All Forum Posts by: Derrick Lubomski

So I have had my eyes on this duplex for a while now, it is if off market and technically not for sale. I’ve been in touch with the owner for months now and it seems she is finally ready to sell. However, we cannot seem to come to terms on what a fair price is. She doesn’t, want to lose money, I don't want to overpay, will we ever come to an agreeance?

Here is the scoop on the property:

It is a 3/1, 1/1 up and down brick duplex with a 2 car detached garage and an additional 2 car parking pad located in the Pittsburgh area. The duplex has beyond solid bones, sandstone foundation that has been repointed and is watertight, roof is 10 years old with a 25 year warranty, windows were replaced as needed, and newer furnace/hw tanks.

Sounds amazing right? Well the inside is stuck in the 70’s. Wood paneling everywhere, pink 4x4 tile in the bathrooms, orange and green countertops, you get the picture. The current rents are $700 and $1,000. I know the area, it is a hot spot for grad students and young professionals (as myself), with a few large developments coming to area as well. Based on my research as well as what my friends pay to live in the area, I think conservative numbers for what I could get in rent after bringing the place into the 21st century are $800 and $1200 plus $200 for the garage, a total of $2,200 a month.

Now for the price, this neighborhood has a low inventory of multifamily so it is hard to run comps. A triplex sold down the street for $285,000 and a duplex a block away is pending sale at $229,000, and researching what the rents are, both came in around 1% of the sale price. Now when running numbers, both those properties sold at $96/sqft. The duplex I’m looking at is around 1,925 sqft, so at $96 a sqft, that brings the sale price to around $185,000, which is still more then I’m willing to pay.

My game plan is to purchase with an FHA, renovate myself (I estimate roughly $15,000 for me to do all the work) then hopefully refi out of the FHA after a year, and also be able to pull some cash out to put towards another rental. I'm running my numbers based on what I could get in rent once I move out, and really the absolute most I want to pay is $170,000, bringing the total I'm into it for to $185,000. Yesterday when talking with her I came up to $165,000, but she had an agent tell her they can list it for $229,000 since a 3/1 3/1 duplex down the road just sold for that amount, so all she is seeing is dollar signs now. I had brought up the point that most places are going for 5-10% off asking, as well as I'm saving her the 6% she would be paying in agent fees since the awesome guys at Deacon-Hoover are handling my paperwork, but was only able to bring her down to $195,000 which she seems pretty firm at.

My dilemma is I really like the place, I have a ton of tools and constantly flipping/rebuilding motorcycles, cars and jet skis so having a garage in the city is very crucial to me. However I don’t want to overpay. When listening to the podcast they always say your first property is a throw away anyways, but I’m stubborn and think I’m smarter than that and want my first property to be a smoking deal. Is trying to meet her in the middle in the low $180,000’s a bad idea? Am I losing out? After reno it still comes in just slightly above the 1% rule with around a 6% cash on cash return, which are these numbers okay for a neighborhood that keeps getting hotter? I don’t want to make a bad investment that will delay the process of me obtaining more properties, however I do really like the property and it is a place I would like to live in for the next 5 years or so while I obtain more rentals.

Thanks for all the input in advance!

Derrick

@Joe Scaparra All great points, this is exactly why I had turned to bigger pockets. I didn't even think about bringing up the idea of saving 3% to the seller, which I can definitely see as being a strong negotiating point. 

I have ran some comps, as well as I have a friend who works in property management and just acquired their real estate license so he ran a few comps for me as well so I have a decent idea of what I want to pay now. Just need to talk to a few banks for and and get preapproved to get this process rolling!

@Lionel Li Thanks for the input. The Pittsburgh market is full of many different neighborhoods, some have hit their peak from what I've seen in property values, and some seem to be steadily increasing as they become the "next hip spot" to live. This particular duplex is in one of the next up and coming neighborhoods, and have seen property values increase almost 10% in the past year. Now from just listening to pod cast I don't intend to count on appreciation in my numbers because it's never a guarantee, especially if we are approaching the peak of the bubble, but if I figure what my max mortgage would be including rehab cost, I would roughly break even on what I could charge for rent for the 3 bedroom. So I would live there for free, but all expenses/taxes would come out of my pocket. For being 25 I'm in a decent financial position with my engineering position, so this sounds like a great idea to me. However this is also my first deal and I am a little emotionally attached to the property now because it has a yard and a garage for me to store all my tools and toys. Should I be looking for something that'll do better then 1.2%? It can definitely be possible, however just may not be a house that I personally would want to live in for years to come. Thanks!

@Darren Mancuso Thanks for the reply, and you are right when it comes to being a hard task when it comes to finding off market deals in the area so I believe I truly lucked out with this one. 

Your points on having an agent walk me through the process are why I was considering acquiring one, though I'm not sure the seller will be thrilled if she has to pay the agents commission and realize she could just list it and potentially get more for the property. 

I'd definitely be interested in learning about some of the properties you have in Pittsburgh though, shooting you a pm now!

@Bill E.@Jay Belcher Thanks for the input guys. I have been using the Bigger Pockets calculator and have an idea what I would like to pay for it. However when running comps what I want to pay is a lot lower then what I've seen 4/2 houses going for in the area. I know come in low with my offer, but I'm afraid it may insult the owner and turn her away, then again you never know until you try. 

Ideally my game plan is to acquire this duplex, renovate it, rent the 3 bedroom then live in the 1 bedroom for years to come, since I would then have the experience of this one under my belt as well as some equity built, I would use that as leverage to private lenders and start using the BRRR technique to acquire more properties. So since I intend to live in this one for a while, do I count what I could be getting in rent for my unit towards the numbers? If so, my monthly rent would be around 1.2% of what my max I would like to pay for this property would be. Making this a good investment?

All the hype on where to make the most money and find the best deals seems to be you have to find them off market. This being said, I have been trying just about every option possible outside the MLS to find a duplex up to a quadplex in the Pittsburgh area for me to house hack for my first deal.

Turns out I may of found the perfect property for me. Stumbled upon a duplex that is very dated but over all in good shape, and owned by an older widow who is getting tired of dealing with the turn over of tenants and is strongly considering selling within the next couple months. 

I communicate with her often, and after her showing me the property she wanted me to make her an offer...as this is my first deal and the first rule of negotiating is never make the first offer, I replied I needed to do a little more research and asked her if she had any idea what she was looking to get out of the property. Clearly she knows the first rule as well, because she said she had a range in mind but wanted to know what my research showed first...

This is where I'm stuck at, since it is off market as well as being my first deal, do I need to bring an agent on board?? What about inspections/appraisals? Since I plan on living in the one unit for a while do I still apply the 50% rule or the 2% rule when running numbers? I have contractors in my family as well as me being a Civil Engineer myself, so my plan for financing would be an FHA 203K loan, renovate/modernize the 3 bedroom/1 bath asap so I can get it turned over and get it rented, then live in the 1 bedroom/1 bath and renovate that myself while I live there.

I have already been pre-approved for a conventional mortgage, but this was back in my rookie days when I was looking on the sites like Zillow for multifamily properties. So my next step is to talk to banks about the 203k loan now, but will they make me get an agent regardless? Are there any steps I'm missing? As I said I'm working on getting my ducks in a row with trying to minimize all mistakes with my first deal, so any advice helps!

Thanks!

Derrick

@Chris Martin I appreciate the input, that is why I came to Bigger Pockets because with this being my first deal I have a lot to learn.  I had heard about the property because it is actually a few houses down from my agent's lake house, and running simple numbers it seemed like a smart deal to me with it needing minimal work, however you're right my long term goal is not to flip houses on Lake Gaston, and as @Jay Hinrichs said the list of buyers is very thin up top as not many are looking to drop 600k on a lake house. Looks like this is one I'm going to have to pass on and stick to my original plan of house hacking a duplex.

Thank you all for your input!

@Chris Mason The family owned the land, demolished the original house that was on the land and had this one built, the house is complete to an extent and the family had started to move in. I believe what had happened was they were putting off the completion of the lower level/basement and site work to do themselves, however they were older and both passed away within months of each other. Now the daughters own the house and want nothing to do with it so are looking for a payday.

@John Leavelle I appreciate all the input, and I think you are right a flip would be my best option, which has been what my gut has been telling me this whole time. My optimistic mind is what keeps telling me I'll have no problem renting and cash flowing, then 10 years down the line when I'm ready to settle down I'll have a lake house in my portfolio to settle into. Hopefully I can find a partner in the area who would want to team up on this flip with me.

@Jay Hinrichs I've considered that too, this property does come with that risk which I'm still unsure of if I want to take that on

@Chris Martin The house should have it's CO as the family had started to move furniture into it before they passed. You could 100% live there now as is. The work that needs complete is the basement needs finished and a storage room up stairs I would like to turned into a bedroom. You enter on the 2nd floor then the property slopes down grade to the lake, so the basement level has sliding back doors that enter into the back yard. Currently all that is down there is a finished bathroom and a large open space with a sealed concrete floor and interior framing/ceiling exposed. 

The daughters currently own the property and from the sounds of it, it is paid off, they're just looking to cash in. So how would you suggest financing?