The market where I am at is scarce in terms of deals. I've been working with a developer who has a duplex who is interested in selling but is by no means motivated to sell. I'm trying to house hack my way into a decent deal to start out. The facts are this:
- Duplex built in 1980 with detached (2) 1 car garages
- Rent for long-term tenant is currently $825 while rentometer says it averages out to $1015 for the area
- Rent for the recently remodeled (5 years ago) for the short-term tenant is $1000
- Neither tenant utilizes the garage
- Property taxes are $2,797.20 annually
- The owners opinion of value is $285-300k (assessed value at $251,587)
Factoring vacancy at 5% (current area is at .2%), 10% management, no capital improvements included as I'm rolling the management fee with that as I would self-manage for this first go around. The property doesn't really cash flow above $255,000 and at that price is maybe $30 total.
Before I got the owner's opinion of value, I offered $235k and that was too low, he countered with maybe he'd consider $250-280k but didn't want to negotiate against himself. He gave me the opinion of value last week.
Is there room to negotiate on this deal to make it a positive win-win for both parties?
$250k and a $40 cash flow seems slim after everything, but perhaps its a start. Any advice on trying to make this work is appreciated, or is it too far of a stretch.
@Kevin Bagwell welcome to BP. MF is crazy hot in most places and buyers seem to be OK paying high prices! Even if you were to raise the rents to 1000 per side IMO your 235k is a reasonable offer price. You might want to check comps and see what other properties are going for. All the best!
@Kevin Bagwell - The deal seems pretty thin. Since it's residential, the value is tied more to comps than it is to income. I'd suggest asking a realtor for a CMA (comparative market analysis) to see what the value is.
Without a motivated seller, it might be a tough road.
@Bjorn Ahlblad , I was sent comps from active/sold listings within the past year. Some I think aren't applicable such as a duplex in a commercial neighborhood where 1 unit isn't allowed to be anything more than a short term rental and comes with stipulations of a non-compete agreement for certain other commercial uses. It's been sitting on the market and unable to sell thus far. Two other listings in the comparisons are triplexes and the value just isn't the same when your price is for 3 units and not 2. If I averaged those listings out, I get between $211,500(active average) and $257,500 (active and sold average).
Out of the 3 active listings sent, one has sold, the other two have been sitting on the market because they're bad deals.
@Greg Scully , Would it be fair to kick out two listings in the comparisons sent to me (by his real estate agent)? One has zoning issues, non-compete agreement, and isn't selling because that price is too high for what it is. The triplexes just aren't the same in my opinion as that is 3 units for that price, I'd take 33% off the value of both triplexes to factor that into the average.
If it's fair to average those prices down, I think we get down to a more reasonable number, If we come down to about $250-255k, the numbers start to work out, thinly, but at least it balances out.
@Kevin Bagwell - I'd get comps from a different realtor, and only SOLD properties within the past 6 months or so should be used for comps. You can use Realtor.com to look at sold properties by zip code. Comparing sold price/per sq ft is also a good way to ballpark values.
Since it's a duplex it might be a little tougher to nail down comps. Between a CMA and price per sq/ft you'd hope to see some consistent numbers presenting themselves.
@Greg Scully - Since there's not that many comps out this way, I looked at active and sold listings and broke them down to get an average price and cost/SF. I took the 3 duplexes that sold in the area (that had photos there were others that popped up that didn't look like they'd be a similar listing at all) and averaged the costs out to $234,666.66 or 128.44 /SF. I used those numbers to create a range between $234,666.66 low to $271,265.28 high. I split the difference to $252,966. With the rents stated at what they were and after accounting for all the costs (5% vacancy, 10% management, 6% capital improvements, 6% maintenance, and 8% sale costs) the property cashflows at $51.84 monthly. That's not bad from my standpoint. It's lower than ideal but better than nothing. Cap rate at 5.97%, IRR at 25.70% and COCR at 10,292.97%.
I refute two of the listings in their comparison that were on the higher end of costs because one is a lemon that is over priced and doesn't work well as a rental (but maybe as a BRRRR, and the other has zoning issues with non-compete agreements attached to the title.
I think that $255,966 is the price that is on the good side of fair. If the market is based on comparable sold listings being averaged out. Is there anything I may be overlooking on this before I reply back?
@Kevin Bagwell - It sounds like you've determined what your willing to pay. Just stick to it and be willing to walk away.
Since cash flow is thin I would recommend keeping 3-6 months of P&I and expenses in your operating account plus 5-10K for unexpected repairs and unit turns. Treat it like a business and don't let it interfere with your personal economy. I'd also recommend getting it professionally inspected.
Well, @Greg Scully , it fell through this morning. The seller saw he could list for $300k and would not accept $252,966. That was far too low. I really appreciate the advice though. I'll just scrimp and save until the next property decides to show itself.
@Kevin Bagwell - That's too bad. Take what you learned and apply it to the next one. Best of luck to you.