Made My First Offer!......And Got Laughed At :( (With Numbers)

[Franky Davis]

Hello all,

My name is Franky Davis and I am relatively new to real estate investing and a newish member to BiggerPockets. Let me start with a little about me. I'm currently an orthopedic surgery resident (year 3 of 5) and have had an interest in the small business world and real estate as long as I can remember. I had a landscaping business in college, have dabbled with multiple online business opportunities throughout my educational career, and have continued to read and read about real estate investing. However, medicine was a big draw to my humanitarian side and would provide me with some job security. 

Over the past year, my interest has really peaked. I have listened to 80+ episodes of the podcast, read multiple books, and begun scanning my local market of Chattanooga, TN for deals that would be possible for my wife and I (Special Ed Teacher). This has been a tough search due to our financial situation with my student loan burden and relatively low resident salary. However, I have stayed persistent and some non traditional financing options have gradually presented themselves.

Recently, I came across a deal that I thought had some potential. It was a subtle craigslist post in my local market for "A 4 Duplex Package Deal". This was originally listed at $275,000. I thought, "Hmm...that sounds interesting". Upon further investigation, I discovered that these were currently 100% occupied, C-class properties near the downtown Chattanooga area in C class neighborhoods. "Ok, let's see who's listing them." 

I figured this would be another local agent listing for a big investor that was trying to dump the properties for cash to move into larger commercial investments. However, when I reached out, it was a personal seller. I thought, "Perfect, this will give me some wiggle room to make a deal!" So, I reached out. After several hours, a very nice, early 60's engineer responded. I thanked him for the response and began a general inquiry about the properties. He said he purchased them in 2012-2013, and they stayed rented. 7 of the units rented for $450 and the 8th rented for $375. He had data on the taxes and insurance. But, he didn't have alot of information on the major cap ex info like roof age, HVAC, etc. Regardless, I pushed on.

My next move was to figure out what this guys motivation was. I asked him what he owed or if they were paid in full. He responded quickly that he had paid cash and owed nothing. "Sweet!" I thought. "This'll definitely give me some room to work". He said he was hoping to retire and move to Florida where he owned a condo with his wife. So, he was just testing the market to see if he could make a sale. "That is my window!" I thought. 

So I gently proposed some seller financing. He said he preferred cash but would be open. I began to try to harness some of my "how to win friends and influence people" dogma and told him that I could possibly provide him with a completely passive income stream that would allow him to move to Florida without any of the active burden that landlording required. Upon hearing that, he said "Propose your deal and I will consider it". I couldn't believe it! So I got to work.

Over the next 4-6 hours, I began researching comps as well as comp rents. My offer was no money down (I know not ideal), 6% interest rate, 30 year amortization with a 5 year balloon. The tentative numbers are as follows.

So, my goals were to attain between the 1.5% and the 2% rule. This property was listed at $275,000 (1.29%). Also, when calculating my expenses using the 50% rule, that gave me $1775 to cover my debt service ($1229.08). So, my decision to come in low was for multiple reasons: 1) These were C properties in C neighborhoods. 2) There was definitely a lack of maintenance based on the pictures and the google street views. 3) These rent rolls/expenses were a pro forma so I couldn't guarantee that they were on the mark. Therefore, I came in at $205,000 with a 5 year balloon at 6%. 

And as the TITLE SAYS!!!! He didn't even consider it for a second. So, I tucked my tail pretty ashamed and have been re-evaluating my numbers ever since. I tried to calculate everything conservatively and make an offer that was low hoping he would counter and still leave me with some wiggle room to make money. However, I definitely feel as if I overestimated his motivation and desire to move to Florida. I thought maybe this deal would feel like his ticket out. And lastly, I may have given too much importance to the above stated "Rules" that I've learned about. However, I think my offer definitely would've set me up very well to start my real estate journey. Plus, I think it would've provided me with an opportunity to really improve these properties for these people living there. And, possibly, raise the rent if the properties deserved it. 

So in closing, I'm excited to have submitted my first offer! I've been blown away by the quality of this forum and the quality of the podcasts. I would love to hear from you more seasoned folks as to how I could've handled this better. I am still running the numbers in my head and may reach back out to him after this has cooled off a little bit. I can't wait to get some feedback. 

Cheers from my family of 3 in Chattanooga!

Franky Davis