What is the General Over Inflation of the MLS in Your Area?

Question

Hi BP Community,

So I know that this has been asked/stated like a million times, but I didn't quite find what I was looking for as a newbie, so here it is with a little background.

I've been practicing deal analysis with the calculators using listings that I find on Zillow, and generally what I'm finding is that the number I need to make it a good deal is 55-58% of the asking price. Craigslist deals are pretty similar too.

Obviously off market deals from deal funnels are the better way to go than strictly going off of the MLS, but my question is mainly to the more experienced investors out there that analyze the MLS all the time. Is the MLS over inflated (deal wise) by about 55-56% generally speaking?

I'm guessing it's probably market dependent too, so as an example, in my area most 3-2 SFR units will rent for about $750/month.

What percentage of the asking price makes it a good deal in your area?

Thanks for the help,

Pete

John Teachout · Answer

There's really not a usable ratio between asking price and a "deal" price. We purchased most of our rentals off the MLS and paid anywhere from asking, over asking to well under ask. A property has a value to an investor and determining a good price to pay for that particular property is an extremely important skill. I've looked at properties I wouldn't pay half of ask for as they were "junk". So instead of trying to come up with some kind of "formula" based on asking prices, learn how to determine ARV's, rental rates and rehab costs. Those are the numbers that have meaning in the REI business.

Marc Winter · Answer

@Peter Korty, your original assumption that off-market deals are 'better' than what can be found on the MLS is flawed, IMHO.  Off-market:  some are better, while many are worse than MLS listed property.

I have found many of my best deals right on the MLS!  Then too, when I was actively listing properties as a broker, I'd come across a deal and would buy on the spot.  That is NOT an off-market property.  A really motivated seller will list with a broker 8 out of ten times.

Matter of fact, we used to find the true market value of a property by looking at a FSBO and deducting about 10%--15% off their ask.

Moral of the story:  the more oysters you open, the better the chance of finding a pearl.

Good luck.

Marcus F. · Answer

Hi @ Petter Korty,

I also buy in Lafayette (home town) but I live in California. All the properties I have purchased were MLS listed and all under market value. In August I purchased a 3 bed, 1 bth 780sqrf for $65k and rents for $900. I put $4k in that property prior to rent. A “good deal” is a relative term. I use the Deal check software to screen all my properties if the math doesn’t make since I walk away and don’t look at that property again unless the price moves. My key is the property manger, who screens the property and tells me exactly how much they know they can rent it for prior to me purchasing. Also my agent, owns the property management. Again, I’m in California so a trust but verify relationship is required. The only property I have physically walked through was my first. This also opened the door to pocket listing and off market knowledge.

My goal is to purchase four to six properties a year and that is driven buy the amount cash flow they can produce. I’m never selling them so all the other numbers don’t factor or matter to a degree. I make sure I get a a very good inspection on all.

MLS or off market, it’s relationships that can bring you the deals.

Question: Are you trying to to rent to students? I don’t but I am curious to here from someone in the area who does.

John Teachout · Answer

The percentage is meaningless because you're looking at the properties from an investment aspect and properties are listed on the MLS based on what the sellers feel like the retail market will bear. If you see properties on the MLS regularly selling for a significant discount of the original ask, that means that the realtors in that area are not in tune with the actual market. On zillow, you can see the price history of a property and on ones that were overpriced, they often have a long list of small reductions, perhaps switched sales agencies a couple times and eventually, they sell for significantly less or are still unsold. The market determines the prices. As an investor, most MLS properties will simply not make good rentals because of the ratio between cost and rent rates (the ole 1% rule)

Each property must be assessed individually for it's income generating potential. We went nearly two years without acquiring a property because there were no deals to be found. We shifted our target area and started buying again.

Peter Korty · Answer

Thank you everyone for helping me with this. I was talking with a friend at work who is also just getting started in real estate investing. Like Mark, he suspects that I'm over analyzing my market and am probably erring on the too cautious side. And I probably am. I'm an engineer by trade, so over analyzing a problem is kind of what I do... Maybe a local meetup will happen soon now that restrictions are loosening from COVID-19 and I can see if another investor would come up with similar numbers as me.

@Marcus F., I'm not planning to rent to students. I know how hard they can be on things that are not permanently theirs, especially if they are only planning to be there for 3-9 months. I would initially think that it's all in the screening process and lease to make a real difference IMHO though.

Thanks for the help,

Pete

Russell Brazil · Answer

It sounds more like you have unrealistic expectations for the market, as opposed to prices inflated by the multiples you are coming up with.

Matt Williams · Answer

@Peter Korty

Yeah brother. The further in we get to chatting about it, the more I’d actually have to be chatting with you to help you figure out what’s broken, and get you pointed in the right direction. I coach/mentor folks individually. DM me if you want to learn more. But I can tell you something is wrong with this picture to me. It would just be way to intensive to keep commenting back n forth.

Peter Korty · Answer

Hi @Matt Williams,

The Market I'm in is relatively rural or agricultural based (Lafayette Indiana). The nearest large city only has a population of 72k. There is lots of manufacturing, but almost no one works directly for these companies. The manufacturing companies that do have direct employees are almost fully automated and only have about 80 employees at each. Almost everyone works through a temporary contract agency, so max pay is about $20/hr before taxes. The only other major employer in our area is Purdue University.

I'm looking at properties generally need moderate repairs IE $20k-$30k repair budgets. I always sort my Zillow listings by price lowest to highest. I throw out the houses that are in the worst neighborhoods and analyze the rest using the BP calculators. Once I finally find the right purchase price, I just divide that by the asking price. It's frequently been around the 55-58% of the asking price.

To answer your questions:

• Are you absolutely positive about what the potential gross rent will be?No. The extent of my research is talking to one local investor that said he rents out his between $700 and $750 per month. I also check Craigslist relatively frequently to see the rental rates. The rent ranges from between $450-$1400 per month with the apartments being removed from Craigslist within a week for $550 or less, within 2 months for $550-$800, and $800 and up have been posted for more than 3 months.
• No. The extent of my research is talking to one local investor that said he rents out his between $700 and $750 per month. I also check Craigslist relatively frequently to see the rental rates. The rent ranges from between $450-$1400 per month with the apartments being removed from Craigslist within a week for $550 or less, within 2 months for $550-$800, and $800 and up have been posted for more than 3 months.
• 
• What formula are you using to determine that you should be offering so much less than what homes are listed for?I don't have a formula. I just use the BP calculators until I find a purchase price number that gets me to where I want to be. Then I divide the purchase price by the asking price to find what percentage of the asking price I'm looking at. I just noticed that several of the properties I've analyzed come out to about 55-58% of the asking price.
• I don't have a formula. I just use the BP calculators until I find a purchase price number that gets me to where I want to be. Then I divide the purchase price by the asking price to find what percentage of the asking price I'm looking at. I just noticed that several of the properties I've analyzed come out to about 55-58% of the asking price.

• No. The extent of my research is talking to one local investor that said he rents out his between $700 and $750 per month. I also check Craigslist relatively frequently to see the rental rates. The rent ranges from between $450-$1400 per month with the apartments being removed from Craigslist within a week for $550 or less, within 2 months for $550-$800, and $800 and up have been posted for more than 3 months.
•

• I don't have a formula. I just use the BP calculators until I find a purchase price number that gets me to where I want to be. Then I divide the purchase price by the asking price to find what percentage of the asking price I'm looking at. I just noticed that several of the properties I've analyzed come out to about 55-58% of the asking price.

• Are you looking at single family, or multi-family properties?Single family thus far. I started analyzing multi-family properties last week. These are coming closer to the asking price, about 65-70%. Dave Ramsey always says to use the 70% rule, so I don't feel too bad about those.
• Single family thus far. I started analyzing multi-family properties last week. These are coming closer to the asking price, about 65-70%. Dave Ramsey always says to use the 70% rule, so I don't feel too bad about those.

• Single family thus far. I started analyzing multi-family properties last week. These are coming closer to the asking price, about 65-70%. Dave Ramsey always says to use the 70% rule, so I don't feel too bad about those.

• Are you open to investing in other markets?Yes and no. If I weren't working full time an hour away or were not just starting out, most likely yes. But right now, no not really unless I really can't find something in my target area.
• Yes and no. If I weren't working full time an hour away or were not just starting out, most likely yes. But right now, no not really unless I really can't find something in my target area.

• Yes and no. If I weren't working full time an hour away or were not just starting out, most likely yes. But right now, no not really unless I really can't find something in my target area.

Thanks for the help,

Pete

Marc Winter · Answer

@Peter Korty, IDK, buddy, maybe over-analyzing?  Look, if the property will cash flow according to your numbers, and you can afford it along with the CapX, you do the deal at your number.

Are you worried about insulting an owner or agent?  Faint heart never won fair maiden, or words to that effect, LOL.

Formula:  inspect as many properties as you can, learn your market by heart, and the properties that meet your criteria--go for it.

Matt Williams · Answer

@peter kortyDude, what market are you in? $750/m for a 3/2? Look, what is it you’re trying to do? But turnkey rentals? BRRR strategy? Fix & Flip? I get the sense since you’re talking about rentals, that you’re most likely talking about turnkey rentals. If that’s the case, there’s no freaking way you’re going to get a property for 55% of what it’s listed on the MLS.

Here’s a couple questions for you.... Are you absolutely positive about what the potential gross rent will be? What formula are you using to determine that you should be offering so much less than what homes are listed for? Are you looking at single family, or multi-family properties? Are you open to investing in other markets?

There are frankly a lot of variables to your initial question and solving your problem.

What is the General Over Inflation of the MLS in Your Area?

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