For the past two weeks I have been interested in a triplex home. The owner is asking for 210k but is worth around 208k. All units are 2beds/ 2baths. It is fully rented out with 2 people paying 550 and one paying 650 (much below rent caps). One lease is up in September (550 lease) and I have 60 days to move in it from time of closing which is perfect for a house hack. In order for me to look inside the house I have to lock up a purchase and sales agreement which I worked at getting. I negotiated with seller and got the price down to 195K. The day the sellers were going to sign someone else offered more and took the deal. 2 weeks later the deal fell through and now it's back on market currently. The issue with previous buyers is that the home needed 3k in work down and the sellers didn't want to pay it. I tried offering again and offered 200k but they pay closing (5,500) and repairs (3,000). They countered at 205k but no closing and no repairs. I'm using a VA loan which is 100% financed but the VA adds on their own fee of about (4,500) which is tacked on to the loan. If I was to pay for what they wanted I would essentially be paying 218K In a mortgage with the 205k purchase price+4.5k VA fee+3k minimal repairs+5.5kin closing that I would put all into loan if I took their offer. A good amount over the marketed value (10k over). I really like this deal but numbers wise it is out of wack mainly due to the amount of offers the sellers are receiving. Also the home needs some touch ups in order for me to raise the rents to it's worthy cap of 850 based off of the market. I feel like I'm falling in love with the deal and rental potentials instead of the numbers. I told myself the most I will pay is the market value 208k but they would have to pay for those closing & repair cost. Right now I'm waiting for their response on the the 205k offer. I want to know opinions before this property is in contract again.
@Allen C Herring I don't know what your counter was, but right now you're looking at $213.5K (205+5.5+3). While you pay closing costs, they aren't part of the home value. Based on a purchase price of the home for $208K, what do the numbers look like? Do you know the terms of the failed offer and why it failed?
If you need to move into the house, you also need to state in the contract that one of the units (specify which one if you want), must be vacant upon possession. Make sure you get copies of the lease and security deposits...and the tenants know who to give the rent to.
@Theresa Harris hello Theresa in the post I disclosed how much I’m currently offering, why the sellers last deal fell through, & what the rents are currently.
@Theresa Harris Also one of the leases are up in September so I was looking to move into that one. Thanks for that advice, I will make sure I get lease copies and rent and deposits!
You definitely have to stick with the numbers. Do not buy anything based on emotion. There is a cardinal rule in real estate. You make your profit on the buy, not on the sale. If you over pay, there is less return over both the short and long terms. As a rule, I never get into a bidding contest for property. I worked out the maximum that I am willing to pay and if the seller refuses to accept the offer, I move on.
Also, I hope you have a good real estate attorney to facilitate this type of transaction. This is not something you want to give to a title company.
If you know that the rents are under market, you need to calculate what the costs of improvements are that you need to make in order to get market rent and then calculate what the return on those improvements will be and what the overall return will be.
99% of the time the appraiser will appraise the property for the price on the contract. If it appraises for less, you can renegotiate with seller before proceeding to move.
Structure your offers with never reducing the credit, but only bumping up the price. This way you strategically keep $8k in your bank account - "since cash is king" and you get to finance the costs and escrows into the price.
Suppose 204k was the sellers bottom line.
a) 212 with $8k credits towards buyers closing costs & escrows = 204 net to seller
b) 204 with $0k credits towards buyers closing costs & escrows = 204 net to seller
Seller nets the same either way, so just explain to seller that you want to raise keep the credit, and bump the price to whatever price he needs to do that.
Happy investing! Ask anything.
@Allen C Herring How are you determining market value of this property? If you're just going off Zillow, know that their valuations are often wrong. Have you looked at similar properties that have sold in the area? You mentioned that the true market rate for rent on these properties is $850 based off the market, well $850 x 3 = $2,550 (i know you're planning on living in one unit, but should still evaluate as if the entire thing was rented out). Based on the 1% rule you wouldn't want to pay more than $255,000, though that rule is really just an estimate.
Two other things, first off run your numbers and stick to them, if you feel like you won't cash flow enough at $218k mortgaged but you will at $208k then stick to that and don't go over it. Second, if you are truly concerned about paying more than what the house is worth, remember that to get your mortgage you'll have to get an appraisal and if it comes in under the agreed upon price you can either re-negotiate or walk away. Good luck!
make sure the rent comps you're using are truly applicable. this deal makes 0 sense at current rents and your financing.
@Dennis Cosgrave thanks for the advice. I really needed that Dennis.
@Dennis Cosgrave I see what you’re saying Dennis. Thanks for the knowledge!
@Jim Blackburn I get what you’re saying Jim. Up the buying price to cover the fixes and closing cost. My thing is I feel like they should pay the 3,000 in maintenance not I.
Your VA funding fee is your cost to use that type of financing. That means nothing to the value of the asset.
@Kevin S. Thank you Kevin, I appreciate you giving me some more tips in making my decision!
if you feel they should pay the $3k then your negotiation move is to lower the price by $3k but keep the seller credit---- this allows you to roll the costs into the price and keep 3k more cash IN YOUR HANDS (where you want it).