likely won't support enough mortgage to re-finance and get your money back out. RR

you are not going to get it for $250k. so focus on the rehab cost and work the number backwards. if it rents for $2k, how much do you need to buy plus rehab cost to make it cash flow? sounds like it's in a very good location so it's a long-term hold. you can afford to pay a little more because 10 years from now even if you over paid $10k now it is insignificant. that's the main difference between flip and buy and hold. this one sounds like a really nice buy and hold because it has good school and also close to freeway.
@Ralph R. in my neck of the woods Seattle as well as Portland it is very common to rent 400k house, actually more like 600k to 700k in Seattle and normally you get better renters as price goes up. this one is an appreciation play and there's nothing wrong with that as long as you are not getting into a negative cash flow situation which I don't think is the case. actually SFH is more of an appreciation play than cash flow anyway. for pure cash flow, apartment is the way to go. as far as down payment I would take the heloc from the condo as down payment and keep both if your income to debt ratio is Ok.

Thanks for your thoughts @Harrison Liu .  I think this is an appreciation play as well, as the values have increased 20% in the last two years alone.  Portland is growing and while the market will cool off, it will continue to development hasn't kept up with growth.   And $2,000 a month isn't unheard of around here.   I don't think I'll get the $250k price, but for the amount of work needed, $400k was out of the question and $340 will make it tough.   

@Ralph R. I appreciate your thoughts on the rental.  It's tough down here in the PDX market.   I don't know which needs to be corrected, the housing prices or the rent prices.   1% while a good measure, seems unheard of here these days.   

Question for both of you.   In the debate of cash-flow vs appreciation, at what point does that change.   Does making $50 dollars a month count as cash-flow?   Or is it more like $500 a month before it's truly considered a cash-flow investment? Should any investment cover your costs at the very least?  Maybe I'm being too nieve and short minded.  

@Anthony Varela it's not a one size fits all answer. it depends your overall financial situation. you will not want have negative cash flow for sure even though it's in a class A neighborhood with tons of appreciation potential. a lot of investors got burned play this game in the last crash. a $500 vs $100 cash flow ($50 is too low in my opinion) really doesn't make much difference remember your end game is appreciation, cash flow is really icing on the cake. but it will make a big difference depends on how much reserve you have and how much other income you have when raining day comes. the key is to be hold it minimum 10 years by then both rent and property value will go up substantially yes they do go up hand in hand you will be in the position I am in today. i don't plan on ever selling my properties, but I may take cash out to buy other property.

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@Harrison Liu that's what I said. It's an appreciation play or value add. The principal and interest payment on 350,000 at 4.5% for 30 years is $1773.40. Thats what the OP said the comps were today. If the OP buys it at 250k and puts $20k in it his payment on $270k is $1368 a month. Plus taxes and insurance. These are conventional loan numbers. If he uses hard money the interest is way more plus points. A HELOC will be more as well. As I see it $250 with a minimum 20k rehab and sell for 350k is his best bet. That's if the roof and furnace are good. (The house is already 40 years old). Using his numbers If it needs either roof or furnace he's at the 40k mark pretty easy. im not seeing how he can pay more than 250 sell another property and do 2 finances (one to buy and one to conventional) rent at $2000 a month and hold for 10 years?? RR

@Anthony Varela I do buy and hold. First off cash flow is a bogus number. I'm talking about single family here. If you put 20k down payment on a property how long at $200 a month before you recoup your money?? In this case cash flow is really the renter giving you your own money back at a slow rate. All the while you dollars are loosing buying power. It's years to break even. Some months are more some are less. It also depends on how you figure cash flow. If you figure cap ex and sell before you have a major problem (roof furnace AC etc) your CF is better. If you put a new roof on and sell now your CF is less. The way I look at buy and hold the tenant is holding the property while I figure out how to make money from it. The easiest way is to buy right. Or you can do value add. New kitchen etc. (ideally the new renter pays more rent and buys the kitchen for you). Appreciation is the other way. Hold it long enough (with the tenant paying ALL expenses) and sell or 1031 into another or bigger unit. Cash flow is not the way to build wealth. Put your property into an calculator that figures Internal Rate of Return. Play with this type of calculator for a bit and see what it tells you. It will help you see what I'm talking about. It should help you understand something about leverage as well. What you are looking for is the highest % of return remember your initial investment starts losing buying power the day you invest it. As the renter buys down the loan your investment dollars go up your profit % goes down. My SFR's usually require either a cash out re-fi or sale around 7-10 years. RR

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@Anthony Varela If they've been living in the house for such a long time, my first step would be to find out how much they owe on the house. If they refinanced and owe over 300K, you're wasting your time. However, if the house is almost paid off, then you can get a good deal. You have to find out who's the decision maker. When dealing with older people or probates, a lot of the times is not about the money. You can give them some good concessions or help them solve their problems. Offering assistance to relocate, selling as is (leaving stuff behind), cash deal and quick close are just some that come to my mind.

Sometimes family members want X price but in reality they have absolutely no clue how much homes are worth. Find out their true motivation for selling, this will help you determine whether they are willing to sell at a discount or not. What do they want to use the money for? By when do they need to sell? 

Bring comps of similar dated properties (preferably cash transactions). And make a point as to why you believe it's worth X or Y amount. Take a good look at the HVAC, Roof, electrical.  While these items might work now, if they break in the near future it will cost you a lot of money to replace them. 

FYI, 20,000 is quite a small budget for the type of project you're describing. I'm not familiar with Oregon labor prices, but I know it's somewhat expensive. Also, check for code requirements in your area. Not all cities/Suburban areas have point of sale inspections. It's start to get pretty bad when your "cosmetic" rehab goes over budget because the city/village starts asking you to open up more walls, change plumbing, electrical, etc.

I think its great that you live so close to the investment! I would double your estimates for cost of rehab just to be safe. As far as striking the deal, I would emphasize to the owners how much you love the property and how great the market it. Talk about how nice the homes are around it and the quality of tenant this market brings in which requires fully renovated property. To assess the value of the work needed, I would call contractors and ask for bids and understand that they are factoring 30% for profit so the cost of the job would be 70% of their bid numbers.

Originally posted by @Daniel Moctezuma :

@Anthony Varela If they've been living in the house for such a long time, my first step would be to find out how much they owe on the house. If they refinanced and owe over 300K, you're wasting your time. However, if the house is almost paid off, then you can get a good deal. You have to find out who's the decision maker. When dealing with older people or probates, a lot of the times is not about the money. You can give them some good concessions or help them solve their problems. Offering assistance to relocate, selling as is (leaving stuff behind), cash deal and quick close are just some that come to my mind.

Sometimes family members want X price but in reality they have absolutely no clue how much homes are worth. Find out their true motivation for selling, this will help you determine whether they are willing to sell at a discount or not. What do they want to use the money for? By when do they need to sell? 

Bring comps of similar dated properties (preferably cash transactions). And make a point as to why you believe it's worth X or Y amount. Take a good look at the HVAC, Roof, electrical.  While these items might work now, if they break in the near future it will cost you a lot of money to replace them. 

The house is paid off.  I'm talking with the owner's son, who is taking care of the sale of the home.   He is eager to not list is, and mentioned wanting to pay a full-service turnkey realtor to clean it up and sell it.   I don't know enough about that service to know how much a cash deal would be saving him.   Thanks for the advice in probing him a little more about the financial situation.   I planned on getting my numbers better sorted out, and then giving him another call.   Before I share what I think it's worth, I'll dig deeper to find out their motivations.  

Originally posted by @Ralph R. :

@Anthony Varela I do buy and hold. First off cash flow is a bogus number. I'm talking about single family here. If you put 20k down payment on a property how long at $200 a month before you recoup your money?? In this case cash flow is really the renter giving you your own money back at a slow rate. All the while you dollars are loosing buying power. It's years to break even. Some months are more some are less. It also depends on how you figure cash flow. If you figure cap ex and sell before you have a major problem (roof furnace AC etc) your CF is better. If you put a new roof on and sell now your CF is less. The way I look at buy and hold the tenant is holding the property while I figure out how to make money from it. The easiest way is to buy right. Or you can do value add. New kitchen etc. (ideally the new renter pays more rent and buys the kitchen for you). Appreciation is the other way. Hold it long enough (with the tenant paying ALL expenses) and sell or 1031 into another or bigger unit. Cash flow is not the way to build wealth. Put your property into an calculator that figures Internal Rate of Return. Play with this type of calculator for a bit and see what it tells you. It will help you see what I'm talking about. It should help you understand something about leverage as well. What you are looking for is the highest % of return remember your initial investment starts losing buying power the day you invest it. As the renter buys down the loan your investment dollars go up your profit % goes down. My SFR's usually require either a cash out re-fi or sale around 7-10 years. RR

Thanks again for these points on cash flow.   It puts it all into perspective.   A lot of people call it cash flow when they are talking about making $400 a month, but fail to mention the amount of downpayment to put in.   So what you're saying here is if the big purchases are relatively new 5-10 years, then the play is for appreciation.   If markets continue to rise through another up/down cycle of 7-10 years, sell and roll into the next larger property.  Am I hearing that right?   If that is the play, what should I be shooting for in return cash each month?   I know it's not a steadfast number, but if I'm able to get $400-$800 a month, that should be enough to make it interesting.   

I should mention I was able to get in and see it tonight.   There is a lot of cosmetic work needed.  new carpets, paint, and curtains throughout.  The kitchen needs new stove/oven and cabinets could be painted with new hardware.  counters are fine.   

The plusses are - I need to confirm but I think the roof is only 10 years old, the windows are 10 years.  When I say that, that doesn't feel like a plus.   But here's the kicker, there is a corner room used as a bonus area that can easily be walled in for a fourth bedroom.   It will need a closet (easy enough) and already have a sliding glass door.   I think this would boost the rent to $2400 a month.   

Originally posted by @Rob Beardsley :

I think its great that you live so close to the investment! I would double your estimates for cost of rehab just to be safe. As far as striking the deal, I would emphasize to the owners how much you love the property and how great the market it. Talk about how nice the homes are around it and the quality of tenant this market brings in which requires fully renovated property. To assess the value of the work needed, I would call contractors and ask for bids and understand that they are factoring 30% for profit so the cost of the job would be 70% of their bid numbers.

 You totally hit the nail on the head.   Play up the area and what it will take to get good quality tenants into the home.   It will take a lot of work, and in order for him to not worry about the hassle of listing (his words) he'll have to sell at a discount to make it worth a buyer to purchase.   Even if a family was moving in, they'd need to put a tremendous amount into it to make it livable.   Thanks again!  Even if I don't get it, there is so much learning here just analyzing a deal and making an offer.   

Thanks to everyone and their input.   

Originally posted by @Anthony Varela :
Originally posted by @Daniel Moctezuma:

@Anthony Varela If they've been living in the house for such a long time, my first step would be to find out how much they owe on the house. If they refinanced and owe over 300K, you're wasting your time. However, if the house is almost paid off, then you can get a good deal. You have to find out who's the decision maker. When dealing with older people or probates, a lot of the times is not about the money. You can give them some good concessions or help them solve their problems. Offering assistance to relocate, selling as is (leaving stuff behind), cash deal and quick close are just some that come to my mind.

Sometimes family members want X price but in reality they have absolutely no clue how much homes are worth. Find out their true motivation for selling, this will help you determine whether they are willing to sell at a discount or not. What do they want to use the money for? By when do they need to sell? 

Bring comps of similar dated properties (preferably cash transactions). And make a point as to why you believe it's worth X or Y amount. Take a good look at the HVAC, Roof, electrical.  While these items might work now, if they break in the near future it will cost you a lot of money to replace them. 

The house is paid off.  I'm talking with the owner's son, who is taking care of the sale of the home.   He is eager to not list is, and mentioned wanting to pay a full-service turnkey realtor to clean it up and sell it.   I don't know enough about that service to know how much a cash deal would be saving him.   Thanks for the advice in probing him a little more about the financial situation.   I planned on getting my numbers better sorted out, and then giving him another call.   Before I share what I think it's worth, I'll dig deeper to find out their motivations.  

I reckon you're wasting your time with this one. (If you were an accomplished flipper, I might have a different view).

It's apparent that the son wants to squeeze every dollar out of the market that he can. (And why shouldn't he?) He THINKS that'll be accomplished by hiring a "full-service turnkey realtor". All he wants to know is: will YOU give more?

Whereas in reality, he may be not so wise to ignore the advice that he would be given by a Realtor, who might suggest listing it after spending SOME money on cosmetics. It makes sense that you DO need to spend money to make money! 

How are you funding $300k? Remember, you'd only be flipping to Owner-Occupiers, not Investors. Has to be PERFECT!

Originally posted by @Brent Coombs :
Originally posted by @Anthony Varela:
Originally posted by @Daniel Moctezuma:

@Anthony Varela If they've been living in the house for such a long time, my first step would be to find out how much they owe on the house. If they refinanced and owe over 300K, you're wasting your time. However, if the house is almost paid off, then you can get a good deal. You have to find out who's the decision maker. When dealing with older people or probates, a lot of the times is not about the money. You can give them some good concessions or help them solve their problems. Offering assistance to relocate, selling as is (leaving stuff behind), cash deal and quick close are just some that come to my mind.

Sometimes family members want X price but in reality they have absolutely no clue how much homes are worth. Find out their true motivation for selling, this will help you determine whether they are willing to sell at a discount or not. What do they want to use the money for? By when do they need to sell? 

Bring comps of similar dated properties (preferably cash transactions). And make a point as to why you believe it's worth X or Y amount. Take a good look at the HVAC, Roof, electrical.  While these items might work now, if they break in the near future it will cost you a lot of money to replace them. 

The house is paid off.  I'm talking with the owner's son, who is taking care of the sale of the home.   He is eager to not list is, and mentioned wanting to pay a full-service turnkey realtor to clean it up and sell it.   I don't know enough about that service to know how much a cash deal would be saving him.   Thanks for the advice in probing him a little more about the financial situation.   I planned on getting my numbers better sorted out, and then giving him another call.   Before I share what I think it's worth, I'll dig deeper to find out their motivations.  

I reckon you're wasting your time with this one. (If you were an accomplished flipper, I might have a different view).

It's apparent that the son wants to squeeze every dollar out of the market that he can. (And why shouldn't he?) He THINKS that'll be accomplished by hiring a "full-service turnkey realtor". All he wants to know is: will YOU give more?

Whereas in reality, he may be not so wise to ignore the advice that he would be given by a Realtor, who might suggest listing it after spending SOME money on cosmetics. It makes sense that you DO need to spend money to make money! My 2c...

Not an accomplished flipper, or investor as the first post states.   If not a learning tool at the very least, then what good are these forums?  Gotta get your feet wet somehow.   

What's your competitive advantage, Coombs?  You buy and hold, what are you looking for?  Are you marketing to 10,000 properties, or like most of us, trying to buy a few and build something?  

Originally posted by @Anthony Varela :
Originally posted by @Brent Coombs:
Originally posted by @Anthony Varela:
Originally posted by @Daniel Moctezuma:

@Anthony Varela If they've been living in the house for such a long time, my first step would be to find out how much they owe on the house. If they refinanced and owe over 300K, you're wasting your time. However, if the house is almost paid off, then you can get a good deal. You have to find out who's the decision maker. When dealing with older people or probates, a lot of the times is not about the money. You can give them some good concessions or help them solve their problems. Offering assistance to relocate, selling as is (leaving stuff behind), cash deal and quick close are just some that come to my mind.

Sometimes family members want X price but in reality they have absolutely no clue how much homes are worth. Find out their true motivation for selling, this will help you determine whether they are willing to sell at a discount or not. What do they want to use the money for? By when do they need to sell? 

Bring comps of similar dated properties (preferably cash transactions). And make a point as to why you believe it's worth X or Y amount. Take a good look at the HVAC, Roof, electrical.  While these items might work now, if they break in the near future it will cost you a lot of money to replace them. 

The house is paid off.  I'm talking with the owner's son, who is taking care of the sale of the home.   He is eager to not list is, and mentioned wanting to pay a full-service turnkey realtor to clean it up and sell it.   I don't know enough about that service to know how much a cash deal would be saving him.   Thanks for the advice in probing him a little more about the financial situation.   I planned on getting my numbers better sorted out, and then giving him another call.   Before I share what I think it's worth, I'll dig deeper to find out their motivations.  

I reckon you're wasting your time with this one. (If you were an accomplished flipper, I might have a different view).

It's apparent that the son wants to squeeze every dollar out of the market that he can. (And why shouldn't he?) He THINKS that'll be accomplished by hiring a "full-service turnkey realtor". All he wants to know is: will YOU give more?

Whereas in reality, he may be not so wise to ignore the advice that he would be given by a Realtor, who might suggest listing it after spending SOME money on cosmetics. It makes sense that you DO need to spend money to make money! My 2c...

Not an accomplished flipper, or investor as the first post states.   If not a learning tool at the very least, then what good are these forums?  Gotta get your feet wet somehow.   

What's your competitive advantage, Coombs?  You buy and hold, what are you looking for?  Are you marketing to 10,000 properties, or like most of us, trying to buy a few and build something?  

I'm sitting around, watching, learning, sharing, NOT in a hurry to pounce on any random property, but aiming to be ready when REAL "deals" come to the surface, having learned how to quickly discard the rest. Cheers...

@Anthony Varela Lets chat on this one.  I'm agreed on the above comments and I recently analyzed one like it and that was 60k rehab.  Being down the street, you might be able to put a lot of sweat equity.  Did you consider doing a "subject to"?   

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