FSBO with previous damage

14 Replies

Hi there,

I am new to real estate and looking to acquire my first buy and hold rental property. I was wondering if you guys would be able to help me analyze a deal and provide pointers on pursuing a FSBO. The sellers are an older couple who are buy and hold investors. They've had the property 20 years and no longer want to manage/ rent. I asked if they would be open to us using a buyer's agent, and they said they would have to factor in the costs to their asking price. I've been doing as much research and reading as much as I can on the topic of FSBO and negotiating a good deal, but wanted to see if members of BP may have some advice or negotiating a better deal that a new member may be naive to see in plain sight.

Here is some information on the property:

Location: Valdosta, GA (Lowndes County)
Year: 1980- 3bed/2bath- 1,252 sqft
List Price: $84,500
Current rent $750/month
Reason for selling: Owners are older and no longer want to manage property/ rent
Other information: Property has been damaged due to tree falling on roof. Insurance claim on property restored roofing and all other damages associated with tree fall. New carpet, paint, and laminate flooring. House will include new appliances. Bathroom and kitchen cabinetry, sink and tub due for an upgrade. Fenced yard and attached carport.

Financing:
VA Loan $0 down, 4.5% interest rate- 30 year fixed (will be owner occupant)

My question is: what would you guys offer for a house with previous damage?
My initial offer would be $75,000, what type of information would you use to negotiate a better deal?

Here are some of my proforma numbers:

Damage would have no effect on my offer aslong as all damages have been properly repaired.

My offer would be strictly based on sales value vs rent value.  And based on the numbers you posted that I would not make that deal

Either rent is way under current value (highly likely as many long term landlords have not kept up with current pricing)

Or the Sale price is way to high.

I think your costs to carry are under estimated

I agree with Scott. I don't think I could come near 1.5-2.0% in my market. I shoot for 1% rule combined with the 50% rule. As far as I'm concerned a rental doesn't have an "intrinsic value" per se. To me it's worth 1% and 50% rule after repairs. 

So, for example, if the market rate rent is $750 I would be looking to pay $75k after doing repairs to make it ready for market.  In addition, I would want the total expenses to come out to less than 50% of the rent. If I'm reading your pro-forma correctly your debt payment plus expenses comes to $685 only leaving you $65 per month net. 

I wouldn't do that much work for $65.  

Like Scott said, maybe the rent is way below market value, but it would have to be WAY low to hit that 50% rule. 

Best of luck! Let us know how it turns out! 

EDIT: I see on the BP calculator they are not including the debt payment in the 50% rule. Just an FYI.

@Adam Shelley the calculators don't include debt service in the 50% number because the 50% number doesn't include debt service.  The 50% estimate is for expenses, vacancy and capital.  You have to cover the debt service out of the remaining 50%.  Of course any particular year may be better, though you always have taxes, insurance and usually a few other expenses.  Or a year can be way more than 50% or even more than 100% of rents for the year.  Like if you have a major outlay for a sewer line or roof.

@Denise Munoz if the damage has been repaired its not directly relevant.   It may slightly affect insurance rates in the future.   I would agree this is priced a little high vs. rent.  But most properties are.  For an owner occupied property, though, that's not really a relevant criteria.  Does it meet your needs?  Do you like it and the area?  Is the price comparable to other similar properties?

Originally posted by @Denise Munoz :

Hi there,

I am new to real estate and looking to acquire my first buy and hold rental property. I was wondering if you guys would be able to help me analyze a deal and provide pointers on pursuing a FSBO. The sellers are an older couple who are buy and hold investors. They've had the property 20 years and no longer want to manage/ rent. I asked if they would be open to us using a buyer's agent, and they said they would have to factor in the costs to their asking price. I've been doing as much research and reading as much as I can on the topic of FSBO and negotiating a good deal, but wanted to see if members of BP may have some advice or negotiating a better deal that a new member may be naive to see in plain sight.

Here is some information on the property:

Location: Valdosta, GA (Lowndes County)
Year: 1980- 3bed/2bath- 1,252 sqft
List Price: $84,500
Current rent $750/month
Reason for selling: Owners are older and no longer want to manage property/ rent
Other information: Property has been damaged due to tree falling on roof. Insurance claim on property restored roofing and all other damages associated with tree fall. New carpet, paint, and laminate flooring. House will include new appliances. Bathroom and kitchen cabinetry, sink and tub due for an upgrade. Fenced yard and attached carport.

Financing:
VA Loan $0 down, 4.5% interest rate- 30 year fixed (will be owner occupant)

My question is: what would you guys offer for a house with previous damage?
My initial offer would be $75,000, what type of information would you use to negotiate a better deal?

Here are some of my proforma numbers:

 I don't know what's accepted in your market, but where I am all tenants are responsible for their own landscaping. Otherwise all your numbers look about right to me. 

Generally speaking though if you're not in a NYC/Boston/LA/San Francisco market then you should be looking to clear between $100-200 on a single family home after covering all of your expenses. If you do that though you can't actually take out any of the cashflow...because the problem with CapEx is that it doesn't actually cost just 8% of your rent. when it come it comes big and heavy, so you'll need to be able to build up to having that reserve account...some people like to gamble and will take it out...I personally don't recommend taking cashflows from your real estate until you're much further along with much larger reserves. Too many squirrely things can happen when you're a newbie (trust me I've been through them)

@Scott Rogers Hey Scott thanks for chiming in! Yeah, I feel the same way regarding the seller's listing price and I feel anything below $75,000 would be a low ball offer. For future reference what would you advise the proper carrying costs be?

Hi @Adam Shelley ,  thanks for providing your insight. I feel the seller, has it priced pretty high as well. I believe that similar properties in the area are also renting for $750-800. 

Hey @Jon Holdman , thanks for clarifying. The property meets our basic needs, in a so-so area. We visited another property down the street from this one, with a listing price of $90,000, renting for $800. The tenants of that property didn't seem to take good care of the property, so that kind of questioned the type of tenants we would attract in the area. 

Hey @James Masotti thanks for sharing that information! We'll definitely put that into consideration. Being that we would be owner-occupants for the first couple of years, I think that would give us some time to make that runway. 

I think we'll keep searching guys! Thanks for all the input!

Originally posted by @Ryan Blake :

@Denise Munoz Did you say that this is owner occupied with a VA loan? Why are you looking at rent numbers if you are going to owner occupy?

 I'm also confused by this. Are you just trying to verify the potential rental value of the property for when you're no longer living in the property? If that's the case than I would consider a few things.

1) If you want to buy something "turn key" don't worry too much about the numbers...first and foremost it's your primary residence. You could decide to live their for 20 years. So you need to be comfortable with the house, the location, the schools, etc. for your own personal use before anything else. If you turn it into a rental after that...great. It wont be your best investment ever, but it at least it will get you started.

2) If you really want to spend the time making sure you get a home run, you need to find a distressed property that you can put the equity into. This is what I did for my first property...it was a live in BRRRR if that's really such a thing...I lived there for 18 months while I fixed the house up and then eventually rented it out afterward. This way I purchased at a discount which made my mortgage low while I was living there and then was slowly able to fix things as I had the money

3) Find a multi-family and house hack so that you get rental income and your primary residence. Now this isn't an option for everyone as where I live there are probably only a dozen multi-family homes total, so I understand if this option isn't possible. 

@Ryan Blake That's correct. My intention is to use the VA loan to acquire my first property, occupy it and rent it out when we move to our next duty station. My concerns for the rent numbers are for the future.

@James Masotti Thanks for verifying, yes that is my intention to evaluate the rent numbers when we have to relocate. I really appreciate the pointers, I think all three strategies are great. For starters, we would be leaning more towards the first strategy (there are not many duplexes on the market here) but would like to get involved in live-in BRRRR's in the future.

@Denise Munoz It is good to look forward towards rent. Just know that a lot can change in a year or two. Make sure to have a good property manager if you will be out of town. You will have to trust them a lot because you wont be able to verify from afar.

Seems like you have a pretty good plan on how to run this. Only other pointers, and I think these may have already been brought up, your property management number should be closer to 10% not 5% (once you have more than 3 properties under the same company they may give you a discount down to 9-8%), your homeowners insurance is at $600 for the year which is very low because once you are out and it is a renter in their the insurance will go up, your property taxes are shown at $900 which seems very low to me. Other than that you did a really good job with the spreadsheet and all other cost estimates.

Looks like this may not be a great buy but you are on the right track!

Hey @Ryan Blake I appreciate the time you took to look over my numbers. It's nice to get some reassurance that I'm headed in the right direction, and yeah not so good of a deal. As mentioned, I will take a look at my numbers and adjust them accordingly. 

@Denise Munoz

I almost stopped reading when I saw it wasn't,  the 1% rule.......If they are selling for $84,500....the gross rent needs to be $845/mo minimum.....

Check the real comps for the area....as opposed to what may be on Zillow and see if you can get them to lower the price.......If you inherit long term tenants there and you try to immediately raise their rents by 12 to 13% then you have a decent likelihood of making them become bad tenants.  

If you raise it by about 5% you may be OK, so definitely try to get that price down from what they are asking.

@Brian Garlington , thanks for the suggestion. It seems as though the consensus is that the property is priced too high or that the current rent is below market value. Thanks for the suggestions.

@Mike D'Arrigo thanks for taking the time to respond and providing your input. The property has been restored to its previous condition, so I'm understanding that shouldn't be an issue with the value of the property. Thanks!