Duplex with Multiple Offers

9 Replies

Trying to pick up my first Duplex.  Put an offer in on a duplex on the first day of the listing, and the seller waited until there were multiple listings.  Now they are calling for best offer.  Here are the details. 

Several recent upgrades: brand new driveway, couple year old roof (architectural shingles), New gutters, gutter filters, downspouts, drain tile for downspouts.  All windows are newer vinyl.  New furnace and washer/dryer in both units.  One new water heater and one 6 year warranty water heater that is 10 years in service.  Essentially, most high cost items have been replaced very recently.  

One unit is newly rented with a 3 year lease (longer than I would do).  It is at market value.  The other is Section 8 and is below market value.  The Section 8 side has been in the unit for 6 years.  It was in pretty good shape, but not as updated as the newly rented one.  The current owner lowered the rent for that tenant this year on the renewal because of her budget constraints.    I don't know the exact rent they are receiving on that one yet.  

Asking Price: 209,900

Down Payment: 15%

PMI: ~$80/month = $960 / year

1st Year Rental Transfer (City Fee): $500

Insurance: $2,000 / year

Rental License: $138 / year

Trash: $900 / year

General Maintenance / CAPEX: $2400 / year

Water/Sewer: $2400 / year

Real Estate Taxes: $3,500 / year

Unit 1 rent: $1200 / month

Unit 2 rent: (estimate) $1000 / month

First offer: Full price, with 3% back for closing cost 

I plan to increase the rent for unit 2 at renewal in July. Even if I can't, I am still showing a cash flow of $216.43 with 0% vacancy. This equates to 16.5% ROI (cash flow, principle reduction, tax savings) on my estimated $38,900 cash invested ($5k of that is misc. repairs and closing costs). If I increase vacancy to 8%, I still cash flow positive. All of this excludes appreciation.

I believe the house is worth more than asking price.  My thought was to go to $226k with 3% back for closing, and that is about $10k over asking.  I still think it is worth more than that.  The cash flow and return numbers above are at that purchase price.  

Thoughts?

I don't know what else is in your market, but if this came up in mine, I wouldn't go after it.  You need to plan for the 8% vacancy.  That only gives you $100/month cash flow.  This does not pay you at all for management.  My personal goal is to get $200 door cash-flow for self managing... and yes, this is hard to find.  That being said, here are some more thoughts...

1st... how solid is this loan quote? I haven't been able to get that high of an LTV without owner occupying. If you have a commitment letter for this loan, that changes things a little bit. Yes, the cash-flow is way below what I would like, but to get into a duplex with that little down would be great... and your ROI would look better.

2nd... are these expenses numbers that you found yourself, and how solid are they?  In my market, this is what I would do.... have tenants pay for trash (Alaska lets you do this in a duplex)... get better insurance (I'd get a policy for around $1200 here), and drop your maintenance budget a bit since a lot of the big ticket items have been done (but I do most of my own work).  So, I don't mean to second guess you, but if this is the best deal in your market, and you can get that financing, these things might make your numbers a little better.

3rd... if you want this property, I think you have the right idea... I would have done 5k or 5% over asking, but I don't have a feel for how much competition you have.  The only properties I've bought with multiple offers, I offered 3k over and 6k over.  I picked the 3k just to get over the asking price, and 6k just in case someone else picked an even 5k.

I hope these thoughts help.

Hey Nick, I am going to comment on how to win the multiple offer. Sam gave some good input on the validity of the deal. I am an agent and in our market we have lots of multiple offer deals. The best way for you to win while paying the least is the use of an escalation clause. That way you win, but don't have to pay and extra few thousands to secure the offer. It would look like 

"This offer will exceed the net amount to seller of any and all other verifiable offers by $1,000 up to a purchase price of $200,000 etc. "

This is a very useful strategy as a buyer so you don't end up paying $5000 more than the next best offer. Hope this helps!

Thank you Sam and Blake for your advice. I really appreciate it.

Blake,

Have you ever had a seller respond with a counter offer at your disclosed maximum (200k in your example)?

Submitting a counter offer or highest and best offer with an escalation clause is a great idea to help get your offer accepted and not overpaying.Hopefully $1000 will get the sellers attention, but you may have to reach higher than that. I would circle back with the RE agent representing your interests and make sure your terms, in addition to price, are the very best  you can offer. Perhaps you can close sooner, shorten either your loan, appraisal or property contingency periods. Good luck !

$1,000 over best offer would not likely be the difference maker. imagine you have an offer at $200k with terms you like and another at $201k with terms you don't like. Which offer would you take? Using an escalation clause is a great tool, but the escalator amount needs to be significantly higher to incentive a seller to take your offer.

Russell Brazil, Real Estate Agent in Maryland (#648402), Virginia (#0225219736), District of Columbia (#SP98375353) and Massachusetts (#9​0​5​2​3​4​6)

$226k is about 1% of your $2200/mo rental income. It's about right a deal on a simplistic view with that metric, and yea, sounds like what I can find in Omaha as well.

Problem lies in your offer strength. You are doing financing, and most sellers in today's market will consider that "meh" in general. If someone comes in all-cash then you will be up against really stiff competition.

If you can do a HELOC or some sort of commercial credit facility where you can get this done all cash and season it for a year before you refinance it, that'd look a lot better as an offer. But yea, if that's not viable, I second @Scott Raley 's suggestion of an escalation clause with a cap at your $226k figure.

At the end of the day, just offer what you think makes sense for you. No point to chase deals, especially when we are already years into a real estate cycle. The financial performance of buying 1 deal really right will outperform 5 ok-ish deals especially if you are buy and hold.

Just curious, what type of financing are you using with 15% down and PMI, and it not being your primary residence?

Kurt Pauley

    Originally posted by @Kurt Pauley :

    Just curious, what type of financing are you using with 15% down and PMI, and it not being your primary residence?

    I have passed on this particular deal, but I have financing set up from a small-town credit union in Minnesota. They are allowing me to purchase the property in my name (not an LLC) with as low as 15% down. If I purchase it with less than 20% down, I will pay PMI, but it really helps improve my cash-on-cash ROI by using this method. I will have about 5 years of PMI with this financing.

    @Nick E. , even though I gave you a vote for your post above, I don't REALLY like your idea of focusing on your CoC on just 15% down - because that means you're responsible for an EIGHTY FIVE percent leverage, with basically no margin for error if and when there's a hiccup in the market.

    (But at least it's not as bad as those who boast of their potential 25% CoC - on just 5% down!)

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