Would you purchase this deal?

Question

Hi Biggerpockets,

I need some help evaluating a deal. I currently live in the DC area and put in an offer on a property with the following details:

Listed Price: $235k Estimated Value: $245kRequired Repairs: $7,500

Average Rents: $1750

My Offer: $190k w/ 10k Seller AssistEstimated PITI: $1370 (I calculate my numbers at 5% down even though in actuality I'll be putting down 20% because it will be an investment property. At 20% PITI is: $1173). I use the 5% estimate because it allows me to stay conservative in my analysis.

I received a counter of $232k with $10k Seller Assist. If I accept, the estimated PITI @ 5% down is $1520 and $1340 with 20% down. My thought is with $10k seller assist, I really won't be paying any fees to acquire this property, though I will incur costs in fixing it up. Surely, I will counter, but if they won't budge, would you take this deal?

Russell Brazil · Answer

Without knowing where the property is, and thus not being able to properly evaluate the value....going that far below list would singal to me as the listing agent that you are wasting my time.  Sure you occasionally run into overpriced properties...but by your own estimation you said the property is worth $245k and needs minimal repairs. If that is the cade you already have them at a signifigant discount, which will not be possible to get in 5 weeks when the spring selling season starts.

And you are saying you are investing for cash flow...but you are only putting 5% down. That means it is an owner occupied loan, not an investment property loan. Of course you are not going to cash flow well with almost no money down. 1750 rent on a 230k property is a good ratio for the DC area.

Russell Brazil · Answer

A foreclosure is one of the instances worth lowballing.  You dont run the risk of offending the seller or pissing of the agent, so actually you are ok here. @Upen Patel is a loan officer in the area and I think his bank goes down to the 15% floor that fannie allows.

Alexander Felice · Answer

Gross rents:  1750

expenses:      787.5 (45% ratio)

Net:                 962.5

Debt Service:  953 (222,000 @ 5% w/ $44,400 Down [20%])

Cash flow:      $9.5

No deal here. You'll never get your money out of it, your price/rent ratio is too high, No room for error.

If you can afford to subsidize this for 5-10 years and maybe make it out in appreciation, then MAYBE it'll be a good deal, but we won't know for a decade.

Thomas S. · Answer

SFH will have higher expences than a Multi however in either case this property will not have positive cash flow short or long term. I would definatly pass.

Brandon Malone · Answer

@Russell Brazil thank you for the great resource. I am certain that if this deal happens I'll contact him to see what we can work out.

Brandon Malone · Answer

@Russell Brazil As always it's great to hear from someone in the area as well. The property is located in Frederick, MD and is a foreclosure. I always try to bid low on these properties because I, as I'm sure like many others like to see how much equity we can have remaining in the home after purchase. On few occasions I've avoided bidding low only later to see a property close at a price even lower than I would have bid. For example I recall seeing a property sell for 480k list price of 550k off Ranworth in Germantown. I mentioned in my post that I ran my numbers as if I'm putting 5% down even though I'll have to put 20% because I definitely will not move to Frederick to house hack this property. I may look for a lender that can do 15% on an investment property.

Brandon Malone · Answer

@Casity Kao I completely agree with you at 80%-85%, I'd need that property at roughly 195-201. I plan to counter at 197k with same seller assist to see what kind of response I get.

Casity Kao · Answer

@Brandon Malone  It really depends on what part of DC area.  Is this a rent control, high appreciation area?  I doubt it is based on the pricepoint and the rent you quoted.  How long has it been on the market?  If it has been on the market 30 days, I never offer more than 90% of list price because anything above is market and you really should always be buying below market because you want to be able to get your cash back out with appreciation, otherwise you are stuck with your downpayment in a property and it will limit your growth.  For our business and our investors we buy at 80-85% because it allows us to almost always get a portion of our downpayment back if not all, or refinance into a no mortgage insurance mortgage.  This does two things, reinvest money into more properties while cashflowing on properties with high cash on cash return, as well as increase cashflow by investing more, or reducing mortgage insurance if it is a househack.

Brandon Malone · Answer

@Alexander Felice @Thomas S., I appreciate the feedback. I'm definitely going to counter to see how low I can go, it appears the general consensus is that even with using the 5% estimate, this is a no go.

Would you purchase this deal?

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