Low Balling vs Realistic Offers for Properties

[David Edwards]

Hello BP,

I'm new to this so my apologies if this is a dumb question. 

I'm looking to get involved in REI in the Seattle / Tacoma area. I've been researching house hacking and doing the 4 square analysis on a number of properties I've been finding on Redfin and from an agent I've been talking to. The issue is that I'm finding most properties up for sale don't seem to pencil out to having any positive cash flow (like gross income is 300 less than the anticipated mortgage+taxes+insurance costs). I figure this might be a reality of the market in Seattle but also where my question on offers begins.

Do you as an investor looking for multifamily properties make offers well below asking (not just 20-30% to make money when buying) to get the numbers to work on your end, or do you largely just assume that the properties are inflated and that now isn't the time to pursue them? 

I've been listening to the back catalog of BP podcasts and strangely enough this was addressed in the quick tip for Episode 198 and is summarized basically as not knowing the sellers motivation means that heir asking could be real or arbitrary and you never know if you don't ask. 

If anyone has some real life examples or thoughts on how you would approach a situation like this or I guess the Seattle market please let me know. 

Thanks for the read everybody,

-Dave  

[Andrew Johnson]

@David Edwards So you're in the same boat as everyone in Los Angeles, the Bay Area, San Diego, Orange County, etc. There might be some dicey pockets where you can cash-flow well but you're basically in a market where you're competing with owner-occupants (they don't need an "ROI") or investors that believe they will make up any cash-flow deficiencies through appreciation. In short, their price-thresholds are higher than yours and once the property is on MLS it's basically fair game for all. That's not to be discouraging but something tells me you wouldn't have these issues if went to invest in Spokane.

Now getting to the nitty gritty.  There is (in my mind) a distinction between commercial multifamily and non-commercial multifamily (along with SFRs).  The latter you value based on comps and comps either support the value (in the eyes of the bank) or they don't.  Sold comps are also likely what a realtor used to help ballpark the asking price in the first place.  So unless the realtor was way off, there are issues with the property that make it undesirable, etc. you'll have a hard time getting your 30% discount.  If you do, it was either poorly priced in the first place or there's something about the property you'll figure out during the inspection process that you may not like.  And there's the inevitable caveat that if you're an all-cash buyer, can wave contingencies, etc. you should be able to negotiate more aggressively with the motivated (time sensitive) sellers of the region.

Now if you're talking about commercial multifamily, it's a little easier to back-compute (for lack of a better phrase) the purchase price that makes sense for you because you are looking at ROI, cash-on-cash return, etc. And every single other person that's making an offer will be doing the same thing. Not to mention the seller should (almost certainly does) know that everyone is doing that same analysis.

In these cases (and what I've done personally) is come up with the purchase price that makes sense for me.  When doing this I don't take into account the asking price.  The purchase price my number spits out (in all cases) is lower than the asking price.  And it's a number that isn't going to be identical to other investors.  They likely won't have exactly the same views of risk, cost-of-capital, etc.  Regardless, I have "my number" and make an offer just a little below it.  

For what it's worth, you also have to take a look at all of those properties that you've crunched the numbers on. How many have sold? Have they sold for prices that were close to your discounted price? Have they sold for list price? Did they take 20 days to go into "pending" or 200 days? I would imagine there's enough data in the Seattle market to tell you if your price expectations (and ROI expectations) are reasonable or not.

And if they're not reasonable, you can just plug away and hope to find the 1 in 1,000, wait for a drop (and hope interest rates are the same, capital is readily available, etc.), seek out less desirable properties, or seek out a less desirable market.