A range of questions for the experts

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A range of questions for the experts

Mr Good
Bellevue, WA · Member since 2008 · 40 posts · 0 votes

Hi,

Found a property in a good location, minutes away and no traffic (big problem here) to huge employment areas.

House for sale is on a private side street, custom built 2002, surrounded by 4 other 50 yr old homes on same street. All 5 homes owned by one elderly lady who is in nursing care. Family says they will only keep 1 of the 5.

Strange that all 5 homes are zoned on county records "Duplex". Perhaps the old lady had them all zoned that way in the 1970s, as far as I can tell she has owned them since at least then. In this area, duplex designation just offers more possibilities I think.

The house for sale is 2100 sq ft, 4 bdrm on large 17000 sq ft lot, for this area that's unusually large. It has no garage, just a parking pad. There are two separate entrances and fully separate kitchen/living areas (upstairs and downstairs). I went to city hall and got building permit for this, it took her 8 years to get all of the prop lines redrawn, soil samples, private road widened, enviro crap, geotech, etc etc etc. It is zoned duplex but building is what they call ADU (Accessory dwelling unit). Owner can live in half and rent out the other half. No separate power/sewer meters. House is in excellent condition, like new. 50 yr roof. Big covered deck, very nice touches throughout.

It was offered $365k 200 days ago. Never gone STI. Eventually hit $320k 50 days ago. I offered $300k two days ago and seller is apparently still "putting things together" but my offer was only for 1 day so I guess it's invalid at this point.

I am unimpressed with the real estate people involved. I have little experience, only purchased 2 homes previously. Is it standard practice to tell the buyer he must write a check for earnest money, at time of making offer? My credit score is range 796-819 and I showed that to RE agent. The contract says I have to deliver the earnest money within 2 days. Why should I have to write a check at the time I make an offer? I don't like my checks floating around like that.

Thanks for any feedback about this entire deal.

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  • Lynn Z
    Member since 2008 · 689 posts · 23 votes
    18y

    The earnest money is the "consideration" which accompanies the "offer" which if it becomes a contract and completes delivery is required have consideration to make it a binding contract. In our state, it isn't the agent that holds the earnest money it is their broker and their broker's escrow account. If there's a dispute and you need your earnest money back, it isn't an automatic. There a form to be filled out at that broker's office etc.
    If you go FSBO make sure your attorney holds the earnest money, not some agent friend of the buyer who has no horse in the race at all.

    The average new magazine fails within 5 years. Real estate isn't any different. It's risks are great and market ocal and in my city street to street, block by block. There may not be one good buy for an investor every month and certainly if it were 70% off of retail, every hungry agent in town (and there are many of them now) would have bought it and flipped it themselves. And many of them have cash reserves. The successful ones always have something on the side going every year besides selling to other people. Every appraiser in town has a broker's license and they're the game too. Those guys know what they're doing too. That's your competition. Year's of experience.

    I can't get a tenant for a perfect 3 bedroom house much less a two year requirement. Everyone's property is sitting because THERE'S SO MUCH OF IT right now and it's winter. I'm picky and could have rented to three applicants with dogs and bad or stinky credit. The only safety factor you have as a landlord is your good sense and experience and cash reserves. You will never last on a shoestring. That's a guarantee.

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  • Mr Good
    OP
    Bellevue, WA · Member since 2008 · 40 posts · 0 votes
    18y

    Thanks a lot for the advice. I really can relate to the shoestring comment. I am prepared for the worst, and willing to give it a shot. Fortunately I do not have to be on a shoestring, knock-on-wood, I own a small company that is doing well and pays me about $150k per year, and I live a pretty frugal lifestyle with the exception of forking out money for my kids' education and a travel bug. So why not get going with properties now--it seems like I should use the current slow market to pickup a few smart buys, followed by years of working hard to maintain them and keep the cash flowing to pay back the debt, and 20-30 years down the road I have a nice little nugget of revenue coming in when they're all paid off.

    Regarding your comment that there might only be one deal per month for an entire metropolitan market. I tend to disagree. There might be only one really good deal, that gets snapped up by the insiders you mentioned, but there are plenty of homes for sale and a skilled negotiator should be able to come in at the right time and make an offer, and still get a great deal. That's where I think a good real estate agent can help me, but I am hopelessly unimpressed with all of them. I have purchased FSBO before and it was so much better that way.

    Assuming I don't get the greatest deal for a given month, I might buy $20k higher, but over the course of 10-20 years, if I paid a bit more at acquisition and did a good job taking care of it and got lucky with sound renters, it still turns out to be a good buy. Keep in mind I believe strongly that inflation is on the way, this is something that many economists will disagree with, others will agree with me. So I am making a bet that property acquisition will pay off not only due to monthly rental revenue, but also longterm appreciation.

    Aside from that I think we would agree that when there are too many buyers, it's not a good time to find the best deals. In the current environment there are too few buyers in my opinion, very little cash floating about looking to buy, so the shortage of buyers works to my advantage and now I can get deals that would not have been available 1-2 years ago because the cabal of insiders would have been snapping them up.

    Do you think rents will go down due to oversupply of rental homes? I would love to hear your insight on that. Thanks.

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  • Lynn Z
    Member since 2008 · 689 posts · 23 votes
    18y

    Appreciate your comments. In my city home appreciation ran 6.7% Q3 2007 over Q3 2006 so we're fairly stable vs. the coast where appreciation isn't even running 3%. Rents were flat the past 5 years but last year we were able to go up on rents, especially SFH's significantly. This month there are a tremendous number of units available and rents seem depressed. Hard to find tenants at all this fall. January will be the next best month.

    Rents are market driven so no, I don't think rents will be going up every year in the future. Here it will be flat, increase, flat, increase over time. Everyone is market conscious. When rents go up, everyone goes up. When rents go down, there's a tendancy for everyone to adjust downward --if they don't want months of vacancy. We're a university town so the thousands of new apartment complexes built on the outskirts of town affect our in-town market. I'm renting more to working graduates who are sharing a house or an apartment because they no longer want to party down and congregate in a square. Some attend law school or graduate school and are a more responsible bunch. They measure the miles to work and school and will not go out past a predetermined distance. Smart.

    Keep us posted on your successes and experiences with your acquisitions.
    I'd love to follow how they turn out. I'm not impressed with many agents I've dealt with either. I prefer FSBO's but find them overpriced much of the time.

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  • Nick Albin
    Member since 2008 · 117 posts · 3 votes
    18y

    Hmmm. No offense man but I have to agree with Mike and a lot of other vets.
    Granted I just bought my first rental. It has immediately made me money. Because I used some of the basic principals that Mike and a lot of the other vets preach. I also used the some techniques to buy my home that I live in.

    I mean would you buy a stock or bond that is gonna cost you every month for some time and will go up in value, but to what extent is uncertain. I mean I wouldn't. I would only want to put my money into something that I am for sure it could make some money or at the very least has a good chance of making me money very soon.

    As far as the damage and land lord issue. Go to a nearby REIA meeting. If you talk to any investors who have been in the business for any amount of time with rentals. They will tell you about the bad tenants, evictions, damage, set outs, etc. Its just the nature of the business.

    Now with one home, maybe you won't experience that.

    I understand you had a home before that you manage, but why not take your time and buy a smart investment that can provide a little extra money for you and your family and at the same time be a nice nest egg for later on.

    (I am still learning so any vets feel free to correct me on anything. Thanks guys)

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  • Mr Good
    OP
    Bellevue, WA · Member since 2008 · 40 posts · 0 votes
    18y

    It seems like there are a lot of ways to make money in real estate, long term especially.

    An old German lady I knew as a kid bought 20 acres of land some 40 miles out of town and sat on it without ever getting anything in return as far as rent. Paid taxes and just had the land. Do you know what, she is getting the last laugh now, it's all becoming industrialized and developed and parceled out for very big money. She would have never been able to make the same return earning bank interest. Granted it may have been 30 years in the making.

    I am averse to the stock market even though I have done "so so" in the past. I will not put my money there now. We all have our preferences.

    I absolutely agree that the hunt for a great deal is the most important thing involved but whether or not a property loses a bit of money in rent over a 10 year period due to vacancy or broken windows or whatever, I tend to think that in the longrun it will always pay the best return especially if you keep your books clean and run a tight ship.

    So good luck with your rental and your home and hope to hear back from you as well.

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  • Michael Rossi
    Real Estate Investor · OH · Member since 2008 · 4k+ posts · 1k+ votes
    18y

    There are also thousands of people in this country who have gotten the last laugh by playing the lottery. They put their money down each week for decades and then one day they win millions (something they would never have been able to do earning bank interest). Is this a valid method for getting rich? Yes (but I wouldn't do it).

    The story of the little old lady brings up another point - TIME! While it may be true that the old lady finally struck it rich, it may also be true that she had to wait to the end of her life to get there. That is unacceptable for me. I am not looking for money and wealth in 30 years. I insist on getting the increased cash flow from day one, instant equity on every purchase, and significant wealth in only a few years (5 years). I'm not waiting 20 or 30 years, all the while betting on appreciation.

    Let's be clear here. The "HUNT" for a great deal is absolutely irrelevant. This is not a game or sport. The only thing that matters are the numbers on the deal (are you making money or losing money). The deal that you were looking at was not losing a "bit" of money over a 10 year period, it was losing nearly $500 per month. Chances are that appreciation over the long run will result in you being able to sell this property for more than you paid for it. However, that "profit" will be offset by losing nearly $6,000 per year and the opportunity cost of actually making money over the same period of time. This is really just a forced savings program. There is absolutely nothing wrong witn having a forced savings program, but let's not pretend it is something that it's not. The payoff in this forced savings plan depends on speculating on appreciation in the future.

    If a person's goal is to have only one or two rentals, then this type of plan certainly won't destroy them financially (provided they have the cash to feed the alligator each month.

    Good Luck,

    Mike

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  • Nick Albin
    Member since 2008 · 117 posts · 3 votes
    18y

    I agree with Mike man

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  • Mr Good
    OP
    Bellevue, WA · Member since 2008 · 40 posts · 0 votes
    18y

    Thanks for your response. I suppose the big difference between property purchase and the lottery, in particular for the person who purchased 20 acres and held them, at any time immediately after purchasing that land it could have been sold for an increasingly higher amount of money. How long you hold it determines the payout obviously but it's not a strict lotto, win or lose.

    There are so many ways to win with real estate, not just buying and making money right away via rents, and at the end of the day what you purchased almost always has value if it needs to be sold. Excise taxes and real estate fees add up though so the outlook has to be in years but hardly anything like an all-or-nothing lotto ticket. But I am sure you are a winner with the market area of your focus. No question about that.

    I wonder something about regional difference in capital outlay vs timing of positive cash flow. From what I can see there are a lot of people renting homes in my area for levels which are far below breakeven, if they choose to sell those homes and walk away. In other words, you can see a home that could get $380k on today's market and it rents for $1400/mo. The only way this is happening is that the guy has owned it for a long time.

    There must be a fairly common timeline involved for certain large markets, in terms of the amount of time it takes to invest and the lag for rents to catch up, as well as appreciation. I don't doubt that in many markets it's possible to assume 50% rent is lost due to various factors, and still get positive cash flow on a property with 30% down payment, and in other markets if those formulas are applied nobody would ever invest in rentals.

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  • Will Barnett
    Investor · DFW, TX · Member since 2008 · 66 posts · 2 votes
    18y

    Goodvalley I have a thought you might find useful.

    In most cases, low end properties cash flow better but do not appreciate much, if at all. High end properties are harder to cash flow but are a much better speculative play because their values rise the most, sometimes astronomically, in an up market.

    I try to find blue collar properties in the middle that I can purchase at a big discount to gain instant equity, cash flow pretty well, and might even have a chance to appreciate tremendously in a market upswing.

    My opinion is why risk your money on an upperclass rental that has the extreme possibility of negative cash flow, especially if you're just beginning your investing career? You might as well play the stock market, at least you won't have any tenant headaches.

    What I'm trying to say, as well as Mike, is that investing in properties that cash flow well, bought well below market value, is a proven method of generating wealth in ten years or less. It involves far less risk than purchasing a luxury rental and hoping the value will skyrocket sometime in the next three decades.

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  • Brady Winder
    Rental Property Investor · Tacoma, WA · Member since 2008 · 30 posts · 11 votes
    18y

    Goodvalley,

    I sympathise with your situation. I currently live in Texas, but I am originally from the Seattle/Tacoma area. I became interested in real estate investing about a year ago and have read book after book since then. I also love reading the forums on this site.

    I have been monitoring the market in Southeast Texas, and it is not all that difficult to find deals that cash flow. We have rental rates comparable to the Tacoma area, but home prices are ~ 1/3 relative to Tacoma. It is not uncommon to find homes in my area for less than $40K, but it is impossible to find homes in the Seattle/Tacoma area that cash flow. Landlords in the Puget Sound must have either purchased thier properties a long time ago when RE was less expensive, or they ignore the traditional guidelines for REI. I have a feeling that most investors in the Puget Sound are more optimistic about appreciation than those in the midwest and the south.

    I would love to hear from experienced investors in the Puget Sound area on the cash flow debate. Maybe four-plexes are the way to go?

    I'm afraid that when I move back to the Puget Sound my money will go into the stock market or I will have to become a long-distance landlord.

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