Well, a different agent/broker isn’t going to change the reality of the market. Your broker is telling you your offers/$150 min cash flow per door with the numbers you are using, are not realistic. He will likely stop submitting your offers soon. If you want that price, you’ll likely have to find some desperate seller, off market, who is willing to take less than market price.
The market will set the price/value of a property. Just because one wants to acquire a property at a lower price does not mean that the seller should simply accept it when there is no real reason to. You will need to find distressed properties or distressed sellers to find the discounts you are looking for. Finding off market properties is where you typically find these kinds of deals.
A wise man I know once said that if he doesn't feel ashamed of himself when presenting an offer, it's too high.
That said, your agent could be correct. What you really need are sales comps. Any REALTOR worth working with who says 5-20% discount is your best possible outcome should be able to quickly pull 10-15 nearby sales within the past 3 months and show them to you. If his numbers back up what he says, then you probably won't get the level of discount you want and neither he nor any other agent will waste their time presenting offers they know will be rejected.
Yes, it's the "agent's job" to present all offers. But then there's reality... They want to get paid too. Maybe you have a target of $150/door, but an agent has a target of only working with investors whose close 1 in 4 offers or better. And your 6 offers with zero closes means they're done working with you.
As others have said, the MLS is generally a very efficient market. If you want 40% off, there will be 10 other buyers who will make offers substantially higher. For big discounts, investors almost always have to find unlisted deals so there's no competition, that are in distressed condition, and sellers who need the property sold yesterday.
Hey, I am a veteran Allentown investor. Shoot me a PM with your contact info, I don’t mind taking some time out to review your numbers quickly. You may be analyzing the properties wrong.
What type of contingencies do you have set? Have you considered removing some of them, such as the financial or inspection contingency? You will be at more risk, but a motivated seller might take you more seriously? Other option is to increase your earnest also.
John, it all depends on the listing. I use very different approaches for "hot" properties, stale listings, and off market deals. For Allentown I have recently sold duplexes in the 75-85k range that cash flow nicely. Though she is correct that most properties will trade at 95% or asking price or higher, there are plenty that trade lower. For the most dramatic examples, 313 N 14th was listed at 110k and finally sold for $76k, and 624 W Gordon was listed for $100k and sold for $60k. It can be done, but for each one of these kinds of deals I generally will get shot down about twenty times first. Don't give up!
For any properties that are under heavy competition, such as new listings, you want to come out with your highest and best up front. You need to move quickly on them, generally I get good ones under contract within the first 48 hours. For stale listings, that's where you can send out the low-ball offer and see who bites. Finally, how is your access to off market deals? These are the least competitive, but also can come with some unique headaches for your agent to deal with when the seller chooses to represent themselves.
The other question is to look at the numbers you are using to project cash flow and rate of return. If you are being overly conservative on these you will find yourself getting beat by others who are more realistic. Most of my clients find Allentown 2-units with a property manager will cash flow nicely all the way up to the $95k range.
I guess the question I would ask is this - being that you are a real estate agent yourself, how hard are you willing to work for lowball shooters asking for 40% off list?
My experience: when you are asking for that kind of discount off list, you need to have a rationale behind it and explain that clearly to your agent, who then can/should relay same to the seller/seller's agent. If your rationale is "I want to make $150/door instead of $100/door", that is probably not going to go anywhere, especially if you've never walked the property.
I've had several "lowball" offers accepted on properties, but only after I explained the reasoning behind the offer. Case in point: a 3/1.5 that was listed at $110 I bought for $50. I offered the seller the following rationale:
1. All cash, quick close, no contingencies.
2. Bedroom #3 had been turned into a commercial space at one time (an at-home hair salon) and needed some work to return it to a bedroom (remove water lines, etc).
3. Aside from cosmetics, roof & heating system were at the end of their lifespan and would need replacement soon.
If you are just shooting out offers without seeing the property, the broker knows you're just hoping to find someone desperate enough to take your offer. They're unlikely to work very hard to secure the property for you at such a low number. The commission on $80k after the split is $1200, and that's before taxes and expenses.
Using your number:
Vac = $117
Utilities (what utilities on a duplex?) = $100
Taxes = $125
Insurance = $84
That comes out to $706
You should be able to nail down utilities, taxes and insurance pretty easily without making assumptions on numbers. I can call my agent and have a number in 10 minutes. The building owners should have information on utilities. Taxes is just a look up on the city/county records.
Even using your numbers, paying around $100k is somewhere around an 8-9 cap rate. In this market I can't see how you're going to do a whole lot better than that unless you're working in a war zone or you're buying something that has a lot of opportunity to add value.
Listen to your agent or broker. They want your offer to be accepted just as much as you do. They want to close deals, but they know the market. I've fired a few clients who refused to believe what I was telling them about the market. Its frustrating on both sides lol
John, based on my experience, the rents can be higher and the vacancy lower. It depends on unit composition of course but unless they are both /all studios the rents can be easily pushed up if you fix up the property a little.
You may need to change your search criteria. In my market, duplexes that are in desirable areas are selling for more than the equivalent single family homes. A lot of them are also going into multiple offer situations within a matter of days and close at or even over the listing price.
As a broker, yes they do have to represent your best interest but they also have responsibility to you to set your expectations appropriately. If the comps show that these should sell at list price with multiple offers, you need to be aware of that. No one is going to take a low-ball offer when there are multiple higher cash offers on the table. If the MLS isn't agreeing with you, you may need to start doing marketing yourself. Several people have mentioned this already, but you may need to start looking for distressed properties and off-market deals.
So for your example, a 2 unit with a $1400 rent roll. Right off the bat, I would need to see what the unit mix is. Typically in Allentown you'll have a converted row home that has a 1 bedroom unit on the first floor and a 3/4 bedroom unit on floors 2 and 3.
Rent is going to be largely dependent on not only the unit mix but also the quality of the finish product.
For a nice finish product on a typical 1 bed/1 bath unit in center city you can expect up to around $800 ($850-875 if the unit is extra nice or has something else going for it, like being super large, exposed brick walls, etc.) The 3 or 4 bedroom unit can rent for $1100-1200 in similar condition assuming new updated kitchens and baths.
So what might be advertised as a $1400 rent roll, may very well be able to be $2000 with less than $10-15k in work. A savvy investor may look at the property and realize a $10,000 investment in some new kitchens and bathroom updates may net them $7000 a year in additional rent. This may be happening with some of these properties. I know you're taught to generally buy based on in place rents, but real solid market knowledge can make you comfortable with deviating from that rule in certain situations.
I would underwrite your deals with 1 month vacancy, $700-1000 per unit in repairs and capex, 10% management, and accurate taxes, $375 per unit for trash annually, $75 per unit rental fee annually, $20 per month for common area electric, $800 per unit if you pay gas heat and hot water, $1400 per unit if you pay oil heat and hot water for tenants. $850 for insurance for duplex.
Also gotta keep in mind that a lot of people buying duplexes are self managing and not including management fee in there, which is going to put you at a disadvantage.
What he says is you need to put more down while matching the local practice for retail sale.
For unlisted properties you can offer what you want factoring in realtor fee for wholesale.
@John Kutrzeba Your signature line says you are an agent. So I operate under the assumption you have some background to in understanding how to value properties. There are many accepted ways to value properties, cap rate, comparable sales, grm, price per unit......what is not an accepted way to value a property, is how much an individual wishes to get in cash flow. I want to get $5k in cash flow per door. You think if I make offers based on what I want, that that offer is going to be taken seriously?
What bothers me is my broker sending me the following email:
Your statement here makes me think of this commonly seen image below.
@John Kutrzeba - tough market in the Lehigh valley at the moment. You have to have a plan immediately of how your going to add value. The last two I bought in the valley, First was full price sight unseen (it got accepted)... We also negotiated a substantial credit due to deficiencies in the place... and I've had to put a few bucks into it as well. It does cash-flow nicely, but its been a challenge for the first several months.
I bought another building a week after closing on that one - vacant duplex that took a $65k rehab. We just refied out of that a few weeks ago... still have some skin in it, but well under 20%. I negotiated a cash deal, 2 week close, and put up $10,000 earnest money to win that one... all in the living room while other investors were in the building!
At any rate, there are plenty for sale - most if not all are "full freight" retail pricing too. I've got a couple that Ill sell that way, and they still make LOTS of money (even with current interest rates)... however I have little inclination to do so. Your going to be extremely hard pressed to get acceptance of those kinds of discounts at the present time... still a sellers market from my perspective.
Id steer you towards re-evaluating the strategy and what your ultimately trying to do. The other unwritten rule is many of the localities are getting fed-up with remote owners that simply squeeze cash out and bring in substandard tenants that cause decline in the neighborhoods. Its a real problem in several areas... I've also found a source of deals working to fix that - but again, its not easy. Ill be blunt, If I had a property listed for $140k and someone floated in an offer of $75k your not going to even get a response from me, than again sellers can afford to be arrogant at the moment.
The common factors in all of my 70% or below market value purchases are:
Offer price is a specific number. No zeroes.
Distressed seller with a problem I solve.
Most had to be cash. Odd property or regular property with too many repairs.
Spoke directly with the seller, usually with them calling me. Even after I emailed them or left a voicemail, they called me and that's important. Then you can say 'Shoot, I don't want to insult you. I'm not your buyer after all.'
When you have permission to insult them, go ahead, in writing. The last one called back and said please, insult me. I bought a bad buy at the auction Fri and own this free and clear. I said I'd snailmail his insult to him tomorrow after talking with my wife.
He received my written LOI and we are under contract at 60% of value. A very specific price that looks large when written out. Need why they are selling. Need them to ask to be insulted. You didn't have either on your offers.
No seller is going to take %40 off if they can get 5% off. You are hunting the wrong game for the what you want to end up with... MLS seller isnt it... as was said above... you need off market, distressed.
cap rate, $ per door etc.. arguments dont matter if sellers can point to comps and say nope, I can sell it for x. Who knows WHY those buyers are paying that, it might offend your math... but that doesnt matter.. the sales prices are the real market in your area... your fantasy market of x per door is moot. Your realtor is telling you your strategy wont work... dont be offended... listen. ask them what you SHOULD be doing to land a property at your target.. use their knowledge.
@John Kutrzeba it is easy to verify if your agent is right or not. You can pull statistics on what properties sell for versus asking price. You can pull comparable recent sales to see if your offers are in line with market prices. If your offer is truly 40% below market, how do you expect a realtor to make that work? You don't need them to fight as much as work magic. They need some ammunition to sell your offer. If the market doesn't support your offer, then you need something else. Are you making all cash offers with no contingencies?
I need to challenge your statement that you have "researched the market". If you have researched it, then you should know with certainty what the market prices are. If your realtor is giving you honest feedback, how are they not doing their job? I understand that you want to get a higher return, but if all other investors are willing to pay more for a lower return, that is the reality you need to deal with.
- Keep making offers that get rejected.
- Look for off market or distressed properties
- Find a different market that meets your criteria
Notice I didn't say, fire your realtor, because they are not the problem.
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