Think I outbid myself; thoughts on overpaying?

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Think I outbid myself; thoughts on overpaying?

Account Closed
Rental Property Investor · Rochester, N.Y. · Member since 2018 · 20 posts · 25 votes

So I'm a newbie investor and I've been searching for SFHs to start my portfolio base. The market right now is a racket and extremely difficult to win bids or get deals (unless paying cash of course). What are your thoughts on offering a bit high to get a solid house with minor upgrades needed? This house is currently assessed at 82k, i offered asking at 106k with 2% concessions. It's a smaller but solid SFH (1000sqft) in Rochester, NY which could get 1200-1300/mo. Cashflowing 300-400/mo. So the numbers still make sense I think, but feel nervous that I outbid myself.

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Russell BrazilBusiness Member
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Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
7y

Everyone who gets an offer accepted thinks they overbid. Then everyone who bids too low gets frustrated they cant get a property. The lesson, most are unhappy no matter the outcome.

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  • Tim Herman
    Member since 2018 · 2k+ posts · 1k+ votes
    7y

    @Account Closed most newbies underestimate expenses. Rule of thumb 50% of rental income is expenses. Long term mine vary from 43 to 55%.  $1200 rent = $600 for profit and  mortgage servicing. $106000@ 5%= $569 PI. $31 cash flow per month.

    8Reply
  • Larry Turowski
    Flipper/Rehabber · Rochester, NY · Member since 2014 · 1k+ posts · 1k+ votes
    7y

    @Account Closed Everybody has their own criteria.  But that is not a deal I would do.  Unless you are putting a huge sum down I have a hard time believing that will cash flow 300-400/mo.  How did you calculate that?

    4Reply
  • Account Closed
    OP
    Rental Property Investor · Rochester, N.Y. · Member since 2018 · 20 posts · 25 votes
    7y
    @Larry T. I figured the monthly payment would be 900 with rent at say 1250 that’s 350 cashflow. I do my own maintenance. But I’d be putting 20% down so would be spending almost 30k to purchase 
    1Reply
  • Russell BrazilBusiness Member
    Moderator
    Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
    7y

    Everyone who gets an offer accepted thinks they overbid. Then everyone who bids too low gets frustrated they cant get a property. The lesson, most are unhappy no matter the outcome.

    [email protected]301-893-4635Podcast Guest on Show #192
    District Invest Group545 Reviews
    WebsiteView Page
    42Reply
  • Frank Wong
    Real Estate Broker · Bay Area · Member since 2018 · 1k+ posts · 3k+ votes
    7y
    Originally posted by @Russell Brazil:

    Everyone who gets an offer accepted thinks they overbid. Then everyone who bids too low gets frustrated they cant get a property. The lesson, most are unhappy no matter the outcome.

     Lol, Facts!  Says a lot by seeing the reaction.  Every one of my clients so happy they get their house.  I am so happy I got my property for the price I wanted to pay.  In every case I got my investment I would have paid more so I felt like I made money. 

    2Reply
  • Eric Lau
    New York, NY · Member since 2019 · 60 posts · 82 votes
    7y

    my agent came back and said "your offer was accepted" Instantly i thought *F#c, I over paid... -_-

    12Reply
  • Rivy S.
    Silver Spring MD · Member since 2015 · 198 posts · 116 votes
    7y

    @Account Closed my concern would be lack of alternatives for exit.  Even if you're thinking to hold for long term, if circumstances change, you want to be able to sell without taking a loss.  

    3Reply
  • Larry Turowski
    Flipper/Rehabber · Rochester, NY · Member since 2014 · 1k+ posts · 1k+ votes
    7y
    Originally posted by @Account Closed:
    @Larry T. I figured the monthly payment would be 900 with rent at say 1250 that’s 350 cashflow. I do my own maintenance. But I’d be putting 20% down so would be spending almost 30k to purchase 

    900 for mortgage, taxes and insurance?  That still does not account for vacancy, repairs (materials in your case), capital expenditures (These are big ticket items that are infrequent, but which you should amortize.  For instance a $3k furnace that lasts 20 years costs $12.50/mo.), holding costs while not rented, gas in your vehicle and other incidentals.

    This will be a break-even property, cash flow wise.  You will be gaining equity, and you may experience appreciation.

    8Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    7y
    Originally posted by @Tim Herman:

    @Account Closed most newbies underestimate expenses. Rule of thumb 50% of rental income is expenses. Long term mine vary from 43 to 55%.  $1200 rent = $600 for profit and  mortgage servicing. $106000@ 5%= $569 PI. $31 cash flow per month.

    nice to have the voice of reason and experience Tim..  50% is a very tried and true number.. I always say use that number and if you do better then that's great.. underestimating long term running costs is the number one boo boo landlords make. 

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  • Joe SplitrockPro Member
    Moderator
    Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
    7y

    @Account Closed too many people get hung up on asking price. There are situations where I could pay 10% under asking price and get a bad deal or pay 10% over asking price and get a good deal. 

    I purchased a house three years ago for asking price the day it was listed. Two weeks ago a similar house next door sold for $50K more than what I paid. Only time will tells if you made a good purchase. 

    There is really two aspects to look at. Cash flow and appreciation. Very often the properties that have higher appreciation value will have lower cash flow. Not a hard rule, but a good rule of thumb. 

    I will tell you that Rochester is not a high appreciation city and NY is not a landlord friendly state. That being said, the purchase price is relatively low and if you self manage, there will be decent cash flow. I don't see a problem here. In fact, most people never even pull the trigger to buy their first property, so that alone puts you ahead of 99% of the wantobe investors.

    Keep us updated on how it turns out!

    4Reply
  • Jim K.
    Handyman · Pittsburgh, PA · Member since 2018 · 5k+ posts · 13k+ votes
    7y

    @Account Closed just said. Give yourself a break. Not sure how this would have gone for me if I hadn't started in something much more solid and conservative than what I've put money into since. I still remember what it was like pulling the trigger on the first rental investment here, and I had three solid European whole-property renovations under my belt.

    Good luck to you!

    0Reply
  • Tim Herman
    Member since 2018 · 2k+ posts · 1k+ votes
    7y

     @Jay Hinrichs Thanks for the shoutout. Like in another post I told how not to buy properties. Sig loan(18%) to assume loan. cash flow negative and poor tenant screening. I learned to love calculators. Better to wait to find a good deal than to buy a poor deal.

    0Reply
  • Account Closed
    OP
    Rental Property Investor · Rochester, N.Y. · Member since 2018 · 20 posts · 25 votes
    7y

    @Joe Splitrock @Jim K. @Tim Herman @Jay Hinrichs

    Thanks to all for the input here. This will be my 2nd rental property, but my first with putting 20% down, so I need to be extremely careful here. In Rochester idk if the 50% rule is doable. Anything below 95k is going to need a lot of work, and I can't do a cash-only deal yet. (Btw thanks Tim for explaining that 50% rule and the way u add that big $ item to the monthly expense, not sure I've ever really thought of it that way). I'm just using the COC return of at minimum 12% my initial investment. I also loosely use the 1-2% rule. I'm just not sure the 50% rule can apply in my area. In this market, it's just very very difficult to find a decent deal without going a bit high.

    1Reply
  • Todd Powell
    Rental Property Investor · Corvallis, OR · Member since 2018 · 840 posts · 1k+ votes
    7y
    One idea is to outbid others, but then do inspections and find some legit stuff to bang down the price. It's a practice that can work and the seller does not want to deal with the ugly truth and want to deal.
    5Reply
  • Daniel Jewell
    Flipper/Rehabber · Warrenton, VA · Member since 2018 · 71 posts · 18 votes
    7y

    @Ethan Mastrodonato

    when I bought my first deal I made an offer, they counter-offered, didn't reply I just let it sit. a week later they came back and accepted. I had the feeling that I could have offered much less.

    So in order to not feel that feeling and other reasons I've started to create systems and ways not to make a deal. so that way if any potential property comes across my desk I'm looking for reasons to say NO. if I say yes then I can trust in my systems. I don't have to worry about if I overpaid, it works for me.

    And if new information surfaces I just put that into my system it's simple maintenance.

    1Reply
  • Ryan Keenan
    bethel, CT · Member since 2015 · 335 posts · 57 votes
    7y
    @Ethan Mastrodonato Have you ever thought about using a unsecured line of credit from the bank to buy or possibly tapping into a 401k? Doing this now
    0Reply
  • Matt Honeyford
    Investor · Rochester, NY · Member since 2017 · 206 posts · 175 votes
    7y

    @Ethan Mastrodonato

    Typically those are deals that I do not participate in. Assessments are everything in this market. The lower the assessment the lower the taxes.

    I would slow down, it took me almost a year before we found our first deal. It will happen, just take your time. Find that same house, but find it for $40k.

    2Reply
  • Account Closed
    OP
    Rental Property Investor · Rochester, N.Y. · Member since 2018 · 20 posts · 25 votes
    7y

    @Matt Honeyford hey man thanks for the input, I understand that but every house I’ve seen not requiring cash-only has been well above assessed value. I used to shoot look for like 20% below assessed, but I’ve pretty much begun ignoring it. I’m looking outside of the the city at sfhs, so anything under 95k needs a ton of work. The market has just gotten extremely competitive so not sure what to do at this point and I’ve had like 5 deals fall through.

    0Reply
  • Allan Szlafrok
    Rental Property Investor · Long Island, NY · Member since 2015 · 490 posts · 301 votes
    7y

    @Ethan Mastrodonato I assume you mean assessed on the tax records? If so those often inaccurate accurate and may only represent a percentage of FMV. It's more important to check comps for similar properties in the area in order to assess value.

    2Reply
  • Dennis M.
    Rental Property Investor · Erie, PA · Member since 2018 · 6k+ posts · 9k+ votes
    7y

    by no means a home run deal but probably will pan out well long term especially if you do your own work . A lot of people get hung up on needing to get a grand slam 30% return on your money when they start out and the reality is it’s okay if it’s not a smoking deal and just a plain vanilla investment instead . You are not going to get rich on a couple properties anyway . It’s only when you scale that you start seeing good returns . The purchase price is relative and sometimes worth every penny of what it’s listed for and then some

    0Reply
  • Kyle Wells
    Realtor · Lake Stevens, WA · Member since 2018 · 122 posts · 91 votes
    7y
    Originally posted by @Account Closed:
    @Larry T. I figured the monthly payment would be 900 with rent at say 1250 that’s 350 cashflow. I do my own maintenance. But I’d be putting 20% down so would be spending almost 30k to purchase 

    You need to analyze as if you're not managing or doing work yourself.  As you may not want to do this for several properties if/when you scale up your portfolio. Even if you do own maintenance you're not getting paint, flooring, appliances, roof, etc. for free. I would see what the net income looks like and offer to get the return on your investment you require. 

    0Reply
  • Michael Ealy
    Developer · Cincinnati, OH · Member since 2018 · 1k+ posts · 3k+ votes
    7y
    Originally posted by @Larry Turowski:

    @Account Closed Everybody has their own criteria.  But that is not a deal I would do.  Unless you are putting a huge sum down I have a hard time believing that will cash flow 300-400/mo.  How did you calculate that?

     I totally agree with Larry.

    The deal does not make sense. 

    Based on experience, after acquiring over 1,000 apartment units and houses, I learned that cashflow is not Rent minus PITI. Below are the equations:

    Cashflow = Net Operating income - Mortgage payment

    Net Operating Income = Rent - Expenses

    Expenses includes:

    - property taxes
    - Insurance
    - vacancy factor
    - property management
    - repairs & maintenance
    - reserves for capital expenditures
    - utilities (in some states, the landlord is responsible for the water)
    - & there miscellaneous expenses

    50% rule is a good rule of thumb specially for apartments but for houses, specially newer homes or if you're going to renovate it, use 40% as an estimate for expenses.

    2Reply
  • Samuel S.Pro Member
    Rental Property Investor · Rochester, NY · Member since 2018 · 22 posts · 35 votes
    7y

    Larry T and Matt Honeyford are spot on. I've been in the Matt Honeyford camp... Education phase for the last 4 months. I know by looking at those numbers, it was an investment I wouldn't have even ran the numbers on (Larry clarified the reasons already). I'll give you one prop, at least you're doing it! That experience will be invaluable. I guess I'm taking a little bit more time to win with my acquisition. That's where you get a great deal...upfront. Good luck and keep grinding!

    [email protected]
    1Reply
  • Mark S.
    Real Estate Investor · Saint Paul, MN · Member since 2017 · 543 posts · 474 votes
    7y

    @Todd Powell You can do that but I don’t think it is particularly ethical to offer a price you know you intend to negotiate down after the fact. Finding unknown issues through inspection is one thing, using the process in the way you described is another, if I understood you correctly.

    2Reply
  • Account Closed
    OP
    Rental Property Investor · Rochester, N.Y. · Member since 2018 · 20 posts · 25 votes
    7y

    Thanks to all for the input. They declined my offer anyway so on to the next one. Learned from this one and move on.

    3Reply
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