Is the current market really that strong?

Question

Hi BP folks,

I’m trying to sanity-check my underwriting and would love to hear some perspectives.

Lately I’ve encountered several listings where the listing agents are extremely confident they can sell at what (to me) feels like very aggressive pricing.

A couple examples:

• A small multifamily (4-plex) where, even with fairly standard assumptions (1% management, 2% maintenance, 5% vacancy, 6% rate), the deal would lose $10k+ per year in cash flow.

I understand there may be some tax benefits for high W-2 earners, but personally I don’t think tax savings alone should justify a deeply negative deal.

• The pricing was anchored to a nearby property that sold for ~$1M, but that same property is now estimated around ~$750k on Zillow, is in noticeably better condition, and was sold using a seller carryback structure (which, honestly, I don’t think could be conventionally underwritten by a lender at 1M).

• Another 4-plex is listed at around $300/sqft, while the one next door—significantly better condition—recently sold for about $200/sqft.

When I asked about pricing, the listing agent said that if they lowered it to $280/sqft, they’d get “tons of offers.”

So my genuine questions are:

• Am I being too conservative with my underwriting?
• Is the market really this strong right now?
• Or are we just seeing sellers and agents testing the ceiling?

Would love to hear how others are underwriting multifamily deals in the current market.

Steven Destine · Answer

You're not being too conservative, those listing agents are delusional or fishing for dumb money. A deal that loses $10k/year isn't an investment, it's a hobby, and tax benefits don't fix structurally broken cash flow. The market isn't strong enough to justify $300/sqft when comparable properties are selling at $200/sqft.

What's actually happening is sellers and agents are anchoring to peak 2021-2022 comps and refusing to accept that valuations have corrected 20-30% in many markets. The fact that an agent says they'd get "tons of offers" at $280/sqft but listed at $300/sqft tells you everything - they know it's overpriced but they're testing anyway.

Keep walking away from negative cash flow deals. Phoenix has plenty of inventory right now and motivated sellers will eventually come down to reality when their properties sit for 90+ days.

Jaron Walling · Answer

As an seller in this market follow your gut instincts. We have a SF for sale right now but unless we get a magical offer in the next two weeks we're pulling it off market. We're going to relist in the spring at a better price or rent it out. Buyer motivation is stalled out in most markets, but agents don't get paid to say that.

Some of those multi-family properties are overpriced. This could be seasonal to the market but either way that agent is tempting you to make an offer close to $280/sqft. In reality the seller would accept less. Offer less or don't make an offer. Maybe you're not the buyer for any of those properties.

You're not talking about house-hacking. In our market a lot of small multi-family properties are priced for house-hacking. It gets people into the homeownership but doesn't mean it's a good deal for the above average REI. Almost every small multi-family property in my market doesn't cash-flow unless you BRRRR, add value, refinance, and command top market rents.

Ying Tang · Answer

@Jaron Walling Thanks very much for the reply, and for bringing up BRRRR! SFHs are harder to cash flow in Phoenix market, thus I have mostly given up on that front... For small multifamily, the two listing I mentioned both need extensive remodeling ($100k for 4-plex) to get them rent-ready. For BRRRR, does it specifically mean that the person need to live in one unit and the person need to do all the renovations by himself or herself?

Nicholas L. · Answer

@Ying Tang

just to try to answer briefly - you can't worry about what an agent or seller thinks.  if the price doesn't work for you, no problem - on to the next deal.

i'm looking for BRRRRs right now, and while a BRRRR-able deal occasionally hits the MLS, most are found off-market.  so - this could be something for you to look into (if you're not already).

here are my answers to your specific questions.

• Am I being too conservative with my underwriting?  No.  That's your job.
• Is the market really this strong right now?  Yes.
• Or are we just seeing sellers and agents testing the ceiling?  Irrelevant - as I noted, we couldn't care less what sellers and agents think or do.

I hope this helps!

Ying Tang · Answer

@Jefferson Black 😭Really? They have -40 posts every day on Facebook group.

Jefferson Black · Answer

That just sounds like a scammer...

Ying Tang · Answer

@Nicholas L. Thanks so much for your reply! Much appreciated. I had looked into several deals I found on Facebook groups. They are all cash only, no inspection allowed. Wholesalers want me to wire $5000 site unseen. I'm wondering if it is the standard for off market deals? I can accept "sold as is", but still want inspection done to know what I'm walking into. Last week, I found one that might work and requested to walk it. Wholesaler kept pushing on the EMD, while in the end he couldn't find seller at all to even open the door.

Jaron Walling · Answer

If either of those properties need $100k in renovations to get rent-ready that presents an opportunity. Most house-hackers won't touch them. If a property qualifies for conventional financing (functional kitchen, bath, working plumbing, etc.) you could absolutely move into one of the units, rehab others, and get the value add required to create a deal. That's how I purchased my first SFH. It's just a matter of scale, remodeling each unit, getting signed leases, and presenting it to a lender. You have to buy it cheap to make that happen. You want to buy some equity and you want to create more during that process. I'm not an expert just mom and pop investors from the mid west. "A small multifamily (4-plex) where, even with fairly standard assumptions (1% management, 2% maintenance, 5% vacancy, 6% rate), the deal would lose $10k+ per year in cash flow." - Did you mean to say 10% for management?? Most investors assume 15% for expenses. Anything that's -$10k per year CF is insanity. Nobody is dumb enough to buy that property.

If it's been on market for a long time the issue could be location, price, unit layout, or renovation costs. Maybe the seller isn't motivated. Unless you walk the units, talk pictures, get a SOW, and get quotes for work you won't know how to approach the deal.

Is the current market really that strong?

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