Looked at My First Property Today - How Should I Make an Offer?

Question

I'm currently looking for a duplex in Danbury, CT for my first piece of real estate. I sent a small letter campaign to all the duplex owners on a street and got a response on one! The owner wants to move to Florida within the next few years, but said he would sell "for the right price".

I met him and toured the whole building today. It doesn't need any immediate work. We talked income and expenses (though his book keeping is lax), but didn't discuss purchase price yet. I'm wondering what my next move should be. Should I send a letter with an offer detailing the reason with analysis, or call and make a verbal offer?

My analysis is as follows (The spreadsheet might be familiar if you've read Introduction to Real Estate Deal Analysis):

I think it makes good sense to offer $200,000, but from the tax records, I know he paid $370,000 back in 2003. The "zestimate" is $237,000, and although I know that's not always a good assessment, it seems pretty close based on the limited comps I see on the MLS.

If I had to guess at the response I'll get, it's something along the lines of "This seller is not motivated enough. Make your offer and then 20 more offers and one will stick." But, of course, I like to check in and see what those more experienced have to say.

Thanks!

Arlan Potter · Answer

he has no real motivation to sell. Don't make a ridicules lowball offer. Also are you sure you could get a 96.5% loan? Or are you planning on living in it?If anything make him say his price first.

Joseph Chen · Answer

Yes. That's actually one of the basic thing to do. @Bob Bowling, I agree about "Knowing why your offers are getting rejected" - this is one of the factor that affects the entire process. Make sure to know the flaws so you can give immediate solutions to it.

Account Closed · Answer

@Joseph Chen made some very good points, these two in particular:Know what price you want to pay for the property and work out your strategy to accomplish this. Study other comparable properties that have sold in the area recently.I would add * Know why your offers are getting rejected". Probably because your analysis is flawed and/or you don't know the market as well as you should or you don't have the resources to participate in this market. I could write offers all day long on Honolulu properties that would be good for me but they'd all get rejected because they have no basis in reality. If my parameters are unrealistic then I am wasting my time and getting a reputation as a lookie loo that will be hard to overcome when I finally get some experience and make offers appropriate to the market.

Joseph Chen · Answer

I believe that making an offer on a property is similar to playing a game of chess. :) And each party waiting to see what move the other party is going to make. First, understand the rules and preferably make the offer in writing – this eliminates any confusion concerning what the offer and conditions were. The negotiation process begins when you first meeting. During this "meet and greet" moment, make sure you have a clear understanding of the process and get the agent to explain how they intend to make an offer. Know what price you want to pay for the property and work out your strategy to accomplish this.Study other comparable properties that have sold in the area recently. Understand the vendor’s motivation to sell, their preferred settlement date and any other information that may make your offer stronger Don’t rush offers if you don’t need to.

Carlos O. · Answer

I'm just starting my RE career and I'm realizing this point about making offers even if they get rejected. A lot of the listing prices on the MLS won't make a good deal and to be honest it's discouraging. So instead of looking at it in terms of "these numbers won't work", I'm changing my perspective a bit and saying "what numbers will work?". Once I have that I can start making offers and if I get rejected, it's okay, because I did the homework already and know it won't be worth it a higher price. Move on the next seller and so on until something sticks.

Arlan Potter · Answer

That is right. We had a deal working a few years back. A REO listed at $89000. I offered $40000. The bank came back at $60000. I said nooooway. The deal had to be around $40000 for a worthwhile flip. 8 months later they came back and offered to sell it to me for a net $40000 to them. We agreed, cost me a total of just less than $43000. We rehabbed the house and sold for $119000. We did make a real good profit, that we couldn't have made if we didn't know what the purchase price needed to be to make the return we needed. And we're willing to wait for the deal.

Kent Verge · Answer

I had one of these "unmotivated" sellers call me back a couple months later to see if my offer was still good. In the course of the two months they were two months further behind on their mortgage and were getting some nasty letters/calls from attorneys. You never know...

Harrison Harner · Answer

@Mike Moles : Thanks! The $2700 is the scenario if the whole property were rented out. Ultimately, I'd like to own multiple rentals and live in my own single family at some point, so I figured my analysis should be based on that, as long as I can afford the scenario of living in one unit.I did some further research and determined that the property is worth about $240,000. I also spent most of the day researching issues with buying property with unpermitted work, because the owner disclosed to me that the finished basement and partially finished attic were as such...a-whole-nother can of worms.I called the seller today and asked what he was thinking on price. Basically, he's underwater and wants to sell for more than he paid. Not motivated. He's waiting for 2007 to come along again so he can get $400k. I thanked him for his time, told him I didn't think we'd be able to make a deal, and offered to set him up with my realtor if he wants to list it.Overall this was still very worthwhile. I learned a lot. It was both the most exciting and nerve racking experience I've had in a while. I can't wait to talk to another seller!

Mike Moles · Answer

Harrison, congratulations on working your first deal! It looks like you are making progress towards your goal and as so many have said doing the live in one half duplex scenario is a great way for you to start out in REI.It seems like $200k might be a little low but you never know until you negotiate the price.Is the $2,700 for just the one unit that you will be renting out?

Harrison Harner · Answer

I guess I don't have a good answer for why it's only 6 times gross rent. I was basing my analysis more on getting the cap rate above 8% and cash flow for each unit between $100 and $200. I do understand that he won't give a damn about that. Market analysis it is.He didn't indicate that he's underwater. I wasn't sure how to bring that up without coming off offensive. I'm meeting with a private money lender this week, so I may be able to go that route and then refinance.