What would YOU offer on this? - Hypothetical

Question

I know everyone has different investment styles, different underwriting, goals and perspectives.

https://www.zillow.com/homedetails/1115-E-41st-St-Kansas-Cit...

My underwriting says I'd need to buy this at no more than $250k in the current market - more than 50% off asking... As someone new to the space, I'm curious at what level this becomes a buy for others and for what investment model. I'm pretty sure this is just indicating the market is out of balance and retail sellers are fishing a bit.

I love how the opening line says "Cash Flow from Day One", sure if you just count revenue as cash flow I guess that's true lol

Thanks!

Mark

Caleb Brown · Answer

Happy to chat to shed light. It is under rented but priced high.

Evan Polaski · Answer

Well, considering it has been listed for 101 days, it is clearly too high.  I can't tell you what I would offer, because I don't know the area.  My initial thoughts are: Kansas City isn't a bad city, so if rents are $925/mo for a 2 bed, this is clearly on the rougher side of neighborhoods.  Not war zone, but certainly more work.  WHen I have owned in "rougher" areas, tenant turnover is more frequent, turnover costs are higher, and finding qualified tenants is more challenging.   So, whatever you end up offering, factor that in.  I would also need to know who is responsible for utilities and of course any major capital items.  Goodman AC units are definitely the budget option, so plan on those likely needing more work than a higher end brand.  Again, not the worst, but whoever put them in chose the discount option.  But, given it appears this last sold less than 2 yrs ago for $380k, the seller would seem to be not thrilled with their investment.  If they sold at asking, they are likely barely making any money on the sale, once commissions and closing costs are factored in.  So, I would imagine you may have relatively motivated seller.  But back to my original point of being listed over 3 months without going pending.  I say, submit your best offer.  Something that you are comfortable with them accepting, but also comfortable with them saying no.  Going in below their purchase price is likely to yield a "no" or just no response, but you never know.  And I would call the agent before submitting and letting them know.  Give them a bit of why you arrived at your number. It still might be no, but for what it is worth, you might save yourself a little time, and let the agent know that while this deal isn't worth asking, you aren't just someone blindly throwing out offers at 50% of list (which I know there are "investors" that do).

Mark Wolek · Answer

Thanks for the reply Greg, you make me realize this was a bad example, I also would not buy a building in a historic district lol...

I'm not sure about that Zillow payment estimate, and that's not accounting for really anything else relevant... I find that almost every retail property I find on Zillow, Loopnet, or whatever... the price I'd need to buy it at is generally about 40-50% below asking. I think my underwriting is solid but conservative, I was mostly curious other peoples read on this when it comes to underwriting and pricing, but I totally missed that some would avoid it due to the historic aspect, making it a bad example.  I saw a pair of buildings in the DFW Texas market I really liked, told the broker the price I'd need them at, and they said they've already turned down better offers.  I'm sure eventually I will probably fine a deal that works if I keep expanding my pipeline, but it seems rough out there these days.

Greg Scott · Answer

This is not a thorough analysis on my part.  Zillow says the monthly payments at that price are $2,700 and rents are $3,400.  Ignoring vacancy and repairs, that is cashflowing. If it just went through a major rehab, you might be able to get away with fewer ongoing repairs.  Vacancy will depend on how aggressive you want to be with rents.

My biggest concern is "Historic District".  That usually means that major repairs will cost 2-5x what it would cost in a normal location.  If this were a total fixer-upper and the math worked, even at the higher repair costs, I would do it. A beautiful property at a premium price, it just isn't going to work. I probably wouldn't touch this deal, so my price would be $0.

The people I have met that tend to buy this sort of asset are not as focused on profit.  They take pride in owning something historic, preserving the neighborhood, and intend to hold for a long time, and usually are not pushing rents.  They operate the property more like a beloved hobby than an investment.  There is nothing wrong with that.  For me, with all the risk and effort I would have to put into managing a deal, I want more profit.

My mom loves antiques, and as a younger person, she might have adored a building like this.  I don't get nostalgic about stuff just because it is old.