Did I lose out on a deal?

Question

Hey guys, while in the process of trying get my first rental property I made an offer on the following property after the previous buyer's financing fell through. I made my highest and best offer $53k and the seller's agent said they would not go below $57k. I'm wondering if I should've offered more. The house went under contract pretty quick after they turned down my offer.

https://www.redfin.com/OK/Midwest-City/4416-Bonapa...

Below are the numbers:

Purchase price: $53k(20% down $10,600)

Rent: $825(may have been able to get $850, wanted to be conservative)

Taxes: $55

Insurance: $65

Closing Cost: $3500

Vacancies: 5%($42)

Repairs: 10%($83)

CapX: 10%($83)
Property Mgmt: 10%($83)

Mortgage(4.75%): $222

Cash Flow: $195

So at this point I am happy with the cash flow number and really even paying $55k-$57k the cash flow looks good.

Here is the part that I am having a hard time with, ROI.

I Estimated that the repairs would be $5k-$10k before getting it rented.

Flooring: $2500

Kitchen Cabinets: $2500(prob the worst part of the house)

Interior Paint: $400

Fridge: $750

Dishwasher: $500

So at $5k repairs ROI: 12.3% (good); however at $10k repairs RO: 9.7% (bad). So if I pay more than $53k my ROI obviously gets worse even if repairs do come out to $5k.

This scenario has been breaking most of the deals out there. Good cash flow, but with repairs it turns ROI below the 12% I am looking for. I am not good at estimating repair costs, so I try to be conservative on my numbers.

Just trying to get feel if I am being overly conservative and missing opportunities. What would you do?

Mason Wade Morris · Answer

Thanks for all of the inputs/insight everyone. I just wanted to see if I was looking at things with right mindset and make sure my numbers are in the ballpark.@Brent Coombs Thank you for the heads up. I knew I had hear of that before, but it did not cross my mind at the time that an under $50k loan was going to be a hassle or even possible. I believe I understand what highest and best means, which is what I believed at the time was "my" highest and best that I could offer, but maybe I am ignorant on the subject(very possible I am new to the game). I'm not really second guessing myself, I understand that this deal has come and gone, but I was just looking for a little knowledge to be able to apply to my next deal. And it seems to be much easier to talk about something real than hypotheticals.@Christopher Phillips Thanks for the info, I agree my numbers are pretty conservative being my first purchase, however appliances weren't really the issue. I agree I did not make it to the inspection phase of the purchase so my numbers are pretty rough and I also plan to do most of work to get an understanding of the rehab process. My financing is through a mortgage broker and I am approved, but that's not to say they didn't have a lower limit on mortgages.@Andrew Johnson I agree the mortgage may have been a problem, I will be speaking with the lender and see if there is a lower limit. I agree I was being conservative on appliances and I will adjust my numbers next time. The area, is not a war zone, but definitely on the cheaper end. Right now I have roughly $20k to invest and purchasing a SFR $100k house at the moment isn't an option. @Ken Dillard @Debra Grumbach @J. Harvey thanks for the encouragement, if nothing else I'm still building capital and expanding my options for the future.@Ralph R. You have some great points, and I agree a $100k house would be nice, however I do have limited capital at the moment and would not realistically be able to afford $100k house and repairs. In this area, the rents tend to plateau as well. just because it is a larger and nicer house the rents do not scale linearly. In other words once I get some more capitol I can start looking into higher end areas.Again thanks for all of the info and insight everyone, I will keep looking and take the words of the experienced into account for my next analysis/offer.

Christopher Phillips · Answer

@Mason Wade MorrisYour numbers are off. For a rental, you wouldn't pay that much for appliances.The repair estimates are being made without an inspection or a contractor walkthrough. $4,000 increase in purchase price would only have been another $22 per month on the mortgage.Where are you getting your financing?

Ralph R. · Answer

@Mason Wade Morris @Andrew Johnson Andrew is right. your numbers are skewed. Better get some real life estimates, and find cheaper improvements. Make the offer contingent on these. a year ago in July I bought a $105K property. I added new carpet, and mostly new laminate flooring. (I hate carpet in a rental but had no choice here) full paint and some minor repairs. All in at $111k. I didn't know the end number when I offered but I had a damn good Idea what it would be. I had a personal inspection contingency and was able to get hard bids before closing. The contingency was due a week or so before closing. after I got the real numbers I never even inspected the property. the difference is that was a year ago and today the property would go for 145K in its current condition. Yes my cash on cash is lower than your goal but the appreciation and value add increased the value of the property by $34K in less than a year. Yes I know appreciation is a gamble. Most of the gain came from buying right. (Across from a new event center), and some cosmetics. What im trying to say is it cost the same to put flooring and appliances in a $50K house as it does in a $100K house. Paint cost the same as well. when you get done you get more "Bang for your Buck" in the $100k house. Better neighborhood, easier to get financing, better tenant pool and so forth. Oh yeah easier to sell? Maybe? RR

Ken Dillard · Answer

My take would be that you set an upper limit on what you thought your numbers supported and you stuck to it - That is worth a "good job". There is some advice in this thread you may be able to use to dial in your next evaluation of a deal. Maybe you can more rent, and maybe you can get appliances for a little less, etc. But you have your $10,600 and did not pick up any debt on a deal you were not comfortable with. There will be another one.

Andrew Johnson · Answer

Mason Wade Morris For a home that cheap: 1.) You likely won't be able to get a mortgage. If you can't it won't be under normal terms. And everything associated with that mortgage (closing costs, appraisal, origination fee, inspection) with a a proportionally high cost of the mortgage. If you do roll it into the mortgage you're still likely talking about thousands added. 2.) You'll be looking at scratch and dent sales for appliances. If you're lazy like me you won't go the Craigslist route because you'll want someone else to do the installation. Still, your refrigerator isn't going to cost $750. A brand new (not open-box scratch/dent) white Frigidaire from Home Depot will cost you $428. However, I think you're focused on the wrong thing. One bad tenant will trash a place to the tune of $3K-$5K easily. It's a risk in any area but let's just say it's "enhanced" in a $50K house area. If this home is a property you believe in and in an area you believe in then the $5K won't make a difference over the long term. However, if the area skews much more marginal-to-bad then even a $45K purchase price could be a "bad" investment. 🤷🏻‍♂️

Brent Coombs · Answer

@Mason Wade Morris, have you considered that YOU (also) might have difficulty borrowing less than $50k?ie. Most Lenders want/need you to have a mortgage of MORE than $50k!That link showed other properties in a similar price range. Are you SURE it "breaks most of the deals out there"?And you DO know what "highest and best" means, right? No good second-guessing later. But, thanks for sharing...

Patrick Britton · Answer

@Mason Wade Morris definitely too conservative IMHO. You have 10% to cap-ex AND 10% to maintenance. So you are assuming 20% of the rental income never sees the insides of your pockets. This is extreme, especially considering how similar maintenance and cap-ex are. Also, why do you need +12% ROI? This is not a criticism, just a question. Keep in mind that the higher the return, the greater the risk MUST be. Investments that have "high" returns typically hide some sort of unexpected risk.Lastly, what if you had offered ABOVE $57,000 but then requested a large amount in seller contributions to closing costs? So offer $65,000 with $5000 back at closing. The increase to your down payment and mortgage will be insignificant whereas your actual out-of-pocket could be much, much less. Less out of pocket means higher ROI. Psychologically, sellers love to see above asking and surprisingly have a difficult time subtracting the seller credit. Listing brokers love it too because it makes them look like superstars and they get a slightly higher commission (insignificant imho but there nonetheless).

Anna Buffkin · Answer

As far as mortgage goes, I have a credit union who does loans in house up to $120k with 30% down for 10 years. I am working on a $21k mortgage on a condo right now with them.It can be hard finding mortgages under $80-$100k, but it's possible if you shop around.

Mason Wade Morris · Answer

@Mike Dymski those are good points. I was looking at the other benefits of investing as extras and really focusing on my Cash on Cash ROI and my monthly cash flow as my primary drivers for evaluating a deal. I thought that was pretty high for closing as well, but that is what the realtor put in the estimate for me. I may need to look into it a little further to get a better number.

Mike Dymski · Answer

Hey Mason. Profit in real estate comes from (1) cash flow (2) principal reduction (3) appreciation - forced or market and (4) tax benefits. The cash-on-cash return that you are calculating only includes #1. If the $5-10k in rehab increased the value of the property, that is part of the return on the investment (#3 above). Your residents will be paying down the mortgage over time and that is part of the return on the investment (#2 above). The 10% cash-on-cash return is only one part of the equation. You will need to use IRR to calculate the true return on investment and to properly benchmark investment opportunities. IMO, you have to have pretty tight execution or scale if #1 is your only source of profit (and it can put a number two in your pants, if not).$3500 in closing costs seem too high.