Should I hold firm or negotiate this deal?

35 Replies

We put an offer in on a property yesterday and we're waiting for the seller to "run numbers" and get back to us (tomorrow morning). My plan was to hold firm at our offer price, but now I'm wondering if that's the best idea.  And it's not that I'm emotionally attached to the property - I'm just trying to determine if it makes sense to go any higher.  I am prepared to walk away if that's the prudent decision.

FYI, this is for a Buy and Hold, not a flip.

Here are the vitals - let me know if I have missed anything:

Asking price: $100K (this is an FSBO, I am working with a buyer's agent)

Our offer: $90K

Estimated Repairs: $5K

Closing Costs: < $1K (we are paying cash)

All-in: $96K

ARV: $125K

Estimated Rent: $1,050 - $1,150 (but based on rental comps, $1,050 is on the very low end)

Property Taxes: $1,178/yr

Insurance: $750 - $850/yr

The property is in a great neighborhood with pride of ownership, excellent school district, minutes from shopping, a major state university, etc. 

We are in a fairly hot market and the 2% rule here doesn't seem even close to achievable. It seems that in our area (premium area, suburb north of Atlanta), if you're above 1% you're doing well.  This would be our first deal, which is why I'm open to any advice I can get from the BP community.  

Please let me know if I can provide any more information and thanks in advance!

I think if you all slapped a loan on the property it would be a break even or a slight positive depending on credit/down payment.   

What would be your monthly expenses?  Upkeep?  

Do you just want to keep the 90k tied into property or refi, pull it out and go get other cash flow.    

What is average appreciation in that area?   

You can find values for free

http://findcompsnow.com

This site has worked well for me and comes within 5% of MLS comps.

Good Luck to you

@Gerald Harris , at this point our plan is to pay all cash for the properties we purchase. I realize many on here would say that doesn't make sense because of COC, etc, but that's just how we choose to do things. We are in a position to build capital fairly steadily from our income, so for now at least, that's the path we are taking.

I did run the the property through findcompsnow.com earlier today and it gives me a value of $134K.  I have also driven the comps for the area and $125K is a number I'm comfortable with - $134K seems a bit high and I would rather go with a conservative figure. I like to estimate things on the conservative side, but I don't want to be so conservative that I miss out on a deal which is why I'm looking for advice.

I used the BP investment calculator to compute expenses using 10% vacancy, 20% maintenance/repairs/CapEX and 10% PM in addition to the property taxes of roughly $100/mo and insurance of about $70/month.  This gives me a figure of around $600/mo in expenses, compared to $550 that I get using the 50% rule.  Is my 20% for maintenance/repairs/CapEX high?  

Thanks for your feedback/questions!

So, running the figures you have what do you estimate your annual NOI to be?

John Thedford, Real Estate Agent in FL (#BK3098153)

What is the local rental market status? Rising rents? Stable? How does this property compare to others on the rental market? I think one of the worst mistakes an investor can make is being in a hurry to buy. This may not be a bad deal, but is it really a GOOD deal? As I look at the most successful investors, they are shrewd buyers and don't pull the trigger unless the deal is good. Not average. Not OK. Good. I find myself wanting to jump in and buy more fast but....that won't necessarily build wealth. Are you sure of the ARV? I am not saying buy or don't but, but never get in a hurry to buy for the sake of buying.

John Thedford, Real Estate Agent in FL (#BK3098153)

If you're paying all cash, and you are not going to refi all or part of it out, my basic numbers tell me you are looking at 900/month CF without inputting problem costs.  That's around $11k a year.

If all in is $96k, and you're only getting at best $11k back per year, it's going to take you at least 8 - 9 years to get all your cash back and break even.

Bad deal.  

Joe Villeneuve
REcapSystem
A2REIC

@John Thedford , you asked how I can be sure of ARV? My agent provided me with comps, and gave her opinion on ARV (which is higher than the $125K I stated here). I've used Redfin and findcompsnow.com as a cross check. Both sites give numbers that agree with my agent's opinion for the most part.

How else can I be "sure" of ARV outside of an appraisal? That's the part I'm really struggling with. I would love to hear how you go about determining ARV.

@Joe Villeneuve  , when would you consider an all-cash deal a "good" deal.  What numbers would you want to see on this particular deal (all cash) to make it a good deal?

@Julie Kern  Screw the 50% and 2% "rules", if you like the property and it meets YOUR investment criteria GO FOR IT!

Since it is a buy and hold I would be MORE concerned with the REPAIRS in thinking about your MAX offer price than the ARV

How did you come up with estimated repairs? Inspection? Contractor you KNOW and TRUST walk through? 

Originally posted by @Julie Kern:

@Joe Villeneuve , when would you consider an all-cash deal a "good" deal.  What numbers would you want to see on this particular deal (all cash) to make it a good deal?

 I love all cash deals.  I just never leave the cash in the deal.  I either refi it out, or I take on a cash "buy-in" partner that gives me all or part of my cash back.

Joe Villeneuve
REcapSystem
A2REIC

Thanks @Todd Whiddon  !  Your post made me smile :) Estimated repairs at this point are from seeing the property with my agent and are based on the obvious cosmetic repairs/updates needed, but I have an inspector ready to go (good friend of ours), and my agent's contractor whom she highly recommends and uses exclusively (she is an investor also) is at the ready as well should our offer be accepted.  If the inspection and/or estimates from the contractor change the repair value then we will seek seller concessions.

And the property absolutely meets our criteria (which we have consistently stuck to throughout this process) - nice neighborhood (older, but well-maintained), great school district, great location and solid comps. We've looked at 20+ properties in the last couple of months and only one other met our criteria as this one does. 

Hi @Julie Kern  I'd be willing to negotiate, given your circumstances.  Sounds like a rare match for what your looking for and a pretty good deal otherwise.

Keeping that much cash tied up isn't particularly smart, but ok, it's your choice (to ignore the numbers.) :-)  

Last but not least, negotiation is a part of the game - an expectation.  You'll lose a lot of deals submitting your best offer as the offer out of the gate because many people want to work through a negotiation for sport or to see if you can reach a more mutually beneficial agreement.

Offer sounds strong, don't hesitate to tweak it to get this one done.

@Julie Kern

If the unit is FSBO, don't you have to pay the agent commission.

Also the age of the house, if it is over 20 years old. I will budget 10K for repairs & expenditures.

Just as @Rick Baggenstoss suggests, prepare for negotiation; especially in a hot market as you stated.

@Julie Kern  Any updates? Remember...  If they counter back anything different than your original offer, you must PUNISH them. Even if terms are acceptable to you, you cannot GIVE without a TAKE.  

They want more money, get a longer due diligence. They want to use their closing attorney, make them cover closing costs. 

There are ALWAYS more things to negotiate AFTER ORIGINAL contract is accepted, begin your negotiating strategy with the END in mind and keep things fluid until you sign on the dotted line. 

Congrats @Julie Kern  !  In my personal opinion, you have a good deal.  This is especially true given it meets YOUR criteria.  On top of that, you are getting >1% in an area that is highly coveted.  Though you should never bet on appreciation, from the sound of it, it is highly likely that this property will appreciate nicely.  ATL is freaking hot right now, and it doesn't look like that will change for awhile.  Check out some of the comments on this post http://www.biggerpockets.com/forums/48/topics/154806-properties-that-doesnt-cashflow?highlight_post=1036705&page=1#p1036705, and pay special attention to @J Scott 's comment.  Absolutely gold when considering your own personal goals.  At the end of the day, you have to do what makes sense to you.  Great post by the way!

Congrats!

John Thedford, Real Estate Agent in FL (#BK3098153)

That was smart to negotiate! We have learned that while you don't want to buy a "bad" deal. It is important to not lose a deal over a few thousand. 

Just got back from going through the house with the contractor (who is also an investor). After I told him the contract price, he said "you hit a home run, especially in this market" :)  At this point, unless the inspector uncovers something major,  here is what we're looking at:

  • Paint (walls, doors, trim and ceiling) and carpet (3 bedrooms).  
  • Pressure wash deck, house and wheelchair ramp
  • Paint deck, wheelchair ramp and wood floor of screened in front porch
  • Replace screen on screen door (front porch)
  • Replace 2nd screen door (front porch)
  • Replace 2 ceiling fans
  • Possibly paint cabinets (depending on how they look after cleaning)
  • Replace vinyl flooring in guest bath (planning to use vinyl tile)
  • Replace guest bath vanity top
  • Possibly replace vinyl flooring in master bath (vinyl tile)

The good news:

  • Furnace, AC unit and hot water heater are all relatively new (~4 years old).
  • Deck is solid
  • Brushed nickel fixtures from the previous rehab are still in great shape.
  • Refrigerator appears to be in working condition, as is over-the-range microwave.  Not sure about dishwasher and stove.  Stove doesn't look great, so even if it's functional we'll probably replace it.
  • Washer and dryer were left behind - not sure if they are in working order, but considering the house has only been vacant a short period of time, I'm hoping they are.
  • Almost full 5-gallon bucket of exterior paint from when the house was painted in 2010 was left behind.  If it's still usable, it should be enough to paint the deck, wheelchair ramp and porch floor.  
  • Kitchen cabinets are in good condition.  
  • Laminate flooring in living room and hallway is in good condition.
  • Vinyl flooring in kitchen in good condition
  • No water damage on ceiling
  • From the ground, contractor thinks the roof looks good.  Inspection will give us the full story.

I guess the story is, the property was rehabbed for sale or rent back in 2010. Pictures from the MLS listing show it was really fixed up nicely, but the tenant the owner leased to became unemployed, hadn't paid rent for a year and had trashed the place (in terms of neglect and lack of cleanliness, but nothing major).

Now, to see if the inspection on Wednesday reveals any major issues.

If all goes well, closing is set for 11/10/14.

there is a investor in our group that rehabs 3 houses a year then pays cash from the profits of those rehabs for 1 rental 

he only pays cash for his rentals 

when he buys a rental he only buys in good areas 

stick to your plan and go forward @Julie Kern  

good luck