Help Analyzing this deal

[Abdul Azeez]

Folks - i need your help in analyzing this deal. The subject property is a homepath single family ranch style property with 3 bedrooms, 2 bathrooms and a basement with 1344 sq.ft listed at $195k. I have used three different analysis methodologies for determining the right price to pay for this property. My findings are below followed by a more detailed APOD analysis spreadsheet attached for those who need details. Kindly recommend what you think the right offer price should be for this property. Financing assumptions are a 30 year fixed rate mortgage with 4.25% APR and 20% down payment including rehab cost. The strategy is BRRRR and that's the reason the ARV analysis is used below as well. I am estimating about $40K in rehab costs including cost to fill in a pool in the backyard and convert to grass. This is just purely based on my walkthrough of the property and I have not had a contractor come through. .

My investment criteria is $150 per month per door. I had to extend the analysis over 10 years for Frank Gallinelli's methodology since first year has a higher cash flow as capital costs are zero (since rehab is factored into the loan) but is a 6% of annual rent year over year. So, I had to strike an offer price keeping in mind cash flow needs from second year to meet atleast $150 per door. This way the gains in year 1 are evened out starting year 2.

Analysis methodologies

1. Frank Gallinelli's APOD analysis

- Assuming, rehab costs of $40k, my offer price should be $139k

- Assuming rehab costs of $20k, my offer price should be $159k

2. ARV method

I ran a search on Zillow for properties in the same area of the same size sold in the last 6 months and couldn't find many.  I found one that sold for $255k in Jan 2016 with a fully finished basement. Removing a fully finished cost of $15k, I translated this to approx $195/sq. ft. I am not sure if this is the right number to use this because one of the major advantages in the subject property is it is 7 minutes from a major train station that takes people into New York or Philly and this is extremely valuable. I have used the $195 sq. ft above in my analysis. If I use this on the subject property, it comes to $262k as ARV. Using this, offer price = $146k (ARV * 0.7 - 20%)

4. Cap rate method

Assuming a median cap rate of 10% for the area, offer price = $98k (NOI of $9737 divided by 10%)

So, based on the above, I see a wide range between $98k to $159k none of which the lender may accept by the way. What would you pay?

I do know that the estimate from contractor for repair cost will have an important effect on this. That's the reason I used most pessimistic to most optimistic estimates in APOD analysis.

And I also want to know if it is insulting if I go with an offer based on my analysis if it is significantly lower than the list price or is it still worthwhile making an offer.