Would you pass on this cashflowing deal?

Question

HI BP,

I already declined the bank's counter but I'm open to hearing others' views as the property is still available.

The property is a SFR 2br/1.5ba initially listed at $80k and reduced to $65k. The property could gross $1300 and taxes are ~$300. I started off at $55k cash and went up to $70k, but the bank approved the short sale at $90k. There aren't any true comps and I really can't see this property being more than $75k. If I met their counter and eventually got a mortgage, the property would cash flow ~$500 (vacancy, repairs, etc were deducted). I'm a buy and hold investor so assuming the property retained a value, of ~$75k I'd need to hold it for at least~3 years to break even. I didn't have a specific hold time in mind for this one.

This is one of the few deals I don't feel bad about losing, which is strange since the cash flow is strong. Would you pay market (or slightly above it) if the cash flow was strong?

Joe Villeneuve · Answer

Paying all cash upfront to "improve" your cash flow, doesn't improve it.  All you've done is pay all your negative cash flow up front.

You did the right thing.  I tell people all the time that "the numbers don't lie, if you argue with them, you'll lose every time".

Sometimes the best deals you make, are the ones you don't make.  I don't mean that in the sense you passed on a good deal.  I mean it was a bad deal, you recognized it, and didn't try to rationalize it...just passed on it, and went on to the next one.

Good job.

Joe Villeneuve · Answer

How much of your money would you have in the deal after you financed it?  Notice I said, your money...as in cash.

I'm assuming that you will have some (% for DP).  That said, unless you will recover all of it within a year (and if it were me, based on the ARV being so much lower than your Offer...I would say no anyway), this is a big loser of a deal.  If anything went wrong where you had to sell, you'd be so upside down it would kill anything else you had going.  You have absolutely NO RISK CONTROL in place.

This is not a REI...it's speculation. You're relying on future events you have no control over.  Leave that to the Stock Market.

Ben Leybovich · Answer

Understand, what's important is how you get out, not how you get in, or what happens in the interim. If you pay $90,000, there won't be an exit that drives investment returns. At $60,000 there will be. And notice, at the lower price, the cash flow takes care of itself...

Shashy - yes, cash flow is everything. But it's nothing. Over time, as the property gets older and tenants beat it up, you'll end up having to deploy cash into it, and if there's no room at the exit, you will be throwing good money after bad.

This is how beginner investors get in trouble - today's cash flow is easy to see, but what happens tomorrow - not so much :)

Eric Fonville · Answer

Sounds like you did the right thing with following your gut.  I can tell you that I cannot give you advise on this deal for the simple fact that I would have had some many more questions that you did not address in your post.  However I am inclined to tell you that you made a good decision because you followed your gut.  That feeling is priceless..

Frank B. · Answer

Stick to your numbers. There are a lot more properties out there.

Brent Coombs · Answer

@Shashy B., even if you could pay all cash, why would you? The same amount of cash could be used as deposits on FOUR similar properties! *

ie. Look for deals that will STILL cash-flow positively even with 75% leverage! Get what I mean?...

* Oh, I just remembered, paying all cash for a property CAN be a good idea, so long as it would genuinely appraise for ~140% of what you paid for it. THEN, you can apply for "delayed financing", and should qualify for 100% finance up to your full purchase price!

Yes that's right, you shouldn't need to wait for a 6 month re-appraisal seasoning. Refer this thread:- https://www.biggerpockets.com/forums/223/topics/30...

Fred Weinkauff · Answer

Hi Shashy, I personally think waiting 3 yrs to break even isnt a good deal. You make money when you buy the property at the right price. If you bought that house at $65k and even waited a few years to sell at $75k between the Agents fees and costs to sell that $10k possible profit is nil.

Shashy B. · Answer

Thank you all for the input! I decided to stick to my initial decision to pass on the property.

I neglected to mention that the bank's BPO valued the property at $100k. That's pretty immaterial as I don't think the market supports it. Like a few of you mentioned, I'd also like to have multiple ways out. Also, to clarify for some, I initially offered all cash b/c my offer was ~30% under (what I think is) market. Recently, I've lost a couple deals to cash buyers so I submitted an offer I thought would be competitive. At a higher amount, I'd pull out equity to invest in other properties.

Again, thanks for your time and insight. Hoping the next post will be a success story!

Thomas S. · Answer

Shashy there is some contradiction in your statements. You say you are a buy and hold investor but seem to be concentrating on the financials of short term hold and flip.

Which one are you, buy and hold or short term flip ?

If you are buy and hold then this property meets all the criteria you simply need to determine your price point to buy as it will cash flow from day one.

If you are short term flip then set your price and hold that price till you get what you want or walk.

This is a kindergarden level investment situation and a very simple decission.

Would you pass on this cashflowing deal?

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