CASE STUDY: How to Steal an Overpriced, High D.O.M Property
As most of you know, Sacramento is a super competitive market right now. Every time a new listing hits the MLS, it's literally a matter of hours before the first offer rolls in (and several more after it), which makes it incredibly difficult to get your offer accepted and beat the competition.
For those of you who have felt the sting of losing out on an amazing deal because somebody else came above you with all cash, I have a suggestion for you...
Try looking at overpriced properties that have been on the market a really long time.
When a new listing hits the MLS, every single person looking for a property like that is notified via email. That means the property will get the most views and attention when it's new, and plenty of investors are just waiting in the wings to jump on a properties like this when they hit the market.
Every single transaction I've been involved in lately is a multiple offer scenario. I've been involved in transactions with 8 offers, 14 offers, 17 offers!!! Hell, I just put up a listing the other day and had 5 offers in the first 48 hours. And each offer that comes in is higher than the last one, making it all the more difficult for an investor to get the property at a price that makes the numbers work.
BUT -- the overpriced property that has been sitting on the market 3 months has ZERO offers, and everybody is passing it up because they can easily see it's simply not worth the asking price.
THE PROBLEM WITH OVERPRICING
Overpricing is the "Original Sin" of the real estate industry, and it causes more problems for sellers now more than ever before. And that's because every single buyer can look on their phone at Zillow, Trulia, Realtor.com, etc. and see all the comps in a matter of seconds.
So they instantly know your asking price is absolutely ridiculous. It wasn't like this back in the 90's, but now buyers have more information than ever right at their fingertips... literally.
When a property is overpriced, it doesn't sell. And when it doesn't sell, it accumulates high days-on-market. And then buyers start to wonder "What's wrong with that house? How come it hasn't sold yet? Something MUST be wrong with it!"
Even if absolutely nothing is wrong with the property, buyers will THINK there is. This negative perception leads to either no offers or low offers, and is the reason most properties don't sell in today's market. There is a beautifully remodeled property sitting on the market right around the corner from my house, that won't sell because they overpriced it.
And it's gorgeous, believe me... new kitchen, bathrooms, flooring, paint, appliances, the whole nine. But they're asking $36 per square foot above the average for the neighborhood, and there are simply no comps to justify this asking price. And so that's why it's been sitting on the market 2 whole months, and will now go below what it would've originally sold for all because of the bad perception from the high days on market.
WHY OVERPRICED, HIGH DAYS-ON-MARKET PROPERTIES OFFER OPPORTUNITY
You may be thinking "Well, that's all great info Wes, but how does it help me?"
Put yourself into the mind of a seller for a minute... you want to sell this property, and have plans for all the money you're going to make. Maybe it's the down payment on your next house, or maybe you'll use it pay down other debt, or maybe it's just a trip to Bermuda for you and the kids.
Each day that goes by and your property doesn't sell, you start to wonder what's the problem...
"Why isn't my home selling?! That home around the corner sold, although it was a lower price, and it wasn't as nice as mine... maybe the market is bad right now? No, that's not true, I just read about how hot the market is. Maybe it's the agent?... Yeah! That's it! I hired them to sell my home, and they haven't brought me a single reasonable* offer! It's all their fault!!!"
(*Maybe they did bring a reasonable offer, but the seller has a different definition of "reasonable")
Now put yourself into the mind of the agent listing the home...
"This seller is nuts if he thinks he's going to get this price, but I told him that's what it was worth so he would hire me instead the other realistic agents. But no one is biting! Crap, if I don't get this thing sold soon the listing is going to expire or they're going to cancel, and then I'm out a commission! I wish someone would make an offer so I at least have something to work with!"
Are you beginning to see why this type of scenario offers some opportunity for you? The seller needs their trip to Bermuda, the agent needs their commission check, and you need a deal. The best part is you'll be the only offer on the table for consideration, so your chances of getting it accepted are much higher :-)
CASE STUDY: 1139 Clinton Rd, Sacramento, CA 95825
1139 Clinton Rd is a duplex in the 95825 zip code near the Arden Fair Mall and Sac State. It's on a street that's full of cookie cutter duplexes, so it's extremely easy to comp. Crime isn't too bad, and you mostly have domestic violence related assaults which are very common in areas with high population density and lots of renters. Here's the crime map from the past 3 months:
No murders, no muggings, and only 1 burglary. Whoopty-do. Here are the numbers:
1139 Clinton Rd - On the Market 81 Days
Duplex, 2/1's, 900 sq ft each
Price: $324,900
Cost Per Unit: $162,450
25% Down: $81,225
PITI at 5% Interest: $1,741
Gross Monthly Rents: $2,190
Gross Annual Rents: $26,280
PITI Cashflow Monthly: $449
PITI Cashflow Yearly: $5,388
Gross Rent Multiplier: 12.36
1% Test: 0.67%
Gross Annual Yield: 8.09%
PITI Cash-on-Cash Return: 6.63%
Here's the property description from the MLS: "New Plumbing, Roof, Water Heaters, Interior Paint, Blinds, Flooring and Carpet installed in 2015. Recent remodeling includes new dishwasher, stove, kitchen counter tops and shower tub in one of the units."
Now, the numbers aren't anything to write home about, and while it's great that so much on the property has been updated and replaced, by the time you figure in utilities your returns are too low to make this a worthwhile deal.
Now, let's look at the comps:
Uhm... notice something here? All the comps sold for WAY below the current asking price. Here are their addresses and the days on market before they sold:
1150 Clinton Rd - $257k -- Sold in 7 Days
1207 Clinton Rd - $259k -- Sold in 14 Days
1108 Clinton Rd - $273k -- Sold in 9 Days
This property is priced at $325k and has been on the market 81 days. But all of the comps on the same street sold in two weeks or less... why? Because they had an average price of $267k.
Someone is dreaming, whether it's the seller or the listing agent. They will NEVER sell at that high price and it will NEVER appraise for that amount even if they got an offer. I've got 3 comps that are all no more than 7 houses down, so there's no way to justify a price above $275k absolute max.
This is the classic case of the seller making repairs to a property and then trying to pass that cost onto the buyer when they sell, and it simply doesn't work that way. You could spend $100,000 to put a bowling alley in your house, but that doesn't mean your house is automatically worth $100k more when you do. Therefore, a $50,000 price reduction in this case is completely justified.
Here are the numbers with the new lowered purchase price based on comps:
1139 Clinton Rd
Duplex, 2/1's, 900 sq ft each
Price: $275,000
Cost Per Unit: $137,500
25% Down: $68,750
PITI at 5% Interest: $1,474
Gross Monthly Rents: $2,190
Gross Annual Rents: $26,280
PITI Cashflow Monthly: $716
PITI Cashflow Yearly: $8,592
Gross Rent Multiplier: 10.46
1% Test: 0.80%
Gross Annual Yield: 9.56%
PITI Cash-on-Cash Return: 12.50%
Those are much better numbers than before, with an additional $267 per month in cash flow and an additional savings of $50,000. And it's completely justified. You're not low-balling, it's all right there in the comps. Simply present the facts and make a logical argument for a lower price.
FIND A PROPERTY YOU WANT, THEN FIGURE OUT WHAT PRICE WORKS FOR YOU
This all goes back to a classic Bigger Pockets mantra "Find a deal you like, and then figure out what purchase price works for you." At face value a $50,000 discount seems like a lot, but when you look at all the comps you can easily see that the property is grossly overpriced. That's why no one has bought it yet and it continues to sit. Here are all duplexes sold in the last 6 months:
$275k seems to be the "price ceiling" for the neighborhood, and duplexes in this neighborhood sell for ~$256k on average. So even though you have some new flooring, counter tops, etc. it's simply not worth an extra $50k in purchase price. Even if you offered that amount it'd never appraise.
The lesson to be learned is that there are plenty of deals out there, it's just that you're passing them over because the price is currently way too high. Granted, this isn't a deal until the seller agrees to accept a lower price, but the comps are all right there for you to justify it.
There are surely more examples just like this one. In fact, there are currently 16 multifamily properties with more than 200 days on market (as high as 383!) There are even more for SFR.
So what are you waiting for? Get out there and steal those overpriced properties! :-)
