roof is 18 years old, should I withdraw my offer, thx!

General Real Estate Investing
14yFollow

roof is 18 years old, should I withdraw my offer, thx!

Peter Zhang
Saint Paul, MN · Member since 2012 · 7 posts · 2 votes

hi,
I’m new to the forum. I have a question regarding an offer I made yesterday. I offered to a real estate investment property last night. The owner accepted my offer but they didn't have the property disclosure available when I sent my offer. I just received the property disclosure today. I notice the age of the roof is 18 years old, and no repair or replacement work was done since 1994. I feel like the roof is reaching the end of life. I was under the assumption that the roof doesn't need to replace soon when I offered. So the owner is telling me although the roof is 18 years old but nothing is wrong with it, and they stand firm with the price. From a real estate investment standpoint, should I withdraw my offer due to the potential roof replacement cost? Thanks,
Peter

1Reply
134 views

Most Popular Reply

Joel OwensBusiness Member
Moderator
Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
14y

Be careful. The sellers cash flow could have been great all these years because they never fixed anything.

It's like a car that you buy new.It gets 80,000 miles on it and the seller says they have never had a problem.Even though items are old the seller states they still work.

You buy the car and then a bunch of things start going out.The seller got a great price and made you pay for the repairs.

Don't do it with this house and don't talk yourself into a deal.Run your numbers and give that to the seller and if they balk keep looking.

Podcast Guest on Show #47
NNN Invest53 Reviews
WebsiteView Page
1Reply
See this reply in the discussion

27 Replies

Jump to latestLatest
  • Will BarnardPro Member
    Moderator
    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    14y

    Is this a flip, or a buy and hold? If a flip, and the roof has good appearance, and after your roof inspection, needs no repairs, I would not worry about it. If a buy and hold, I would have concern as you will run into some capital expenses sooner rather than later. To account for that, you either need to have awesome cash flow, or get the price lower to account for said future costs (or get a deferred maintenance credit from the seller)

    Podcast Guest on Show #130
    0Reply
  • Steven Hamilton IIPro Member
    Accountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
    14y

    Peter,

    Is this a flip or a property you plan to hold onto for awhile? Is there room in your projected profit for this. Only you can answer this. How good of a deal is it? How much will a new roof cost? Can you add another layer or will you have to completely tear it off. Those are items you have to include in your analysis of a property.

    "Is the juice worth the squeeze?"

    Run the numbers and get a quote for the roof.

    -Steven the Tax Guy

    [email protected]224-381-2660
    0Reply
  • Peter Zhang
    OP
    Saint Paul, MN · Member since 2012 · 7 posts · 2 votes
    14y

    Guys, thanks for your prompt replies.
    This is a buy and hold, not a flip. Without taking the roof replacement cost into consideration, my initial calculation of cap rate is 8.3% and cash on cash is about 8.9% for this property. Since I'm new to real state investement, I wonder what would be the ideal return normally for a buy and hold strategy. I'm located in Minnesota. Houses I'm looking at are typical rambler built in 1950-65 with 3 to 4 bedrooms and 1.5 bath, price range is from $130K to $160K. Thanks again,

    Peter

    0Reply
  • Will BarnardPro Member
    Moderator
    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    14y

    If yoy are paying roughly $140k for such a home, what is the gross rent amounts?

    Podcast Guest on Show #130
    0Reply
  • Peter Zhang
    OP
    Saint Paul, MN · Member since 2012 · 7 posts · 2 votes
    14y

    My guess based on craiglist rent in that area is about $1,400/mo.

    0Reply
  • Will BarnardPro Member
    Moderator
    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    14y

    So your gross monthly rent is about 1% of the acquisition price which only means that the income can support PITI and nothing much more above that. To get actual cash flow, you need to be at 1.5% or better at those acqusition prices to get real cash flow which makes me wonder how you came up with the cap rate and COC numbers.

    To get a cap rate, you must know expenses, and that is not just taxes, insurance, and debt service!

    For quick evaluations, you can use the 50% rule which states that 50% of your gross rent will go towards expenses (operating, capital, and vacany). The balance 50% will go to debt service and cash flow.

    So, at $1400 gross, after expenses, you are at $700 monthly to cover debt service and cash flow. With $140k in debt, you are not left with a whole lot of cash flow, so where did you get 8.3% cap rate?

    Podcast Guest on Show #130
    0Reply
  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    14y

    Be careful. The sellers cash flow could have been great all these years because they never fixed anything.

    It's like a car that you buy new.It gets 80,000 miles on it and the seller says they have never had a problem.Even though items are old the seller states they still work.

    You buy the car and then a bunch of things start going out.The seller got a great price and made you pay for the repairs.

    Don't do it with this house and don't talk yourself into a deal.Run your numbers and give that to the seller and if they balk keep looking.

    Podcast Guest on Show #47
    NNN Invest53 Reviews
    WebsiteView Page
    1Reply
  • Will BarnardPro Member
    Moderator
    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    14y

    So in my example, your NOI is $8400 ($1400 X .5 = $700 X 12 months = $8400 NOI)
    NOI of $8400 divided by $140k is 6% cap rate.

    I can think of many returns in RE better than that without the headaches of being a landlord!

    Podcast Guest on Show #130
    0Reply
  • Bryan Hancock
    Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
    14y

    Sounds like closer to a 6% cap rate to me. Sounds expensive....especially with deferred maintenance.

    0Reply
  • Will BarnardPro Member
    Moderator
    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    14y
    Originally posted by Bryan Hancock:
    Sounds like closer to a 6% cap rate to me. Sounds expensive....especially with deferred maintenance.
    Looks like we are on the same page Bryan!
    Podcast Guest on Show #130
    0Reply
  • Peter Zhang
    OP
    Saint Paul, MN · Member since 2012 · 7 posts · 2 votes
    14y

    Hi Will, Thank you so much for the information. I just recalculated my number, you are right, my COC and cap rate were not correctly calculated.
    I did the calculation again. I plan to manage the property myself. I assume the acquisition = $140K, estimated rent income =$1400, and expenses are tax = $216/mo, insurance =$130/mo, repair = $100/mo if any, vacancy loss (1 mo) = $116.67, NOI=$836/mo. Now the cap rate becomes 7.17%, cash flow = $310/mo w/o mgt co. involved, and cash on cash is 9.28%. (25% down pay + $4,000 closing + $1,400 upfront cost, total upfront cash = $40,400).
    Are there any other expenses I omit? When you consider buying a real estate investment property, what would be the target cap rate you guys look for?
    Thanks, Peter

    0Reply
  • Will BarnardPro Member
    Moderator
    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    14y
    Yes, several. First off, $100 a month for repairs is fairly low. Over the long haul, you will incur at least 10% of your gross rents in repairs which in this instance would be $140 monthly. You also did not include accountanting costs, legal fees, evictions, capital expenses, advertising, tenant placement fees, management fees (even if you manage yourself, you still have to pay yourself for your time).

    This is why the 50% rule is so handy to use for quick calculations. You don;t have to itemize every cost, just use 50% of the gross rents as your cost factors and you are done! Then subtract out debt service and what you have left is either positive or negative cash flow.

    Podcast Guest on Show #130
    0Reply
  • Will BarnardPro Member
    Moderator
    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    14y

    In this example, your $700 NOI plus debt service of around $670 would only leave about $30 in cash flow. Not a good deal by any standard.

    Podcast Guest on Show #130
    0Reply
  • Peter Zhang
    OP
    Saint Paul, MN · Member since 2012 · 7 posts · 2 votes
    14y

    I got it now. THANK YOU SO MUCH for the valuable information.

    1Reply
  • Peter Zhang
    OP
    Saint Paul, MN · Member since 2012 · 7 posts · 2 votes
    14y

    BTW, in my calculation, my debt service is around $525, (25% down pay, 30 yrs conventional loan, 4.375%).
    Also I want to know what an ideal cap rate and COC would be when you decide to purchase a buy and hold real estate investing property? Peter

    0Reply
  • Bryan Hancock
    Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
    14y

    Most investors look for cap rates in excess of 10% at a minimum if your goal is cash flow. If you are buying with the hope of some appreciation you can likely adjust this some.

    0Reply
  • Andy Collins
    SFR Investor · Dallas, TX · Member since 2011 · 604 posts · 243 votes
    14y

    I'm going to go back to your question about the roof,,,if my inspector says a roof is in good shape, no signs of leaking, being 18 years old doesn't bother me at all, I replaced the roof on my residence last year (because of hail storm, insurance paid for it), it was the original roof from 1986, no repairs ever done, now I have walked away from a deal in part because of roof condition, but not age

    0Reply
  • Bryan Hancock
    Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
    14y

    Assuming the deal was a better deal than what you have presented you could ask for a deferred maintenance credit for the roof to reduce your cash at closing assuming your lender will allow it.

    1Reply
  • Nathan Emmert
    Investor · San Ramon, CA · Member since 2011 · 1k+ posts · 569 votes
    14y

    Where are you getting 4.375% fixed for 30 years on a NOO? I had heard the going rate was closer to 5% (though I did see someone lock up 4.8%).

    Single famiy homes are very hard to get a solid CoC on, especially at that price point. You might want to look at the VA foreclosures where you can get into homes at 5% down with incredible financing. VA.Equator.com

    0Reply
  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    14y

    With the terms you quote (which are quite good for NOO) you're getting $175 a month in cash flow for an investment of $140,000*25% = $35,000. That's a 6% return. That's quite low for a rental. Is there some other angle here such as appreciation?

    0Reply
  • Mark UpdegraffBusiness Member
    Real Estate Broker · Rochester, NY · Member since 2010 · 1k+ posts · 705 votes
    14y

    Definitely shoot for a 10% cap at minimum. There are too many good deals across the nation to settle for less. Of course, location is always a factor in RE investments, so that can play a part in your decision.

    I agree that an age of a roof is not enough alone. You will see times where trees that hang over a new roof destroy it quickly, or make it covered in moss, shortening the life. So, really you need to evaluate each roof for what it is, not when it was put on. The age will play a part in it. I personally look for how many layers (go to the attic and look into a vent spot if available. You can count the layers). I personally would opt to remove shingles and start fresh no matter how many layers, but I have a small crew at my disposal, and for me it makes more sense to me to do it that way. Shingles over shingles can look OK, but a lot of times it does not look nearly as good as a complete tear. And, in my opinion, it has more potential to fail. While up there anyway, why not just do it right. When you sell it, a savvy buyer will check how many layers anyway. Spend the extra $ and strip it.

    When we purchased our first house (primary) we got the home inspection, and the inspector gave the roof "5 years of life left" based on the age... well, it has been longer than that, and the roof looks exactly the same as when we moved in. I'm not worried at all about failure, and expect to get at least 5 more years of maintenance free life. Anyway, that really bothered my wife, and we almost lost the deal due to it. At the end of the day, go with your gut.

    PS - the water heater is over 30 years old! It is still working fine, and I have not touched it. Luck? Maybe. Just be sensible and look at many many many many many many many many properties before buying your first investment.

    Cheers,
    MC

    Podcast Guest on Show #112
    Updegraff Group Realty4.746 Reviews
    WebsiteView Page
    0Reply
  • Bienes Raices
    Orlando, FL · Member since 2009 · 2k+ posts · 282 votes
    14y

    Peter,
    In terms of future offers, your county should have a website where you can look up permits by address. This will tell you the age of the roof in many cases, except when they replaced it without pulling the permit. It will also give you useful information about open or expired permits on other features of the house.

    Since you received a disclosure, I assume this house is not an REO, but I find it's best to do as much homework I can on the internet and the phone before I even make an offer. Relying on disclosures is not a great strategy.

    0Reply
  • Scott Grace
    Real Estate Broker · Halifax, Nova Scotia · Member since 2009 · 19 posts · 1 vote
    14y

    If you feel it is a good investment than try to negotiate to split the cost of a new roof(money off the price because it doesn't sound like it has to be dine anytime soon) because when you made the offer you did not know the roof was toward the end of it's existing lifetime. Best of luck!

    0Reply
  • Peter Zhang
    OP
    Saint Paul, MN · Member since 2012 · 7 posts · 2 votes
    14y

    Hi guys, thanks so much for all the valuable feedbacks.
    So after the inspection, my inspector told me that he didn’t see any signs of leaking, but the roof does show signs of wear and tear. He thinks the roof may have 5 years or less of life left. I told the seller that my offer did not take the roof replacement cost into consideration because the disclosure was sent to me one day later. I’d continue to honor my offer if seller agrees to compensate to some extent. But the seller stands firm on the price and told me nothing is wrong with the roof. I’m thinking to walk away from the deal now because of the potential roof replacement cost.

    The other question I have is about market value determination. When you guys assess a market value of a property, do you rely on information provided from county estimated market value or zillow.com? Using my situation as an example, for this particular property:
    - previous yr county estimated market value was 158K,
    - this year county estimated value is $150K,
    - zillow.com shows $144K and estimated rent is $1,420/mo.
    - The property listing price was $148K, on the market for 12 days, property was listed last year for a couple of months but removed, reason unknown.
    - The accepted offer was about $140K.

    I initially thought this is a good buy because my acquisition price is below market value plus 5% discount off listing price, in addition I can achieve monthly rent 1% of the acquisition price. That’s why I was obsessed with this property.
    After going through all the feedbacks, apparently, 1% is not enough, but I feel it’s very difficult to achieve 1.5% as Will suggested in my situation. So what resources would you guys use to determine a market value of a property? In my example, do you think that I actually gain immediate appreciation after acquiring the property since I bought it below market value? Thanks,

    Peter

    0Reply
  • Will BarnardPro Member
    Moderator
    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    14y

    Peter, as others stated, an NOO loan will likely be higher than the figures you quoted, plus, in order for investors to compare apples to apples, we use the entire purchase price and assume the loan would be taken out for that amount. Placing money down to lower the debt service does not make a deal better. if it did, investors would simply place 100% cash down everytime and state I have huge cash flow! In essence, you need to compare apples to apples to see if your return matches up to alternative investments.

    As far as valuating a property, never rely on assessed values or "zestimates" from zillow. The only thing that matters is actual sold co0mps within the last 3 months and similar properties (i.e. if subject property is 1500 square feet and 3 beds, 2 baths, you need other sold comps that have similar size and same beds baths or know how to adjust for those with an additional bed or bath.
    Comping values is an artform and takes practice.

    Podcast Guest on Show #130
    0Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free