buy & hold in hot neighborhood, negotiate with seller?

Question

We are about to buy our first duplex in a hot neighborhood here in Portland. They listed it incredibly low, so though our offer was $50k over asking it was still fair for the market (we had to make an offer to view it). It's a side-by-side from 1976, and in our rushed, uncomfortable walk-through we didn't see any glaring issues. Now that we're getting an inspector to go through it (without tenants this time!), considering the market, if we find something wrong should we negotiate?

1. We offered $50k over

2. We were 2nd and were shocked to get the sale (there are section 8 tenants in there now and with Portland's new renter laws we heard the first buyers balked at logistics of kicking out section 8)

3. We did our $360 offer blind just based on the numbers

4. Comps in the area of other duplexes are $340 to $380

Do you negotiate on wear & tear or outdated things like ancient carpet, no dishwasher, old patio doors? I'm kind of new at this as our own house didn't need anything repaired or replaced.

Brian Knier · Answer

It's looking good. Inspection report revealed no show-stoppers but the overall interior condition warranted a modest reduction our offering price, which they just accepted. Barring any snafus between now and closing, looks like we'll be spending more time in St. John's.

Thanks, @Dani Z., @Kory Thaut, @Jon Nelson, @Mike Hanneman, and @Mike Nuss for your insights.

Jessica S. · Answer

Aimee, congratulations on getting your offer accepted, that's great!

Your best bet is to negotiate on repairs only, not upgrades.  For example, replacing a broken furnace would be considered a repair, but replacing a dated carpet would be considered an upgrade.

If you present a big repair list filled with small ticket items, you do run the risk of annoying your seller.  Instead, focus on negotiating for large, needed repairs and make sure your budget will be able to absorb paying for the upgrades yourself.

I always prefer to get a credit for the cost of a repair rather than having the seller do the repair prior to close.  I suggest you do the same if that works with your timeline.

Account Closed · Answer

@Kory Thaut "They" say that cap rate only applies to commercial properties (5+ units), not residential ones.  There's still technically a cap rate, even on SFRs, but the way that appraisers and RE agents valuate 1-4 unit properties is usually by comps, not cap rate.

I still like to know what the cap rate is though, because it's still an investment and whether it's a 5 unit or a 4 unit building, the numbers are the numbers.

Account Closed · Answer

One last thing:  They DID ask for $50k under your original offer.  Maybe they wanted to start a bidding war, but it sounds like a motivated seller (or a property with a big liability--see below).

I think you have a decent chance at getting your revised offer accepted if they think you can close.  Were I in your shoes, I'd itemize ALL the work you plan to do in very clear categories, present those expenses to the seller, and subtract that amount from your original offer.

Given that the tenants are Section 8, I'd first call HomeForward to ask about all the specifics for Section 8 in general and about those tenants in particular.  Make sure that current and future rents make sense for your purchase price, and/or have an actionable plan to get those tenants out (as terrible as that sounds).  The reason they listed the price low, I'm guessing, is because the tenants are Section 8 and either they don't want to (or can't) get them out, so they are leaving the dirty work to the buyer.

In a way, it's good that your offer was second and that the first buyer walked away.  The seller probably already knew that the Section 8 would be a tough sell, but now they have evidence of it.  If you don't mind dealing with the headache of Section 8 and HomeForward, then if I were in your shoes, I'd make sure to get a fantastic deal on the property.  Depending on the tenant, you may not be able to ask them to leave at all, except under very specific conditions, i.e. you're moving into that unit yourself.

I'm not trying to dissuade you from buying this property.  The Section 8 liabilities of this property could be an opportunity, since clearly, other people don't want to deal with it, and the seller now knows this.  You *might* just be able to score a much better deal than you realize.  It never hurts to ask.  If anything, as long as your offer is logical and explains the "why" behind your numbers (including the HUD FMR limitation or the "hassle factor" or even the potential inability to ask a tenant to leave--which is huge--maybe you could assign a $ value to these things and somehow incorporate it into your offer numbers), they might counter--but they might also simply accept your offer.

Kory Thaut · Answer

Got it.  I've only invested in <=4 units but still use a cap rate for valuation across properties (sounds like you do the same).  I keep detailed proformas and even on the SFRs, I run a "cap rate".  :-)  I've always figured  it a.) helps me keep score and b.)will help tremendously when I go to sell.

Kory Thaut · Answer

@Aimee Knier Congratulations on getting under contract.  I think you're in the drivers seat now so it's really making sure the numbers work and if they don't, move on to the next.  In my opinion, it's important not to let irrelevant variables such as back-up offers or the fear of a seller not accepting a counter influence your valuation process. No deal is better than deal you don't feel good about. The nice part about multi-units is you have all the data you need, it's just a matter of crunching it.

Account Closed excellent points.  Curious about the comment re: cap rates not supposed to apply to duplexes?

Jon Nelson · Answer

that's what I was trying to say as a seller anything the inspection turns up that was not visible I would understand but if there was a crack in the driveway or bad carpet when you looked at it I would not be ok with you asking for it as that should have been reflected in your offer. The other thing I will tell you is Dani is right itemize what you are asking for the last 3 houses I have sold they list a couple things and ask for 5 or 10 thousand dollars I replied with zero on all three and completed the deals. One they had appraised for 10,000 more than there offer they ask for 10,000 in repairs if I could have I would have got out of the deal. That's why I am saying do not get greedy

Jon Nelson · Answer

I am currently selling 3 of my units in California so I will give you the view from the other side. I have multiple offers on one right now I paid 70 and am selling for 182.5. I just got the inspection back and they want 8000 in repairs all of the repairs except a leaky drain and beam in the attic which is the HOAs problem were visible when they viewed the condo. since all the offers are close I have no reason to give them anything. so I am giving them 100 for the sink and getting HOA to fix beam if they do not like it I will go to the next offer.

Moral to the story be careful and do not get to greedy especially if you new about the issues before you made the offer to me it has always seemed unethical and when it happens there is always more coming from those type of people.

Account Closed · Answer

@Aimee Knier, the seller balking at your offer will always be a possibility, which obviously you have no control over.  If you haven't already, you could look up what they paid for the property on portlandmaps.com, and when.  If the seller paid $330k in 2007 and is asking $350k in 2016, they might be less likely to reduce the price than if they paid $50k in 1992.

It's been a process for me to get to this point when making offers, but here's what I consider:

1.  Do the numbers make sense?  I can email you an APOD/proforma spreadsheet that I use that incorporates CapEx, and all other expenses including property management and vacancy etc., debt service, and tax deductions, and gives you the COCR, cap rate (which I know isn't supposed to apply to duplexes but I like to know it for comparison's sake), and net annual income, along with projected appreciation value at different rates over time.

Right now, I personally like to see at least 12% COC and a cap rate over 7, after rehab.  I also like to see monthly gross rents at 1% of the cost of the building after rehab, or close to it.  (This is all for the Portland area.)

2.  Your repair/rehab costs will be about the same as they will for anyone.  So unless a buyer plans to also live in the duplex, everyone else will be looking at the property through the same investor lens.  The numbers are the numbers, so other investors will be looking at the same thing as you.  They may underestimate their repair costs, but they will still end up paying about what you will pay.  The difference between them and you will be how much you are willing to profit or lose.  If they overpay, it's not going to be a good investment for them.

3.  Que sera, sera.  If the seller doesn't like your offer, next!  (See #1)  BUT there are other things you can do to improve your offer that aren't about $$.  For example, I've found that moving quickly works wonders in this market.  If you're the first offer in, ideally within hours of it being placed on the market, you have a better chance of winning.

All cash helps too, so if you can take out a HELOC on your residence or use private money for the purchase and refinance later, you have a better chance at getting your offer accepted.

The offer package's professionalism, in my experience, makes a difference.  If you're working with a realtor, they should be good at writing cover letters/emails that appeal to whatever the seller wants.  If they want a quick close, you can reassure them that you can close quickly, and how.  If they want a serious buyer who won't back out after inspections, or who won't nit-pick about every little cosmetic repair, that should be also communicated.  If they want to make  sure the tenants are treated fairly, let them know that you're not one of "those big developers" who no-cause evict all the tenants after purchase.  (You're not telling the seller that you *won't* no-cause evict them, but that you want to work with the existing tenants to make sure they are treated fairly, and/or you will do whatever you can to keep them in place, if they want to stay.)

But if, after the sale closes and the tenants can't afford your rent increase and you can't afford not to increase the rent, then you've done everything you can and it's up to tenant to stay or leave.

Essentially, put together as professional a package as possible, backup your numbers with real repair estimates and comps, and reassure the seller that whatever it is they want, you can provide.

Unless what they want is an inflated sale price.

Account Closed · Answer

Hi Aimee!  Congratulations!!

I had a similar situation recently.  We offered asking and got under contract.  After the inspection, we itemized our expenses and presented them to the seller with our lower offer.  Whatever you do, you'll want to make sure that the numbers work without fudging them.  For me, it was tempting to say, "we can do the kitchen rehab for X, even though such and such says it will cost Y."

Be conservative (i.e. avoid underestimating and if anything, anticipate higher costs) and present the numbers to the seller with your revised offer, explaining why your offer is that specific amount.  You might consider adding a line saying, "buyer's contribution to repair costs" if you want to have some goodwill with the seller, so that the repair costs aren't ALL s subtracted from your original offer.

Here's how I did it:  https://www.biggerpockets.com/forums/223/topics/27...

Regarding Section 8, you may want call HomeForward and ask them about all the details about what it takes to remove a tenant, what the maximum rent can be, etc.  I think for a 2-bedroom in Portland, HUD's "fair market value" is $1207/month in 2016.  I've found that the hotter the neighborhood, the worse Section 8 is from a profit perspective, because you can't increase the rent more than whatever HomeForward allows.  I did not have a great experience having a Section 8 tenant in North Portland.  I tried to increase the rent and they only let me increase it $18.

If the tenant is disabled and has been there a certain amount of time, it may be more difficult to remove them.  Ask HomeForward about how to raise the rent, what kind of notice you need, how to remove tenants, whether you can do a no-cause eviction, and whether the rules are different for disabled or elderly tenants.

buy & hold in hot neighborhood, negotiate with seller?

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