Make my best offer or walk away?

Question

2 Unit Property in area listed at 175k and just fell out of escrow after someone placed an offer above everyone else. I had an offer of 180k on it and they want to know if that's my best offer. Would you offer more or walk away?

I'm assuming vacancy rate of 7%, PM of 6%, Insurance of $650. 1 Unit (1 BR/1BA) is rented at $725 and the other (2BR/1BA) at $750.

The property is in exquisite shape and the renters are taking great care of it. Each unit is 650 Sqft and comes with installed laundry+washer, appliances and the property was recently renovated. It doesn't have central heat and air so that might be another upgrade down the line.

Here is the math:

INCOME

Monthly Rental$ 1,475.00

COSTS

mortgage$ 726.90

insurance (fixed)$ 54.17

vacancy rate$ 103.25

taxes$ 150.00

property mgmt company$ 118.00

water bill, sewer, garbage$ 195.00

city annual fee$ 10.00

misc big ticket items$ 50.00

landscaping$ 40.00

TOTAL MONTHLY EXPENSES (with mortgage)$ 1,447.32

Monthly cash flow (with mortgage)$ 27.68

Richard C. · Answer

Bad deal.

You aren't budgeting anything for long-term capex.  That means you are essentially "living on the principal" just to get to your $27 a month.  7% is also a pretty low number to use for vacancy, and 6% is a very low number to use for property management.  And less the 3.5% for maintenance?

Jordan Thibodeau · Answer

@Eric Bowlin , @Richard C. ,@Elizabeth Colegrove ,@Michael G. , @Tim Holmes , @Joe Villeneuve Excellent points, thanks everyone.

@Minka Sha LOL. I made an offer on the house you're talking about. List price is fucking crazy. I highly suggest you cancel that offer at $180k offer. I made my offer at $147k (So I can at least snag $150 a door and maybe $200 down the road, but that's speculative) because at $175k (list price) there's no profit, I would say it's a loss if you add the time involved in organizing the deal, and $180k, you're cheating yourself.

Your monthly maintenance is too low, I would at least say $100 bucks a month, if you include cap ex make that $170 a month.

There's no profit in the deal, the square footage of the house sucks, you have no backyard, no garage, you're going to need to build a car port, you're within kissing distance of another duplex so you have no privacy, and it doesn't matter how close it is to the med center, your rents will stay low due to the fact that the property is missing the aforementioned features.

My duplex with two 1 bedroom units, each have garages and huge backyards, not including the garage, the square footage for one unit is 828 square feet. When I saw that one of the units was a 2 bedroom for 620 square feet, i cringed.

I highly recommend you pass on this offer, I don't want your first deal to be a lemon. Keep looking my friend, you will find something.

Also, I'll be up in Sacramento on Saturday to look at my property. If you want to grab coffee let me know.

Eric Bowlin · Answer

Thanks @Joe Villeneuve . I agree with you completely.

@Minka Sha Why don't you reverse the system. Instead of looking at properties and discovering what you may earn... wasting time to find you'll make 27 bucks a month.. Figure out what you want to earn then find properties that may meet those parameters.

Eric Bowlin · Answer

Sounds like a terrible deal honestly. $27/month? Might make more in a savings account.

Minka Sha · Answer

Jordan Thibodeau  -- LOL - that's Sacramento "network effect" in action. I'm around on Saturday - I'll send you a PM so we can catch up.

Chris Vail · Answer

@Minka Sha

I am going to echo what Jordan Thibodeau said, pass on this deal or lower your price a lot.  I know you want that first deal badly and its okay to settle for a base hit on the first one but don't settle for what you think is a base hit that is really an out based on the numbers.

Jordan Thibodeau · Answer

@Minka Sha Hello sir. What ended up happening to this deal?

Eric Bowlin · Answer

@Elizabeth  Colegrove Excellent points! There are definitely numerous ways to achieve wealth in real estate and we all have our own ways.

It is my personal belief that cash-flow is the most important aspect, far more than capital gains. Robert Kiyosaki wrote in one of his books that he had something like 3000 properties during the crash, but made out fine because every single one had solid cash-flow in solid neighborhoods. Who knows how true or exaggerated this is coming from a person trying to sell books and seminars...but I think the concept is right....Good cash-flow will succeed in every market.

So to reiterate my first point, many people fail in rentals focused on cash-flow and others succeed with flipping or speculating in property appreciation, both of which are focused on capital gains. Guess we all have to chart our own course! I love BP because I get to read everyone's approach and maybe adopt some ideas for myself.

@Minka Sha I think you should follow @Elizabeth  Colegrove with her advice about tightening the offer by offering lower cash but compensating them with the high likelihood of closing.

Minka Sha · Answer

@Eric Bowlin , @Richard C. ,@Elizabeth  Colegrove ,@Michael G. , @Tim Holmes , @Joe Villeneuve

Thank you all for your replies and the amazing support! It always amazes me how it's not a good deal for someone but it's a GREAT deal for someone else. Good points about reverse engineering!

I'll keep you posted on what ends up happening with the property. :-)

Elizabeth Colegrove · Answer

Let me preface this by saying it is important that you know your market and expenses. Some areas this is great other awful x We have a VERY unique business plan as buy and hold investors and it works VERY well for us! Our areas have great appreciated, low expenses, very little to no vacancy and we self manage. We also don't need or want the cash flow till 15 years from now. So we buy in low cash flow with great potential we see. We do well with .7-.8% deals. So know your areas And busienss plan regarding if this is a good deal for you!

That being said we have won many deals in this situation. The key is not always money! We have been able to raise our Ernest money, tighten the offer and do a quicker closing. Basically "promise" we will close . This has made us the stronger offer. There are people who will take try sre thing over the high money flake!

Make my best offer or walk away?

Most Popular Reply