1st Deal - How Low To Negotiate Price?

Question

First deal to get my feet wet in REI but have quick question.

In contract with a property that I expect will cash flow $70-150/month (10% vacancy, 10% PM, $100/mo comb. capex/RM); cash return of 7-13%, excluding what I'd pay myself to self-manage.

2/1, rentable condition, listed at 52, offered 32, in contract at 41.5.

Feels like a good deal (nice lower income neighborhood, bike paths, parks, 10 minutes from personal residence ) but the AC and roof may not have too much life left.

Based on my analysis, I think the FMV for a 2/1 like this is closer to 35k.

Inspection in a couple days - planning on asking for $3-5k back at closing to a) mitigate risk of roof/hvac replacement and b) bring purchase price closer to FMV.

Is a deal like this worth walking away from if I don't get a concession post-inspection?

Wil Reichard · Answer

I have to agree with @Joe Villeneuve. I read his comment thinking, "man he sure is giving it to him". But in reality I would have to walk away from that as well. If I can offer you some advice, something that I found helped me. Go on the MLS or even Zillow/realtor and go analyze 50 deals. Weather that takes you all of today or a week to do. Get used to running the numbers so you know the exact cash flow and what you're dealing with. Taxes need to be reviewed and not an educated guess, or not what your friend pays for his house. Make sure all the numbers will be darn close to what you wrote down when a deal is closed. Unless its in a great area for good appreciation. I wouldn't get into anything that is under $175 CF a month myself. With greater risk comes greater reward, and I see a lot of risk here (Roof and HVAC needing replacing) and not a lot of reward. Good luck, but definitely go looking for better cashflow with more detail in your numbers.

Joe Villeneuve · Answer

If I were you, I wouldn't offer anything based on the info here.  Why?  You have no info here to make a decision off of.

Your ranges of numbers are worthless.  They are guesses at best, and are not pinned down based on any real analysis:

1 - "In contract with a property that I expect will cash flow $70-150/month".  What WILL your CF be.  If it's $70/month, I would have walked away immediately.  If it's $150/month I might stick around.  Which is it.  It's a big deal to know, and a big difference.

2 - "...cash return of 7-13%...".  Which is it?  13% is passable...7% is terrible.  Again, which is it?

3 - "Feels like a good deal..."  "Feelings, nothing more than feelings,..." (sung to the tune of, well...Feelings).

4 - "...but the AC and roof may not have too much life left...."  Run...don't walk...away.

5 - "Based on my analysis, I think the FMV for a 2/1 like this is closer to 35k."  Uh, what analysis?  Where, and how, did you arrive at your FMV?

Sorry to be so blunt, but I don't want you to go in blindly...and you would be.  There is no analysis here, and analysis is everything.  You can't negotiate without it.

Paul S. · Answer

20% down 30 year conventional.

Joe Villeneuve · Answer

How are you buying it?  Financing?  Cash?

Paul S. · Answer

Thanks, Chris.

I should've mentioned I used rentometer - it's showing between 680-700/month. I'm not planning any rehab so not sure why ARV would be relevant. The selling market doesn't seem to be too strong in this neighborhood; this one has been listed for 60 days and other similar properties have been on the market a while.

Craigslist rents validate my range of rent assumptions between 600-700.

It sounds like the general consensus is this is not a home run deal at this price due to likely roof and HVAC costs.

Any more feedback from others would be greatly appreciated!

Christopher Phillips · Answer

@Paul S.

This looks really thin. Especially since you haven't nailed down the rents and the ARV.

You should use tools like Rentometer and others to get rents for an area. Calling one or two people isn't a great way to gauge rents. Another way would be to look for similar rental ads on Craigslist or ZIllow to see what other properties are looking for...

From a negotiation standpoint, you should have put in your offer already including the roof and HVAC since you already know about them. To come back after the inspection asking for known items makes your offer look week and you'll have a hard time getting the seller to drop their number, especially if you find other inspections items.

Paul S. · Answer

Thanks, Joe.

I mentioned in my comment to Wil above that my broker estimated rents at 650-700 so closer to the top end of the range. I've called a couple current and former landlords in the neighborhood to get an idea of what their properties rent/rented for, but one didn't remember and the other didn't answer.

I assume 10% for PM and included that in my expenses to get to my FCF.

I didn't use Zestimate - I used actual sold comps as close as I could get to the area with similar sq ft (<1000)

Paul S. · Answer

Thanks, Wil – the more feedback the better. I am a little surprised that it seems like I haven’t done sufficient analysis. I’ve analyzed probably 25 deals or so. Can you help me understand where my analysis is insufficient? It would be very helpful! Below are the models I’ve used (confirmed insurance and taxes with insurance quote and auditor website) at the low and high end of rents. Local broker estimated rents for home would be 650-700 but I want to be conservative.

Paul S. · Answer

Thanks for the comments, Joe. I appreciate the candid comments!

1) The range of cash flow is given because I can't confirm what I'll be able to rent this for. The expected floor of market rents is would give $70/month in FCF and the ceiling would provide $150/month in FCF.

2) Again, those numbers exclude the amount I'm paying myself for PM, but point granted.

4) Thanks for this - is this because at my cash flow projections I would wipe out 1-2 years of FCF + Capex reserves?

5) The analysis is based on Zillow recently sold searches for 2/1 and evaluation of county auditor sales in past 5 years of 2/1's in the neighborhood.

1st Deal - How Low To Negotiate Price?

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