What price would you offer for this 4plex?

Question

I'm looking to buy a 4plex, and my realtor introduced me to an off market deal. The quad has 2/1 units, each renting at 900 a month, and one of them is empty (so perfect for a house hack). My market is very tight, I live in a small town on the west coast, and 4plexes come on the market rarely (and this one isn't even technically "on" the market). There was one 4plex that came on the market a couple months ago, that's literally on the same street as this one, with the same rents, and got 3 CASH offers of 500k.

But with the whole corona thing, surely I shouldn't be paying 500k here? What would be a good offer? I'd also be responsible for water/sewer/trash which adds an additional $350 per month of expenses on top of the mortgage. I hope to manage the property myself, and to use an FHA loan.

Help, what should I be offering to make house hacking work? The price wasn't specified, the owners want us to make them an offer,but it was hinted that they wanted somewhere along the lines of 450-500k. Should I offed 430k? Or less? What do you think?

Carl Millsap · Answer

@Ellie Narie here are a couple things to consider:

1. Some "off-market" deals are really deals i.e. lower than market price, and some "off-market" deals are just an opportunity to keep it from going to market you have to weigh the risk / price of letting it go to market.

2. In your case the comp says it's worth $500K. If the one up the street sold for $500k then the one you're looking at if it's close in age, amenities, rents etc. will be in the same ball park. That's the baseline.

3. Schedule a walk through of the units. What do they need? When were they last renovated? When was the roof, windows, HVAC units, and hot water heaters replaced? What other maintenance needs to be done? When was the parking lot last paved, sealed? Factor those repairs into your purchase price.

4. I don't think the market is going to reflect a recession for awhile so I wouldn't count on a lower price for that purpose, but you can negotiate a price you feel comfortable with.

5. As for what you should offer....run your numbers, if you house hack will the $2700 cover the mortgage at $430k, $450K, $475K and other fees or will you still have to pay? If you don't house hack and get the the 4th unit ready to rent what does that do for your numbers? Run a few different scenarios, be conservative with your numbers i.e. if you house hack and 1 of the 3 units is empty or a tenant doesn't pay how will you make up the difference?

Is there an opportunity to raise the rent? If you improved (upgrade) the units could you generate another $50, $75 or $100 per month?

6. Offer what you think it's worth to you (what your numbers will support) all they can do is say no.

Lamont Marable · Answer

Numbers, Numbers, Numbers!!  Run those numbers like you never ran them before.  Listen to @Carl Millsap because, one, he's a Millsap and everyone loves Davi Millsaps.  Two, as he mentions in number 5, generate different scenarios as to how much you can afford based on the sales price and how much are you willing to contribute to the rent.  Some people do house hacking as to pay NO rent but be realistic as you'll have to turn that unit and get it rented so expect to pay something.

Like @Evan Polaski mentioned, this "corona thing" is temporary and RE multifamily, in particular, isn't being affected by it....YET.  You can wait and see what happens in May and June or you can submit your best offer now based on your numbers.

Evan Polaski · Answer

@Ellie Narie to layer onto @Carl Millsap's comments, you need to better understand the competition.  4 families still trade through comp sales, not as much financial returns.  Cincinnati has a lot of 4 families and people are willing to pay absurd amounts for them, where they likely only cash flow with a cash purchase or very, very low loan balance.

In this scenario, I would run the numbers to see if they fall out for you.  One area you could have wiggle room in general: does the LL of the $500k comp pay water/sewer/trash or any other utilities?  In Cincinnati, it is common on older 4 families for LL to pay gas, and that can be a very expensive bill.  And did the comp have the roof replaced, better condition, bigger units (even if still 2/1's), etc?

Before you simply offer less than the comp, I would make sure you build a case as to why this one is worth less, and generally I don't think Coronavirus is the reason.  Unless they NEED to sell NOW, Coronavirus is a temporary issue.  The potential for an upcoming recession is very real and may effect property values, but again, it is too soon to know how long lasting any recession will truly be and what the overall fallout is for your area.

What price would you offer for this 4plex?

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