First Timer - Submitted Highest & Best - How Did I Do?

Question

I've been lurking, and listening to the podcast, for a while now and finally feel like I have something to post about.  We are looking to buy-and-hold for passive income, more so than flip for quick returns.

We submitted an offer yesterday on a foreclosure condo in central VA and the seller came back today claiming multiple offers, requesting our highest and best today.  The condo's been on and off the market for over a year, and continuously now for 4 months, with the asking price having been dropped $60k over that time.

The numbers:

Current Asking: $110k (just reduced by $10k yesterday)

Our Initial Offer: $90.5k

Annual Rent Less 8% Vacancy:  $11.6k ($1,050/mo gross rent)

Taxes: $1,425/yr

Prop Manag. (8%):  $1,260/yr

Insurance: $800/yr (?)

HOA: $1,224/yr (exterior maint. only)

Interior Maint. of Unit (5%):  $630/yr (ext. under HOA)

Misc. (Sewer/Water, etc.):  $700/yr

Mortgage P&I:  $4,600/yr

Cash Flow Before T&D:$930/yr

It meets the 1% but not 2% or $100/door.  I figured it's not a scorching hot deal, but it is in a good area and is pretty much move-in ready (new carpet and paint already installed), with only some minor touch-ups needed.  Non-foreclosure units in the same complex have sold for $160k - $170k within the past 4 - 6 months, which indicated to me that 1) there should be equity coming in the door and 2) this is a really tough area to find units that cashflow.

I'm pretty much sticking to my math for the highest and best response, asking seller to pay for my closing costs and increasing my offer by about the same amount.

My questions: How do the numbers look?  Did I offer too little, too much? Would you have handled the best offer differently?

EDIT: If someone can tell this n00b how to turn off the extra carriage return, I'd be happy to fix the formatting above. Thanks!

David L. · Answer

No plans to live in it, Jesse.  I have thought about the possibility of flipping it (and that would still be my Plan B), but then I figured:

• Let's say I might clear ~$40k after realtor fees and taxes.  That's awesome, but that equity's also not going anywhere, most likely.  This area hasn't been an overheated market for over 8 years, so if that's a real price today for this unit once non-distressed, the price should be at least as high 1 or 2 years from now, etc.
• If I hold the property for at least a year I'd pay tax on long term capital gains instead of being taxed at my current earned income rate. (correct?)
• My premise for getting into REI is to create long term passive cash flow.  If I take my proceeds from the hypothetical sale and stick them in a low risk non-RE investment, I might clear 3% gains, at best, taxable and with no depreciation to offset them.
• If a good opportunity comes along after the property has seasoned, I could always have it reappraised for FMV and pull equity out, assuming I don't just sell it then.

You make a good point, but that was my thought process.  If others have been around the block longer and would do differently in this situation, I'm eager to learn.

Cary Trusty · Answer

I've seen a youtube video recently about how banks typically have an average % that they will accept below their asking price for a short sale or foreclosure. I'm new to the game but figure there is some truth to that. One important thing here is asking for closing costs to be paid is asking for an additional 1-2% off your (already) lower offer. 95.5k (highest bid) - 1.5k (closing costs) / 110k = 85% of asking price. Since they just lowered by 10k, it would have been 78% of their previous asking price.  In the video, the instructor stated Citi bank (on average) won't accept lower than 84% of their asking price. Obviously, this is an average and some would go higher or lower.

Now outside this speculation, I closed on my first home March '13 on a short sale from Bank of America. 170k (offer) - 3k (seller credit) / 180k (asking price) ~ 93%. They accepted my offer within the first 30 days. In my case I probably could have presented a lower offer on my end.

Just some food for thought.

David L. · Answer

Thanks @Raymond B.!

Never would have figured that out.  Guess I should have watched the tutorial video.  :-)

Raymond B. · Answer

@David L.,

To make the @ work, do the following:

Hold down the shift key and type @?

Look below this Window, and you will see a list of names of people that have posted in this thread.

Click on the name of the person that you want notified via an email, that you responded to them.

If you are a Colleague with anyone that has NOT posted in the thread, and you want them to see your post, hold down the shift key, type the @ and the first 4 letters of their First or Last Name.

Then look below this Window and click on that person's name.

Raymond

David L. · Answer

@Joe Gore,  Not sure what makes you think that.  Our offer was consistent with what I detailed in this thread.  $5k above our initial offer, so less than $15k below their asking, but with them paying closing costs.  And the only contingency was financing (with a pre-approval letter submitted with the offer).

I said from the beginning that they indicated this was a multiple offer situation so again I'm confused how you determined we must have low-balled to have been rejected.

Have you found Fannie Mae to have a lot of flexibility below their asking prices?

Account Closed · Answer

If Fannie Mae rejected your offer, it had to be a real low ball offer with a weasel clause in it.

Joe Gore

David L. · Answer

Just a quick update to say that Fannie Mae rejected our offer.  Thank you to everyone who responded here.

On to the next one!

Jerry W. · Answer

@David L. , are you making offers through the listing agent?  It has been my experience that if you can make offers through them they tend to tell you when you really need to raise your bid in these situations.  You might consider how long you have been looking, if its only a month or 2 then maybe wait it out.  If you have been looking for 6 months maybe its time to add just a little bit to offer.  My first rental unit buys were not done using very good science, me and a friend just knew it was cheap and would make its payments.  No cash flow analysis, no figuring out taxes insurance, etc.  It barely broke even.  We sold it about 8 years later and made about 40K on it.  A little of something in that case was better than nothing.  Might have just been been dumb luck, but buying real estate has been been pretty good to me so far.

Martin Zawarski · Answer

David.  However it still depends on your mortgage term.  At my age, lol, I typically get 20 year loans.  A 30 year loan will have a significantly lower return.   I should have specified this.

Jesse Hyder · Answer

So you want passive income alright no problemo. Think multifamily not single units for cash flow! IMO Resell this baby for a profit then find a 4plex at $100-200 a door. Now the cash is really flowing. The idea of cash flow on single units seems kind of bad to me and misses out on economies of scale. I know that 4 units isnt that much scale but once you jump to bigger complexes it matters. Maybe thats not the direction you are interested in going but if you want to 'go with the flow' thats it. LOL