Do I have a deal?

Question

Hello guys,

I need your help to make sure I wont mess it up too bad in what could be my first deal.  A realtor/investor friend of mine brought this property to my attention located in Miami, FL. It is just listed in the MLS for $210K.

Unfortunately there are not many real comps around, there are newer homes sold, smaller homes, apartments...but nothing I can really call a good comp. By how other types of properties are selling (smaller apartments being sold by much more, etc) we "estimated" that this property could easily sell for $280K or so.

I spoke with a Hard Money Lender and to his opinion the market price is more around $235K. I cannot argue that because I have nothing to prove him wrong....furthermore, it concerns me a bit that my "estimate" is too high.

This being said, I am changing strategies from buy and sell, to wholesale it. The property needs no repairs at all and I had another HML tell me that he could buy the contract from me if I get it. That would be great, if at the time of him doing his numbers he still believes this is a good deal, otherwise he would back off and leave me with the contract in my hand.

I know many people use the "inspection period" to walk away if they cannot get rid of the property before its over. Is this a valid strategy?...not that I want to do it but I do need an Emergency Exit. Is there anything I need to be aware of or other corners to cover before I send in my contract?

Thank you for in advance your help!

Jeff Copeland · Answer

@Allende Hernandez - It sounds from your comments like you haven't even seen the property (you mentioned you're unsure whether it's a single family or a condo*, and whether or not it's detached). Are you planning to buy it sight-unseen? If so, how do you know it doesn't need any repairs?

*Also note that a condo is not a type of construction, but rather a type of ownership...so this is a very important distinction when looking at comps - with condos you do not own the land or common elements, and the owner pays a (often hefty) monthly HOA fee, which affects purchasing power when considering financing, which indirectly affects value. So you really need to clarify this when looking at comps; it's truly apples and oranges otherwise.

The listing agent shared with you they had a financed offer at $255k, and a cash offer at $210k - both offers seem to be aligned with your value estimates...yet you're assuming their lying and considering raising your offer to $200k? While there are certainly some unscrupulous characters in real estate (just like in any profession), It's probably far less common than you think, and you can't just assume the listing agent is being dishonest.

It's probably still on the market because the seller is waiting until April 2nd (just like the listing agent told you), and which time he/she will review multiple offers and either select the best one, or ask for highest and best from all offerors.

From what I'm hearing, it sounds like there are already multiple strong offers (as expected), it will go well above asking, and you have very little chance of getting the property under contract at $200k or less. If that turns out to be the case, I'd recommend chalking this one up to a learning experience and tracking it through to the sale and ultimate disposition - track what it ends up selling for (a few weeks from now it will be public record), and maybe even find out who buys it and what their exit strategy is. This is a great way to learn the ins and outs of your market, and learn what successful investors are doing, without ever spending a dime.

I'm sorry to say I don't like your chances on this one, based on what I'm hearing. Again, not trying to rain on your parade....I  jumped on this thread because you asked me to and I'm just trying to play devil's advocate so you can make an informed decision. Hope it helps and I wish you the best of luck!

Corey Woodruff · Answer

of this is going to be your first deal, I am sure you are super excited and congratulations on taking action. But please do yourself a favor and steer clear of this cause you don't want your first deal to tank you. Find one that you have several comps and feel confident about. Without comps and hard money people telling get you its worth 235 is telling me it would be a no fly zone here. Good luck if you end up doing it though. Let me know how it goes.

Tom S. · Answer

@Allende Hernandez

Thanks for the update and good luck on your future endeavors!

Allende Hernandez · Answer

@Tom S.,

The realtor told us they accepted a cash offer over asking price. I dont know how much it was. It was a great excessive for me though.

Thanks for checking!

Tom S. · Answer

@Allende Hernandez  Hi Allende - was following this thread.  You mentioned the offers were going to be reviewed April 2...do you know what the decision was?

Thanks,

Tom

Allende Hernandez · Answer

@Jeff Copeland

No worries, on the contrary, I really appreciate you taking the time to analyze and challenge the deal. You bring up a lot of points I haven't though about as a newbie. Against me is playing the fact that I have been "learning" too much for too long in REI with no practical experience. I've been waiting for the perfect deal and , of course, it is not going to happen. I am anxious to get my hands dirty but I need to be careful not to get desperate and end up in a bad situation.

That being said, I haven't decided yet what to do with the property. Below are my comments to yours:

Property: No, I haven't seen the property. I have seen pictures of it and the description in the MLS says that the kitchen has been remodeled. They are not showing the property until this weekend. By the pics it looks pretty nice. I put my original contract with the assumption that such a good deal would fly without even people looking at it and that I could walk out in case it wasn't as good as it looks in paper.

Condo: You have a great point and I'll double check with my realtor if there is any association fees. He told me their wasn't but it wont hurt to ask again. Though, the "comps" I am comparing it to are apartments that do have an HOA, on top of being sold for a much higher price.

Now, I believe I just found three decent comps :) I may PM you for some more specific questions about the property.

Thank you very much again!

Allende Hernandez · Answer

@Jeff Copeland first thing is to thank you big time for jumping in so quickly. Let me address your questions the best I can

Asking price: This property came out last saturday or sunday and the owner is not making any decision until 4/2 (we were told by the listing agent). I did send a contract for $180K and he responded he has cash offers for the asking price and financed offers for $255. Could be bluffing...or not. That's probably why it is still in the market.

Comps: We found apartments sold by much more than the $210K. Now, these are newer apartments with less sq ft. This seems to be a SFH (also listed as such in the MLS) but the property description in the county says "condo". By the pics its hard to tell whether it shares a wall or not with the neighbor.

The difference in prices between mine and the HML is all subjective. He also had hard times finding good comps so he estimated the market value at $235K. I looked at all those apartments selling for $250K/$260K and "believe" a larger SFH in decent shape would sell for $280K. Again, I am a newbie and could be day dreaming a lot here. I just don't wan't to wait for the "perfect deal" to start (I've been waiting for a long time now and it doesn't seem like it'll come). In the other hand..I don't want to jump into a mess or being stupid.

Offer: The listing agent mentioned that the owner is favoring cash offers over financed. That's why I saw an opportunity.

My idea: Was originally buy and sell retail if the spread was as good as I though but I put that to sleep. My plan is now wholesale it. I already have one other HML who told me he would buy the contract from me but, he hasn't done his research yet, so I am taking that with a grain of salt. I could still try to find another wholesale buyer if he bails.

Exit Strategy:  Of course, the ideal exit would be finding a buyer during the inspection period but giving that this is not a clear cut great deal, I want to be prepared to walk away if the market does not agree with me, therefore my questions about the inspection period. I suspect that they won't accept my contract for $180K so I am tented to up it to $200K. I wont go full price.Does it make better sense now?

Once again thanks A LOT!

Jeff Copeland · Answer

@Allende Hernandez - My first and probably most important observation - if the property has already been in the MLS (and thus fully exposed to the market) at $210k and hasn't sold, then it almost certainly isn't even worth $210k (if you're correct that "the property needs no repairs at all").

Every investor in Miami has already seen it on the MLS and passed at $210k. So what makes you think you can buy it and then assign it at $235k or $280k?

(I'm not trying to be critical or rain on your parade, just trying to be an outside observer with no financial interest in the deal and help you ask the right questions!)

Secondly, there are always comps - especially in an urban area like Miami.

You have to look at comps from the eyes of an appraiser. If a lender hires an appraiser to appraise this house, he/she will certainly get it done...they can't just report back, "sorry, I couldn't find any comps".

An appraiser usually starts with homes of similar size/age/construction/square footage within a half mile, and sold within the last six months. If that doesn't work, then they'd loosen up the search radius (may go out to 2 miles, or even 5 miles if necessary), or the timing (maybe look back 9 months, or a year, for sold properties).  If that still doesn't work, then they'd look for slightly different homes and make adjustments based on square footage, # of beds/baths, garage, pool, etc.

So my first advice is: find a realtor who knows the area, and get them to pull comps from the MLS  using the above approach (and not using an automated valuation tool).

Only once you're fairly certain of the ARV are any of your other questions even worth considering.

Notwithstanding my opening comments above, the fact that you came up with $280k and someone else came up with $235k is too much a spread and is a major red flag. Figure that out first. Then you can consider whether it's worth making an offer, whether there's enough meat on the bone for another investor to be willing to pay you an assignment fee, and what kind of contingencies make sense to put in the contract.

Finally, if the house is genuinely priced lower that market value, it will most likely sell above asking after a highest and best round - making the asking price irrelevant (other than to serve its purpose of attracting more bidders), unfortunately.

And if it's an REO, they are not going to allow you to assign the contract anyway.

Hope that helps!

Corey Woodruff · Answer

you can add a contingency to the contract that addresses you needing to find a buyer or due to inspection and that would give you a way out. But yea like you said it could hurt reputation if he plans on it selling and it doesn't. But to answer yes that is a way out for you.

Allende Hernandez · Answer

Thank you @Corey Woodruff!

I had hope that I could give it a try to wholesale it as long as if the numbers don't add up to my potential buyers I had a way out.

How valid is backing out in the inspection period and how feasible? I do not intend to use this in a regular basis but It is nice to know I always have a safety net.

Thanks!

Do I have a deal?

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