Determining an offer price

[Brad E.]

Hello all,

I am curious about your opinions and thoughts on our current strategy for determining an offer price on properties.  Right now, we are looking to earn around $150 per door on units, but I am not sure we are being realistic with our goals.  Here is one property we are looking at and am curious if you all think our strategy makes sense or if it is unrealistic.

Triplex in eastern North Carolina

Asking price $175,000

Income

Current rents: $675, $675, $625 = $1975/mo

Known expenses

  Management (10%)= $198/mo

  Taxes $151/mo

  Insurance $205/mo

Estimated expenses

  Mortgage (p&i) $745/mo

  Yard care $50/mo

  Repairs (10%) $198/mo

CapEx (5%) $99

  Vacancy (2.5%) $49

Total Expenses = $1695

Income - expenses = $280

Our mortgage assumptions right now are 25% down ($43,750 at asking price) at 5.5% over 30 years.  Closing costs are estimated at $5000.

This is $93 per unit cash flow per month. It also puts us at 6.9% cash-on-cash return with 7.0% CAP rate.

If we want to hit our goal of $150 per unit, we would need to reduce our offer price to $135,250.

This brings our cash flow to $450 or $150 per unit. It also reduces our downpayment to $33,813 putting our COC at 13.9% and 9.1% CAP rate.

On this property, we were told the owner is firm on the price, but we believe it never hurts to make an offer.  But we have looked at many other properties using the same formulas and every time, our offer price calculation is significantly below asking price.  Obviously the seller is trying to get as much as they can for their property, but I am concerned that all our offer prices are way too low and not realistic.

Are we including expenses in our calculations that should not be included?  Any inputs or opinions would be greatly appreciated.  Thank you so much.

Brad

[Russell Brazil]

One thing youve not mentioned in your analysis is the value the market places on the property. What you desire to earn.per door has nothing to do with a propertys value. If your market doesnt give you your desired return, then you have 2 choices.....change your criteria to fit your market, or change your market to fit your criteria.