Is 70-80% ARV (minus repairs) unrealistic in a HOT market?

Question

I have a property under contract in a hot area of Atlanta. I was comfortable with the $125k asking price given the impression that it was move-in ready (my plan being rent it out and ride the wave of potential appreciation as the area continues to redevelop / gentrify). However, the inspection turned up about $16k worth of repairs. The seller agreed in a contract amendment to do some of the repairs, but ultimately failed to do even half of what he agreed to (and what was done was shoddy work). And he's not willing to hold up his end of the bargain. Now, I'm left to renegotiate or walk (do I have any other options?)

Now that this appears to be more like a rehab than a turnkey, I'm not sure what price to ask for in renegotiations.  I know the golden rule (or guideline, depending on who you ask) is to purchase at 70% ARV - repairs. As a buy and hold investor, I don't mind going north of that 70% figure. From what I gather though it's not prudent to go much beyond 80%.

I suggested 80% ARV - repairs to my realtor. I actually kind of figured the seller, who was motivated to begin with, would be lucky to get that from me given that he's in breach, and looking at the prospect of having to relist the property in the winter months with the legal obligation to disclose all the repairs I've uncovered. My realtor though thinks I'm being unrealistic because the current market is a hot market. Is that true? If so, what is the right compromise?

Thanks in advance, Rob

Charlie Fitzgerald · Answer

Both @Leigh Cand @Christopher Brainard are spot on in their advice from both sides of this equation.  I would only add that for me personally, my fundamentals of what makes a good acquisition good, do not ever change, despite the changes that occur in almost every real estate transaction, good bad or otherwise.  My offers are based on sound financial assessments that meet my personal wants, needs and risk-tolerances.  Any changes that occur during a transaction that still remain inside that analysis box of my fundamentals, are acceptable.  Any changes that occur that do not, are not acceptable.  The mind is a terrible/wonderful thing...it can justify anything you throw at it, depending on what you feed into it.  The key is to establish fundamentals prior to ever starting to look for an acquisition, and never changing them on a case-by-case.  That's my $0.02

Christopher Brainard · Answer

@Rob Condy

I've experienced similar issues here in Las Vegas. I had bought several properties with a particular Realtor and even after my 5th purchase in three months he was still pushing me trying to get me to offer more on properties. This is somewhat to be expected, as the higher the price, the better chance of an offer being accepted and him receiving a paycheck. Unfortunately, this is not beneficial to you, your company, or your portfolio. The solution is pretty simple - get your own license. I'm glad I did. Nobody cares about your bottom line quite as much as you do.

If you think you may be reselling a property after rehab, you should never go over 80% and should try to stay under 70% whenever possible. When you turn the property, you are going to end up paying a minimum of 10% in closing costs, so you need to hit that 80% or better make to make money. Otherwise, you're just wasting your time and you are better off not purchasing the property.

I would also caution you about buying a property at market and hoping for appreciation. This is speculation and in the end, someone is always holding the bag. The market has made great strides over the past few years and its quite possible that things may cool off somewhat in the foreseeable future. With that said, if the property will cash flow well while you're hoping to capture that appreciation, there is no reason to hold back. This is more or less a function of your risk tolerance and ability to sustain losses and still sleep well at night.

I agree that the seller should work with you on the repairs, however, most people aren't ethical and it is doubtful that they will disclose the needed repairs to the next buyer. If he isn't willing to cover them, you can always terminate the contract, provided you have an inspection clause. That may push him to negotiate, or he may feel he doesn't need to because of the market. I've run into this before - you just need to decide what is in your best financial interest and pursue that course.

-Christopher

Rob C. · Answer

Thanks NA Beard. Do you mind elaborating on how you arrived at the conclusion it is cash flow negative? My calculations assuming $1250 rent, $125,000 purchase price, and financing (i.e. cash-out refi bank loan) @ 4.625% with 25% down yields about 7% cash-on-cash return. Can you help me understand what I might be missing? thanks, Rob

Rob C. · Answer

Now that I'm through with the dayjob workday, I just wanted to circle back and respond more personally to some of the above posts that I didn't have time for earlier.

@Charlie Fitzgerald, you're right about the owner being ignorant of the deferred maintenance. I gather he was pretty much an absentee landlord... Would you be willing to share your fundamentals, and/or whether those ever shift based on market dynamics as Robert Adams suggested can be necessary?

@Leigh C, Thanks for the clarification. I understand your position better now.

NA Beard, May I ask what makes you suggest walking away as opposed to trying to renegotiate the price to make it a deal (i.e. perhaps even a lowball offer)?

@Robert Adams great insights with regard to markets accelerating in appreciation. May I ask how you changed your fundamentals during those boom years in Vegas, e.g. what %ARV you were targeting before and then during?

Thanks to all who have contributed to the discussion. I'm sure this is valuable to a lot of the biggerpockets community beyond just myself.

Thanks again, Rob

Rob C. · Answer

Thanks for the continued discussion everyone (@Charlie Fitzgerald, @Leigh C, NA Beard). Really good feedback. All of it. I agree with the thought being echoed that if I had fundamental purchasing criteria established that would be saving me a lot of headache. I think part of the problem is that I'm interested in a couple different categories. I'm willing to buy turnkey properties @ 100% ARV that cash flow in markets experiencing redevelopment (i.e. higher chance of appreciation). I'm also willing to buy wholesale properties at a discount, but admittedly don't have a hard threshold on what that discount should be. That is also one purpose of this thread, as I hope to get feedback from all the experts on this board to help me determine and cement the threshold I'm willing to buy at. I started in on this purchase with the expectation that the property was turnkey, so I offered full asking price (what appeared to be just slightly under market, let's say 95% ARV). However, now that it appears there is work to be done, I'm not comfortable taking the property on at the same price less the amount for repairs (i.e. 95% ARV - repairs). Of course I want to be compensated for the time/effort/$ that goes into those repairs. Not to mention there is risk associated with some (e.g. water entry / mold in crawlspace, tree adjacent to the house which could affect foundation despite no visible signs, etc.). The question is what % ARV (minus repairs) is a reasonable one, particularly in a quickly appreciating market. And I understand that is a personal decision. However, I'm interested in continuing to hear where others stand on the issue to help shape the decision I make now and going forward.

Thanks again, Rob

Rob C. · Answer

Thanks @Robert Adams for the follow-up. That is helpful to know. Yea, I wouldn't feel comfortable buying at 90% in the current Atlanta market I'm targeting, but I do think over 70% is more than justifiable. And I can certainly see how flippers still made money at 90% in the crazy boom days.  I had my realtor proceed with sending the amendment at a figure I think is equal to 80% ARV - repairs. Awaiting the seller's response at this stage. Thanks again, Rob

Rob C. · Answer

@Cody Kauzlarich, thanks for your comment. I suppose there was some miscommunication there. I understand that sort of thing is a cost of doing business. And it's not enough to influence my decision to move forward or not. I was just expressing my frustration over the current rules/system, which basically allows a seller to get off scot-free when they default, but buyers forfeit EMD.

Robert Adams · Answer

I honestly don't know the Atlanta  market well enough to advise you on how aggressive to get with your offer price there. I do know that when Vegas was booming you could buy as high as 90% and still be able to flip the property due to the values skyrocketing at the  same time.

I had people tell me my margins were too thin on a flip but when all was said and done my investment of $33k turned into a $65k check when I sold. That was leveraged with financing but none the less still a great return.

Know the market...have a solid plan/numbers...and execute. If you are missing any of those 3 elements be very cautious.

Cody Kauzlarich · Answer

In one of your early posts you said that you were concerned about losing the money that you've already invested for inspections, appraisal, etc... aside from your EMD. Don't be. That's part of the business. Don't make 125k mistake to try and save that, comparably, small amount of money. Go look at the property and take notes on the repairs needed that you missed so you can try and spot those on the initial walk through of your next property.

Jeff B. · Answer

@Rob Condy

• "May I ask what makes you suggest walking away as opposed to trying to  renegotiate the price to make it a deal (i.e. perhaps even a lowball  offer)?"

deal is already cash negative and more money only increases the investment with no improvement in the final cash flow - - time to punt imo

Is 70-80% ARV (minus repairs) unrealistic in a HOT market?

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