Negotiating a purchase - stick to our guns?

Question

We're looking at purchasing a SF home for rental. We found one that is practically turnkey - it could be ready to rent in 2-3 weeks at most. We estimate $500-1000 for improvements/repairs because it needs very little work, so we are budgeting $5k above the purchase price to give us a little wiggle room. We'd like to be in it for no more than $75k when all is done. The list price is $82,500, and they've been trying to sell it for over 6 months, first on their own and now through a realtor.

Here is how the negotiating has gone so far:

Verbal offer 65k ~ verbal counter 75k+ we pay all closing costs

Written offer 70k ~ written counter 75k + we pay all closing costs + they keep the electric fireplace.

That was a bit annoying, so we didn't answer right away. Today our agent came to ask us about it because she said they've been calling her every day and want to know if we have a decision. We told her we were rejecting their counter and why. She asked if we'd consider $72,500 if they came back with that and we told her maybe.

So a little while ago she called with a verbal counter of $73,500, we pay closing & we keep the fireplace. We told her there is another house we want to see first, and then we might consider that deal.

So here's my question. Are we quibbling, or should we stick to our guns?

Adam Johnson · Answer

@Sylvia B. - I picked up on several things in your last post that reinforced what I was assuming:

ALWAYS include an allowance for property management, even if you plan to do it yourself.  Otherwise, you will always HAVE to do it yourself because there won't be money in the budget for any other way to work.  I manage all of my own properties, and I use 10-12% when analyzing potential purchases because that is likely what I would pay somebody else to do it for me if I changed my plan later one.  I am looking forward someday to sitting on a beach somewhere...

ALWAYS allow for maintenance reserves, even if the house is newer.  That is what will pay for large expenses when they happen.  A roof, a furnace, a tenant that destroys the place, etc. are not an annual item (generally), but when you hit the magic year when they happen, it can be painful if you didn't allow for this upcoming expense in previous years.  These items wear out just as fast on a new home as they do on an older home.  It is careless not to plan for this.

I would discourage against using the cashflow from other properties to support a deadbeat property.  What you have effectively done is ruined your returns on the other properties in order to purchase a deadbeat.

I understand the point of your original post was not to get into this part of it, but I caution you on your approach to investments.  You are leaving WAY too much money on the table with the way you are justifying what to purchase.  I offer my thoughts not to give you a hard time, but to give you something to benefit from.  I would encourage going back to the drawing board and rethinking your approach.

Best of luck to you and happy investing.

Jack Tucker · Answer

@Sylvia B.

I am reading between the lines in your post when you say that you want to buy a SFH "to rent".  I'm deducing therefor that your goal is cashflow.  The most important data point that you have left out is the rent you will get per month.

Normally, know the rent that you can charge before you even make an offer. Then you can use the 50% rule (well discussed throughout this site) to determine your offer.  The good news is that you have presented enough data to give you an answer if you are "quibbling" or not.

Purchase price $73,500

ASSUME:

1. Repairs $5,000

2. Closing Costs - $5,000 - actual number depends on your situation

...hence... "Rental-Ready" = $83,500 turnkey

3. Assuming the 50% rule applies

4. Assuming Athens Georgia market cap rates (because that's all I know)

Note: You can plug in your local market or specific area's cap rates to get your magic rent number. Ask a good realtor if necessary.

Min Rent =  $83,500 * 8% Net Cap / 12 months / 50% rule = $1113 / month.

That's a lot of math to say that you are not "quibbling" if the rent you can charge does not reach $1113 per month.  If you cannot get $1113 per month, I would find something else to buy, unless the property will substantially appreciate.

Keep in mind that this house has been on the market for 6 months at  $82,500, and your final basis is going to be right there: $83,500.  This is NOT a good price from an "equity" perspective.

Avoid the very common desire to "finally just buy something". We all get that, but if the rent is not above $1113 for this final price, I'd keep shopping.

Adam Johnson · Answer

You have left out a lot of pertinent information so I will offer a generic perspective.  You need to ask yourself why you want to buy this property.  Is it to generate cash flow?  You also should have pre-established goals ahead of writing ANY offer.  These goals should drive your offer, not the asking price.  For example, if your goal is to generate $ 100/month positive cash flow after all bills/mortgage payments/maintenance reserves and the price is 1/2 what the asking price is, then that is your highest offer price.  Never, ever, ever start at the asking price and work backwards.  You are an investor, know what return you want to see and let that drive your investments.  Just because you are offering less than the asking price and they are willing to accept less than the asking price doesn't make it a good deal!

I have made some offers that could be perceived as "offensive" by sellers and their agents using this formula.  That doesn't bother me.  I do this to make money and grow wealth, not to make friends and grow the economy.

I suspect that your perspective on the numbers right now is flawed, but not knowing anything but asking price and offer prices doesn't allow me any insight into whether the deal makes sense.  My gut feeling is that you should walk away and not look back and spend more time establishing investment benchmarks that every deal has to meet or exceed in order to buy it.  You will walk away from more deals than you close on, but you will be more successful if you do so.

Best of luck!

Chris Clothier · Answer

@Sylvia B. -  It sounds like you have already come off your guns by up to $5k if you agree to a price of $72,500, budget $5k in repairs and play closing costs.  You will be in the property between $5k and maybe $6,500 more than what you wanted to pay.

If that is not a major consideration for you guys, then accept the best deal you can get and go forward.  But if you ran numbers and felt that $75k all in was the best you could do, then stick to that number and tell you agent that is all you will pay period.  Make sure she is working for you and not working for getting a deal done.

Lastly, there are always, always, always other deals.  You do not have to budge simply to get a deal.  Be patient - it is your best friend right now - and make a well -thought out decision that meets your exact needs and wants.

Thats my .02 cents!  Best of luck -

Sylvia B. · Answer

Thank you, Adam, I do appreciate the advice. If I thought I had it all figured out I wouldn't come here and ask questions. It's always a good thing when you can pick the brains of people who have more experience. One comment, though, about robbing the cashflow of other properties. We would only do that so that it could be paid off quickly. If we wanted to get a 30 or even 15 year mortgage the property would support itself.

Matt R. · Answer

Hi Silvia, newbie here...3k would not stop me if I really liked it as investment @70k.   That would probably be my limit of going to higher offer on 70k.  Mentally, I can take that if I thought it was still a good deal. The fact you have a stale listing would make me want to go 69k tops and counter 70k tops. I am going to deduct 25% from asking on 6 month old listing as a starting point formsubn100k

Sylvia B. · Answer

Cashflow, yes, and I purposely left out the expected rent. Rents in our area are much lower than what I've seen posted on here, and I didn't want to distract from the purpose of my post. I would be highly surprised if there is ANY house renting for more than $800.

Now about your assumptions:

1. We budgeted $5k for repairs, inspection, and closing costs total.

2. Closing costs will be approx. $750, at a purchase price of $73,500 it would be $78,500 rental ready.

3. I think this house will be closer to 35% for many years. It's fairly new, so repairs should be low for a while, no property management fee, and taxes & insurance should run about $1,000-1200/year. We would pay for it with about 1/2 cash and 1/2 on a line of credit, and should have it paid off in 18 months.

4. I don't know what "market cap rate" is, so I don't know how to answer that. Instead let me tell you our muddled computations. We should get $650/month on this property. 100 T&I + 150 for repairs(set back if not spent) leaves $400/month for debt service. We have 3 other properties that are rented that we own outright. Rents are $500, 650 and 6,000 (that last one is commercial). After expenses we have $200, 300 and 5500 that we can use for debt service and investment. Monies from those rentals would go to pay off this purchase. This is why I left out the detail about the rent. I know everyone would just focus on that and advise passing without answering the question I'm really asking.

As I said in my last post, our gut feeling is to walk away, and we're listening to it. I do tend to second guess myself, so I wondered if $3k was enough to make others walk or if we were quibbling. If you were willing to pay $70k would you stretch to 73k or just say no?

Sylvia B. · Answer

Thank you, Adam, excellent advice. We didn't really start at the asking price and work backwards, though I see how I may have given that impression. Our guts are in sinc. We're walking away.

Christopher Giannino · Answer

@Sylvia B. I'm in a similar situation but from the scenario you explained it seems like the sellers are very adamant about selling but not being 100% realistic with themselves. I think that with the circumstances you mentioned above, (assuming there's no other offers on the table for this particular house) I think you should have the realtor tell the sellers that this deal is becoming less and less appealing and that you have interests in other houses in the nearby area. IMO this gives you the leverage you need to get to the numbers where YOU need them in order to make it a worthwhile investment.  I think it will allow the sellers to realize that you don't HAVE to buy their house and if they need to sell, they will meet you at the price you want.  If not, you will probably will have to move on to another deal.

Just remember what you said, "We'd like to be in it for no more than $75k when all is done."

Good luck and keep us informed on what happens!

Sylvia B. · Answer

Thanks, guys! Being patient is hard, we just really want that next property! I just keep telling myself that it won't hurt us to wait, and they may be that much more willing to agree to our terms.

Negotiating a purchase - stick to our guns?

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