Am I crazy for offering so low?

Question

I am working on analyzing a duplex plus garage apt near me and the numbers seem too extreme to make sense. I finally saw it today and it needs some major work, including foundation repair and tile work in the baths. The rest of the work might just be cosmetic, but one never knows what you'll find. The asking price is $189,000, I'm looking at a purchase price of $55,000-$60,000 when I include the cost of repairs and such, and giving room for if I ever wanted to use PM in the future. The property is located in Conroe, TX. If I went with this price range it would enable me to pay cash through a private lender. I'm trying to be conservative and pursue a reasonable cash flow for myself. Do these numbers sound overall correct? Please let me know if I'm missing something.

Rent: $2,000 Monthly

Repairs: $25,000

Taxes: $4,000

Insurance: $2,000

Maint: $1,200

CapEx: $3,200

Vacancy: $2,400

Rent: $2,000 Monthly

Repairs: $25,000

Taxes: $4,000

Insurance: $2,000

Maint: $1,200

CapEx: $3,200

Vacancy: $2,400

Rob Golob · Answer

I guess I'm confused.  Who is selling the house?  How was the $189K asking price conveyed to you.  You want to offer $55-$60?

Play along...

Your sister: "Hi Daniel.  I just listed my house with XYZ for $189K.  My realtor thinks it may be a little high, but we think we've already discounted it for some repairs I think it will need - probably $10K."

You: "Well sis, I've looked at the house and it really needs $25K.  And I think your $189K is optimistic if it were already fixed."

Sister: So you are saying its really only worth $164 tops as it sits?"

You:  "Yes, I'm afraid it is.  And don't forget, someone buying it will still want a little more discount to account for the time and risk of fixing it up."

Sister:  "Wow, so if my 189 should be only 180 and take off 25 for repairs and arbitrarily another 25 for risk etc, I can only expect $130.?"

You:  "Yes - I'd say that's about as much as you will get."

You:  "But wait, I've got a great idea.  I can buy it from you and rent it out.  After my calculations I think I can offer you $55 - $60K - after all,  taxes, and ins, and maint, and lawn, and vacancies are pretty high ya know."

Sister: "Oh Daniel, You're such a sweetheart.  I'll take it!!!"

John Leavelle · Answer

@Daniel Jarvis

You approach the BRRRR strategy the same as a flip.  Shoot for 70% all-in costs.  The reason is when you Refinance the loan will be typically 75% LTV based on a current appraisal.  Therefore, in order to pay off your acquisition loan and get your cash back your costs  need to also be 75% or less.  70% gives you a 5% buffer encase the appraisal comes in low or your Rehab costs are more than expected.

You do need to be concerned about Cash Flow after the Refinancing.  This is what it could be based on information you provided.

ARV  $189,000

25% Equity remaining in property  $47,250

Refi Loan $141,750

Mortgage payment $761 month (5% APR/30 years)

Monthly Income $2,000

Expenses $1,000 (50% rule)

NOI = $2,000 - $1,000 = $1,000

Cash Flow = $1,000 - $761  = $239 month  ($79.67 per unit)

Note that the less you take out on the Refi loan the better your Cash Flow will be.  For instance if you only pulled the all-in amount I suggested ($132,300/70% ARV) your mortgage payment drops to $710 and Cash Flow increases to $290 month.

I would not want a new tenant in place right when I put an offer in.  If units are currently vacant, then, they need to stay vacant until closing.  Allowing you to Rehab them prior to tenants occupying them.

John Leavelle · Answer

@Daniel Jarvis

Did you layout the reasoning (immediate repair costs required) for  your low offer?  They should understand the necessity of the repairs.

Keep the property on your radar as @Ian Hoover suggested.  Keep researching that Market area to fine tune Property Values, Rental Market rate, and expense estimates.  The more properties you analyze and the more data you collect will make it easier to develop fair offers.

You may analyze 100 properties, submit 10 offers based on your analysis, and get one deal out of it.  You may only find one to submit an offer on.  Don't be surprised to get a lot more "No's" than you get "Yes's".

Daniel J. · Answer

@John Leavelle Sorry I am just now replying, things have been crazy the last couple days.

Thank you for the perspective and approach to BRRRR! I've never seen someone explain it that way. Using that perspective I relooked at my numbers and solidified 85k. My agent made a verbal offer and they didn't like it very much, certainly not surprising though. It's hard with the extra CapEX and lawn care though. From the sound of it they wouldn't have budged much below the asking price anyway.

Daniel J. · Answer

@John Leavelle Whould I still plan my offer the same way even though I will be keeping it as a rental? That's my big issue with numbers. With CapEx being so high it swings my numbers quite a bit.

My agent is going to be looking for more accurate comps.

If the property was in good shape I would say the value probably would be 189k. I am wondering how many more repairs might pop up when the foundation is fixed though.

Rehab timeline would hopefully only be 2-3 months max since a lot of it is cosmetic. They are trying to place a tenant in the vacant unit now, so obviously that would change if they placed a tenant. I would have to wait until it was vacant again. I do have a plan for refinancing with a local mortgage broker. Costs for the loan would just be 5% annually

Linda S. · Answer

The seller likely knows it needs $25-$50K in improvements, so if you want it, I'd suggest offering around $140K, start there... offering $60K for a house that's on the market for $190K sounds like a waste of everyone's time, you are too far apart price wise if that's what you think it's worth.

Ian Hoover · Answer

It really depends on the property, if it has been on the market almost or over a year and they have not dropped the price much it could be because they owe more than what it is worth.

Your agent needs to have a talk with their agent to see what the deal is, more than likely if the place is cash flowing $2k per month the owner is not going to go anywhere near your price even if it needs work because he is making money.

I have had decent luck with lower offers by negotiating verbally and be upfront "Hey I like the property but you and I are not on the same page with pricing, I am interested in the "$XX,XXX" ball park and I know you are probably not but my offer is here is you ever decide you need to sell.

I still don't get it for that price but a good amount of the time I get a reply back that the lowest they are willing to go is...

I just helped a client get a beat up tri-plex $30k under asking price with this method and last year I helped one of my clients get $45k off a property in a very hot area of town using the same strategy, I also set reminders on my calendar to go back to them every 2-3 weeks just to touch base and let them know my offer still stands.

Hope this helps.

John Leavelle · Answer

@Daniel Jarvis

I understand the difficulty of finding comps.  But, you still need to make the effort.  These kinds of deals are extremely dependent on developing a good ARV.  Alternatively, I would put an appraisal contengency in the contract if you do send in an offer.  What do you consider the value of the property once you complete the Rehab?  $189K?  I f so, a more realistic offer would be closer to $97K.  Your all-in initial costs basis needs to be 70% ($132,300) of the ARV ($189,000).  That means the purchase price ($97,300) , Rehab ($25,000), Closing costs ($5,000), and Holding costs ($5,000).  Using this formula and your $60K offer the expected ARV looks like $91,700.  Is that your assumption?

Are you planning to use the BRRRR strategy for this property?  Given that you are using Private Lender funds.  What is your Rehab timeline?  Have you planned for Refinancing?  What are your cost estimates related to the Private Money Loan?

To answer your other question about CapEx.  Yes, since you have 2 roofs, 2 HVACs, that will increase your replacement costs.

There are a lot of questions and information you still need to work on.

Daniel J. · Answer

@Rob Golob It's a deal on LoopNet. I can to that price after figuring out my expected costs, costs of money, rehab costs etc.

Daniel J. · Answer

@John Leavelle Comps are a chllange due to not having many similar properties in the area. Does 70% still work even though I would be using it as a rental? I'm struggling because my costs seem so much higher than the norm. My best guess is that is because my CapEx is higher due to having 2 buildings, does that sound accurate?

Am I crazy for offering so low?

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