Determining Initial Offer Price!

5 Replies

Greetings my fellow BP colleagues,

I currently have a place that I am interested in that is listed at $52K and is turnkey (recently renovated) with rent going for $800. At that asking price and rent the CAP rate is 18%. However, one of my criteria that I seek to achieve is 20% CAP which would put an offer price from me at $46K. Additional note, I am an out of state investor. Now, I know the individual seller the property and do not want to disrespect him or have him feel disrespected with my offer. However, I do want to ensure I have the best deal. Another note is the seller is also an investor and is currently trying to sell is 30+ properties he owns and move into retirement and a few other projects in HI.

Now you all, as experienced investor, would all advice to push the $46K offer?…Or possibly offer lower or closer to the asking price?

Key Notes:

Asking Price: $52K
Rent: $800/month
Loan Info
-15% down (i.e. $6.9K if price is $46K, $7.8K at $52K)
-30 years fixed @ 5% 

Travis, you're basically asking for a $6K discount. I would give him the $6K and ask him to hold the note on the property. Talk to him about the advantages of being the bank. If he goes for it you have 29 more homes to buy with him being the bank. 

Basically you are asking him if you give him 6k down, will he hold the note, meaning that you will make your monthly payments directly to him...There will be no bank involved in the deal.  Google Owner Financing.

Obviously this guy knows the value of putting his money to work. He owns 30 rentals so he is use to the idea of receiving monthly income checks. Find out what he will do with the cash. If he doesn't need it offer him a note secured by the property he is familiar with at a reasonable fixed interest rate (I pay 5%). Amortize it over 30 years with a 10 year call. I wouldn't offer him any money as a down payment unless he brings it up. Figure out if you have to do any improvements to the property to get it rent ready. And use that as a leverage in place of the down payment. If this works out mutually you can buy the rest of his portfolio as he is ready to sell. 

Couple of quick items:

These guys usually sell their worst properties first. Find out his motivation to sell this one.

Remind him that no more tenants, toilets and termites. Bank gets paid no matter what. It is the ultimate passive income. Top of the food chain - stroke his ego.

If he does need some cash upfront as a good faith or vacation, etc. offer him a small down payment. There is no point in 50% cash, 50% finance.

Be careful if he wants to shorten the call period from 10 years down to 2 to 3 years. You will not have paid much of the principal by then. For 2 years he will collect interest and sell you the house near full price.

Good luck,