Offer price help needed in Northern Utah!
Real Estate Investor · Ogden, UT · Member since 2015 · 38 posts · 7 votes
So I was listening to the podcasts the other day - and I could have heard wrong - but a guest said that they always come in at 70% of the asking price and then deduct rehab costs below that number. When I run this out for some of the properties we are looking at in Northern Utah, the offer is coming in way low - sometimes at 50% of the asking price. My realtor doesn't seem to think this is reasonable, and I kinda agree with her. I'd love to get these properties at this level -but it isn't happening. What we are trying to do is find rental properties & have NOI of at least $500/month per unit after all expenses. We don't want to carry a note for more than $150,000. Our goal is to have 40 cash flowing properties in 10 years - purchasing 4 per year. The problem I'm seeing is that all of our estimates are way below that $500 number. The only way to change it is either put way more money down (not going to do that) or get the purchase price way down. Any ideas? Am I looking at this wrong or being unreasonable? We are new - so that should explain a lot. :)
William makes good points about potential indicators. My lead-lined crystal ball tells me that we are in a decelerating market. Good indicators are absorption rate and the affordability gap. Days on market seem to be stretching out, prices are outpacing ability to purchase, and I think we're on borrowed time with interest rates. The minute those go up you'll see some things shift. How much time that actually turns into I'm not really sure, maybe year or two and we'll be at more of an equilibrium?
Here is my opinion, as posted on Facebook about a month:
"Yes, the real estate market is back to 2006/2007 prices but you have to remember it is doing so with 2013 interest rates. If we put the interest rates back to 2007 rates, then we would need to cut something like 25% off the values to have the same monthly payment. Something to think about when you look at home values and consumer buying power."
That got me thinking about other factors, so I followed it up with this:
"What about income and inflation? Here are some more numbers for everyone to consider. I did some digging using the US Census Statistics, median home sales prices as recorded by the MLS (kept in a table by the Salt Lake Trib), and some inflation calculators. I went back to 2004 which is before our home prices started going crazy and we were still on a natural progression. Check this out:
Since 2004, inflation has totaled 27%
Since 2005 to 2014, median household income in Utah County has gone up 30%
Since 2004, median home price has gone up 59%
I'm not economist nor statistician, but based on that, I surmise that inflation can offset all but 3% of income and all but 32% of home price growth. Here's the kicker:
A 6% interest rate on $250k loan is a payment of $1,500/mo
A 3.5% interest rate at the same payment allows a loan of $333k.
A 32% increase in buying power.
"Well that's ironic isn't it? So, in conclusion, the home value spike of 2005-2008 was due to easy to get loans. The home value spike of 2013 to 2016 can be significantly attributed to cheap money. So does that mean that home values should be 32% lower? I would not go that far, but certainly if we had normal interest rates the home values would HAVE to be 32% lower.
"We have a massive demand right now and significant shortage of quality homes available to purchase. New construction, as busy at it looks, is still significantly lower than historic highs. So that looks like a legitimate supply and demand issue. We also have land constraints driving prices up. But is that significant demand only due to the fact that money is super cheap which means we have more buyers than we normally would have? I think so. Does it matter though, since if the money was more expensive, prices would be lower so we could all still buy the same house it would just be a different price points (higher rate, therefore lower value and same payment).
"So the moral of the story to me is the interest rates are going to really hose everyone if they spike too fast. I think we are fine IF the rates don't go crazy. Eventually they have to go up though, so I expect we will see them start to creep up which will mean home values will flatten out and stay that way for several years."
Joseph,
Are you trying to buy in the Ogden area? I currently live in Layton myself. I own homes in AZ, AL and UT. I've been looking for additional investment properties throughout the country and as far as I'm concerned, UT isn't where it's at right now...not even in Ogden. There may be some diamonds in the rough, but the numbers just never seem to work out for me in our area. Have you considered out of state or are you wanting hands on management?
I've been looking primarily all over northern Utah. I'm open to out of state but need help with that. I have already decided to use a property manager. I also have one employee who can help out finding and sourcing deals.
Joe
I live in Layton and own homes in Utah and Ohio. I've been actively looking for new investment properties in Utah, but have so far been unsuccessful. As you said, the numbers just don't work. I would have to offer very low to come close to making the numbers work. I'm also wondering if there are other markets I should be exploring but I haven't done research on that so far. While my Ohio properties are profitable and cash flow, I don't think I want to buy another property in the Cleveland market. The taxes are high and the city requirements with yearly inspections are tiresome. @Steve LeBlanc any recommendations in other markets?
@Stacey Mollinet, I've been working with an investment group that turned me on to the Vance, AL area where I most recently purchased a home. In 2010, I bought three in Surprise, AZ, but that market has exploded and Phoenix as a whole is out for me, even though it still promises growth, the cash flow seems to be gone. It's funny you should mention Cleveland, I've been looking there myself and multi-units seem to be aplenty. Thank you for mentioning the taxes and city requirements. So bottom line, I'm still in search of a decent market to invest in.
I assume that your "NOI" of $500 is your net after debt service right? If you truly mean NOI, which doesn't include debt service, all decent properties should this when your rents are over about $900/month.
The problem is your $500 per month criteria. Rents cap out even in expensive markets. For example, I get $800/month on $80K properties, but can't get $1600/month on $160K properties.
Clearing $500/month is only possible in Utah is only going to be possible with multifamily, but here your going to have an even harder time finding your 30% equity position.
I have a lot of clients looking at this same criteria (without needing to clear $500/mo) and they're not getting properties.
Flippers are snatching up properties that are at 75-80% after repair value and up to 85% in Salt Lake. Moreover, we're in a very competitive owner occupant market where anything close to habitable is getting snatched up by occupant DIYers at prices we can't touch. If the property is on the MLS, you are competing with folks who can get into these properties with next to no money with the intention of fixing them up later.
There are certainly better cash flowing markets elsewhere. But by definition, this means that the market has less confidence in the long-term prospects. This is what cap rates are all about. If you are getting higher returns, it means that buyers are saying that they aren't as confident in the underlying asset. And be careful of projected market values in cash-flow markets.
The take-aways are that your criteria is very difficult, even in Ogden. So consider relaxing the hard $500/mo criterion and work from rates of return. (e.g. $200/mo minimum with a double digit cash-on-cash is very doable). And you won't be finding these on the MLS with any frequency.
That being said, I still like the fundamentals in Utah and recommend altering your strategy before looking to other markets.
Hi @Joseph Davis,
Couple things.
First it is not 70% of asking price it is 70% of ARV (After repair value). Which is how much it is worth after it is all fixed up, then deduct repairs and then pay 70%. Asking price may be a whole lot closer to that (But in reality may not be). If it all fixed up is worth 100K but they are asking for 70K you are already a lot closer. If you use asking price you will always be offering about half of what they want and you will never get anything.
Second: That formula is really for something you are going to Buy/Fix/Sell (You need that 30% for closing costs, agent costs, profit). if you are looking at buying something you are going to keep and rent you will most likely never find one. Those use the calculators on the site and it is really based off how much money they bring in a month vs how much you are paying in taxes/capital expense budget/property management/note/insurance etc. Those will often times end up being a whole lot closer to what the asking price is. Because the seller knows what they are making off of it and what the cost will handle (But your agent should be able to help with value).
Hope that helps some and good luck!
@Joseph Davis from the research I've done it seems that these types of offers (70% of ARV minus repair costs) are being made on off-market properties (found through direct marketing, networking, wholesalers, etc) and usually to owners in some kind of distressed situation or with a property that is pretty distressed. Low ball offers on MLS properties in a sellers market is probably not going to happen. I'm sure there are exceptions.
@William Hochstedler do you think it's possible to BRRRR properties here? It has seemed very difficult to find something that meets the 1% rule and be all in for 70-75% ARV. I've been looking for a while and have resorted to looking primarily for vacant and boarded up properties. My concern with a highly distressed property like that is my lack of experience.
@Ryan E. that is what I've been thinking. I've been reaching (sending out letters) out to find off-market deals but haven't been successful as of yet. I like the idea of the BRRRR strategy but my lack of experience is surely present too!
I'm doing it in Ogden. All in is closer to 80% though. I have fixed up, fully rented properties that I can sell that meet the 1% rule, but at closer to market value.
I have more luck with the intensive rehabs because of the owner occupant competition. In other words, I can get properties at a much larger discount (after repair) when they have hairier problems and need the kind of work that scares banks and first time home buyers. Lack of experience might be an issue with this strategy though.
Let me know if you find good deals any vacant, boarded up, falling down properties. I love them.
@Joseph Davis that's awesome you are sending letters. I've thought about doing some direct marketing in SLC but have focused on driving for dollars for now. I feel like the brrrr strategy is incredibly scalable if done correctly which is why I want to focus on it. The rehab is intimidating but I'm going to go for it. I need to find a reliable GC who can manage it and of course the most important...a steady stream of deals!
Let me know if I can help you in any way.
@William Hochstedler it's good to know that people are out there doing it in UT. I have a decent size list of properties I've found in pretty good areas in SLC and I've been working on cold calling owners.
I love hearing that you prefer the really nasty houses as that's one of the things I have wondered about: should this thing just be torn down? Is it even worth pursuing? Etc. I think the obvious answer is to look into everything and if I get to the point of being able to walk it with a GC let the numbers decide.
Do you work primarily Davis and Weber counties? Do you have any recommendations on GC's or rehabbers in Salt Lake county?
Good feedback here. I'll echo what some of the others have said. I'm a property manager/realtor of 14 years managing a portfolio of 900 doors here in Utah and I'm pretty much telling clients to sit this one out right now or look out of state. The best investor deals are privately transacted or built from the ground up on the development side (if you're the early investor with a good build team). Otherwise you pay too much for a piece of junk. If it isn't in bad shape then you're paying too much so someone else can reap all the profits. I know that sounds discouraging but it's the reality of all investment markets: Opportunities are a moving target and right now the typical targets aren't there in a way that makes a lot of sense. Some people are willing to buy on the promise of higher future rents and improved cash flow, but that's a quick way to get into trouble like so many did in '07+ Be careful, be patient.
I'm primarily Weber north (Box Elder & Cache). So I'm probably not much help with rehabs in Salt Lake. But let me know when you venture north.
To answer your latest question, real estate markets are VERY cyclical primarily because the system is designed to overbuild in good times and under build in bad. New construction is on a rampage right now. As soon as we get up to normal inventories combined with rising interest rates (inevitable), even really solid markets like Salt Lake will soften. This upswing still has some legs. Our our absorption rates are still very high and interest rates are very low. As these two numbers shift, make sure you're battened down.
William makes good points about potential indicators. My lead-lined crystal ball tells me that we are in a decelerating market. Good indicators are absorption rate and the affordability gap. Days on market seem to be stretching out, prices are outpacing ability to purchase, and I think we're on borrowed time with interest rates. The minute those go up you'll see some things shift. How much time that actually turns into I'm not really sure, maybe year or two and we'll be at more of an equilibrium?
Here is my opinion, as posted on Facebook about a month:
"Yes, the real estate market is back to 2006/2007 prices but you have to remember it is doing so with 2013 interest rates. If we put the interest rates back to 2007 rates, then we would need to cut something like 25% off the values to have the same monthly payment. Something to think about when you look at home values and consumer buying power."
That got me thinking about other factors, so I followed it up with this:
"What about income and inflation? Here are some more numbers for everyone to consider. I did some digging using the US Census Statistics, median home sales prices as recorded by the MLS (kept in a table by the Salt Lake Trib), and some inflation calculators. I went back to 2004 which is before our home prices started going crazy and we were still on a natural progression. Check this out:
Since 2004, inflation has totaled 27%
Since 2005 to 2014, median household income in Utah County has gone up 30%
Since 2004, median home price has gone up 59%
I'm not economist nor statistician, but based on that, I surmise that inflation can offset all but 3% of income and all but 32% of home price growth. Here's the kicker:
A 6% interest rate on $250k loan is a payment of $1,500/mo
A 3.5% interest rate at the same payment allows a loan of $333k.
A 32% increase in buying power.
"Well that's ironic isn't it? So, in conclusion, the home value spike of 2005-2008 was due to easy to get loans. The home value spike of 2013 to 2016 can be significantly attributed to cheap money. So does that mean that home values should be 32% lower? I would not go that far, but certainly if we had normal interest rates the home values would HAVE to be 32% lower.
"We have a massive demand right now and significant shortage of quality homes available to purchase. New construction, as busy at it looks, is still significantly lower than historic highs. So that looks like a legitimate supply and demand issue. We also have land constraints driving prices up. But is that significant demand only due to the fact that money is super cheap which means we have more buyers than we normally would have? I think so. Does it matter though, since if the money was more expensive, prices would be lower so we could all still buy the same house it would just be a different price points (higher rate, therefore lower value and same payment).
"So the moral of the story to me is the interest rates are going to really hose everyone if they spike too fast. I think we are fine IF the rates don't go crazy. Eventually they have to go up though, so I expect we will see them start to creep up which will mean home values will flatten out and stay that way for several years."
@Jeremiah Maughan couldnt agree more...I just don't have the time or GAS to articulate it as well as you. Secondarily, I'm jumping back and forth between "the good deals exist but I'm just not looking hard enough" to "things are too hot to touch" and the only way to find a deal is direct from the owner. I think its probably a good thing I'm so conservative on numbers... @Ryan E. its unlikely you'll be finding 500 NOI deals even in Ogden at this point. Know if you're going to be okay with a "good deal" by whatever your standards are. I don't look at things as NOI, myself... I do however take a hard look at IRR and I'm no longer finding anything near the 14% range (which is what I consider a GREAT deal).
Nice post.
Where are you getting your numbers for new construction? When were the historic highs?
To your point about days on market climbing, I too see that. I at least partially attribute it to real estate agents pricing properties really aggressively and the market not taking it. I think this is healthy. It shows that buyers have not completely lost their minds and have some memory of the past decade.
As far as your numbers go, I'd like to see how Utah compared to other metro areas in 2004. Qualitatively, I think Salt Lake and Utah in general has been undervalued for a long time. The current market is full of new buyers, often from outside of Utah, who are comparing value to other markets, not historical prices. This is new here.
Cheers
@Ryan E., the Wasatch Front is becoming difficult to acquire any good investments that meet NOI, IRR, or BRRRR.
If you do want a GC to rehab houses, I have a recommendation.
What a great forum.
As an investor with 4 properties up in Ogden, thrilled to read all this :) Might just be time to use these price increased to do a cash out refinance after all!
Hey @Adam Willis! My wife and I were just discussing that very topic like two days ago haha. You are right and that is still part of my strategy. I was thinking of reaching out to you to see if you have heard of any existing homes with the above garage apt. I want to give it a little more time but still very much in the market for an above garage or accessory dwelling unit set up. I finally convinced my wife to get on board with the strategy of moving every year or two into a new primary residence and then turn that into a rental. The ADU set up is so appealing because it's essentially a duplex.
In the mean time I would still love to brrrr some stuff to scale faster but do it as smart as possible so as to not get in over my head...so I appreciate all the insight everyone is putting out!
@Joseph Davis sorry for sort of derailing your thread!
@William Hochstedler, Good point about the DOM being an indication health and sanity. It did get scary there when everything was selling immediately at full asking price. Regarding the new construction numbers, that came from a recent economic forum co-hosted by the Utah Central Assoc of Realtors and the Utah Apartment Association. James Woods was one of the speakers and covers such topics each year: http://gardner.utah.edu/team/james-a-wood
The historic highs for new construction volume were 2007. I went back to 2004 to try to capture the time before the 2006/7 run up. I concur that Utah typically lags other metro areas and this time it seems we're a more prominent state. Good things are happening here, I feel like we just need to be vigilant.
PS - Hi @Adam Willis. Always fun to see a buddy on these forums!