So, I made a full price offer on an apartment complex last week and lost the deal. Here are the details:
19 units, 11 need complete rehab (down to the studs). 7 units rented month to month at an average of 395/unit. 1 unit rent ready. All units 1 bed/1 bath. Asking price was 160k, I offered 160k with a contingency of 80% financing.
Current expenses provided by seller:
- 3000 tax
- 3200 insurance
- 6900 utilities
I add in 3000 for repairs (5%) for current 8 units, 1644 for vacancy (5%), and 3288 property management for a grand total of 19729 operating expenses. NOI is $13151, which would be an 8.2 cap (this is a 12 cap neighborhood), and debt service would be 6400 with a 30 year am, 5% interest. If I did nothing but kept the current tenants and rents, I would cashflow 6755, which is about 16% CCR after I account for closing costs and reserves. Market rates are 550, so there would be a big upside to raising the rents, along with renting out the 8th unit. So, based on these numbers I offered full price.
And I lost the deal. I spoke with the agent about why, and she said there was a second offer for cash - a lower offer, but it was cash and cash is king. Additionally, I *think* my offer was suspect because I submitted a LOI instead of a PA, and I probably came across as a newbie on the phone, so they may have wondered if I would actually close.
Lessons learned. Does anyone else have any insight on why I might have lost the deal?
Could have put $10K as earnest money and $3k option fee (not sure if your state uses these). This would have shown seller you were serious enough to lose $3K.
@David Wright You are correct. Cash is king and as Rocky said, a large non refundable deposit might have helped. Were you working with the sellers agent? If so, it might be a good idea to find an agent to represent you next time and get pre-qualified. Find another property and try again. Good luck.
Look at it from the sellers perspective. What offer would you have accepted? We don’t know the exact dollar amount of the other offer but let’s assume it was within $5000 of your offer. Cash, no contingencies, no appraisal, so basically guaranteed to close for the amount of the offer...or, your offer. Appraisal, Mortgage contingency, the chance of the appraisal coming in low, or you not qualifying or the property not qualifying and the deal falling apart. I’m taking the cash offer 100% of the time. Unfortunately, there is not much you can do to compete with cash offers with a Mortgage contingency, other than offering more money, making your deposit go “hard”, waiving other contingencies.
I don’t agree with this per say as an agent because I would not operate this way, but you may have had a better chance of getting the property if you used the sellers agent as your agent as well. They would have made 2x commission on the deal, so therefor would be more motivated to get your offer accepted. Every agent is different, and like I said I don’t agree with this practice, but some agents may work harder to get your offer accepted since they will make more money that way. Best of luck on the next one.
@David Wright maybe it was a good thing you didn't get the property... 19 units for $160k or $8421/unit. With numbers like that I don't even have to ask if the property is in a war zone. Just run the other way. If you're really intent on buying a Detroit war zone property just wait two years and you can probably buy the same property for $120k.
This deal was in a different state, not Detroit. It was a working class neighborhood but not a war zone like some pockets in Detroit. And I was thinking it was more like 20k per unit when you look at what can be rented and what would be needed to get the others rent ready. But point taken.
It happens all the time so I wouldn't worry about it. If you have the ability to buy it with cash but still want to look into finance, you can basically waive the financing contingency. That may help depending on the seller.
As for the deal itself, I kind of agree with @Jeff Kehl . While I don't know all the details, there are a lot of red flags. That's especially true if you don't have a lot of experience investing in real-estate (which you may have --- I don't know).
Disclaimer: While I’m an attorney licensed to practice in PA, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it for legal advice. Always consult with your attorney before you rely on the above information.