All Forum Posts by: Eric Blackford

@Account Closed,

I've seen and heard of appraisers in the area saying "how much do you need the number to be?" Also, they tend base their appraisal off of the negotiated price. Google "anchoring heuristic" for issues in this department. But the point is that in illiquid markets such as the area I am investing in, it seems like agents base the appraised value some number off of the listing price or the negotiated price, as finding comps can be impossible. 

If the property is listed at a 3 cap in a 12 cap non-appreciating market, who is delusional?

@Charles Worth

I'm working in a 15,000 population town and FSBO investment properties are rare. MFP sellers in the area like to list the property with an agent on the MLS to potentially attract absent investors... even still, properties may not sell for a year.

@Joshua Springer

A net listing is on the seller's end, not the buyers end. Interesting thought though, I would want this to be legal.

As far as I'm concerned it's more like a tip, and if tipping your agent is illegal, then yes we are in trouble with this idea.

@Doug W.

My thoughts exactly, but you wrote it more tactfully than myself

@Account Closed @Mark Gallagher ,

I see this in my area, albeit at much lower prices Mr. Honolulu, when duplex and triplex owners are trying to sell their property to people that may want to live in one side and rent the other side(s) out. So they try to sell the place as a 6 bed 2 bath house and comp it that way when really it needs to be treated as an investment property.

What you get is duplexes listed at $180k that bring in $1,000 in gross rent. I want the agent to attempt to bring these sellers down to earth after they are listed for 365 days and scratch their heads.

@Mark Gallagher

interesting, I appreciate your input that commission difference is marginal. So lets keep in mind that @Steve B. says that my bonus plan is over incentivizing. What incentive would make you, as a buyer's agent go back to the seller's agent during negotiations and initiate a tactful argument that the buyer's offer is fair value for the property and he should sell it at that price point? (Assuming that if there was no incentive, you would go to the buyer and convince him to just give up or offer a higher amount). 

And yes, I am talking about sellers listing their properties at 3-4% cap prices in markets trading at 10-12% caps.

@Steve B.

Perhaps the plan is too generous. How does 20% sound? 15% for $150 per $1k under? I think that number sounds good. What number would you use?

Remember, my anchor is set at the price that I want and know I can make the desired cash flow and cap rate, so at any level below that anchor is bonus for me too. Why not share it with the agent that worked her butt off and got denied 20 deals before this one closed?

@Mark Gallagher,

As an agent, tell me if you have ever been in this situation.

An investor comes to you and says, "These are my numbers, the ROI, cap rate, and the numbers tell me that this house is worth 50% less than the asking price on the property. Therefore, I will offer that amount and no more".

What did you say?

Did you ever say, "I think that offer is too low."?

You may be the wrong agent for that investor, and me.

We shouldn't succumb to the anchoring heuristic that plagues the transactions and negotiations among the agents and their investor clients in this industry. An investment property's value should never be based on what the seller lists it for... In fact, I prefer not to know the asking price when doing my analysis.

My numbers are aggressive, and the bonus plan is to award the agent for working so hard to get me the right deal. While my offers are based on fair ROIs and cap rates for the market in my area, they are sometimes very far below asking price of many of the properties.

I stand my ground and say that these small voluntary bonus plans over time will establish good working relationships with agents and give them incentives to work harder than even a good investor friendly agent.

@Scott R.,

The buyer's agent already gets the 3% commission from the seller's office... this will not change. I'm talking about implementing a bonus plan paid for by the buyer, if he so chooses. Of course, not all buyers would want to do this, and it is up to their discretion to do this but I do because I want an even lower price than my desired price

Flat Fee

The problem with the flat fee is that again the agent doesn't care about getting the lower price for the investor, she just cares about closing the deal (given that she is already going to receive the 3% from the seller's office). Under the flat fee, there is still no incentive to get the price lower. My bonus plan is just that, a bonus, or a tip - not commission to be split between the agent and her office. Even if it had to be split with her office, her incentive to reduce the price is still there.

@Jesse T. 

 If the investor is wise, the agent will do the opposite of spending time chasing overpriced houses. Neither the anchor I set, nor my offer is ever based on the asking price of the home, it is based on the CoC return, Cap rate, and a few other metrics (neighborhood, demand, etc..)

Using the example above, I said that my desired cap rate of 12 and CoC return was 20% if I could get the house at $100k but the asking price was $112,000. No matter what that asking price is, my deal only works at $100,000. So if that home was even more overpriced, at say $130k, that agent would have to work way to hard to get below $100k and into bonus. In fact, if she has to talk the seller down $31k just to get herself into bonus, she won't chase that overpriced deal.

@Julie Doke ,

I found mine through word of mouth from a mentor. We connected well and maybe I got lucky.

 I will use this method of finding houses until my wife/business partner gets her broker's license. I still haven't found a better way to get agents to work really hard for an investor.

Now, to figure out a way to get a property manager to be on your side!

     If you haven't heard about the Freakonomics bit on real estate agents and how their incentives aren't aligned with yours, watch this 3 minute video here to get some insight into the problem.

https://www.youtube.com/watch?v=17jO_w6f8Ck

     The same phenomenon holds true for investors' agents, and the pressure can cost investors that work with agents dearly if they don't pay attention. Further, the manner in which your agent works with the listing agent can determine how hard the listing agent works with the seller to talk him down. I want to propose a theory... an idea.. that I will test with my agent on my next buy and hold deal that will cause my agents incentives to truly align with my own. I think this plan will work until my wife gets her agents license and we don't have to worry about having a listing agent.

      First, lets talk about the problem that investors face when using buying agents to make offers on properties.

According to the incentives, buyers agents want to close deals. No close, no money. Second, agents actually prefer that the deal costs the investor a bit more rather than a bit less. Although incremental returns are marginal, they still matter, and I argue they still affect the agent's actions. My agent tells me stories about how she tells some of her investor clients their offers are too low. This gets me worried, because I don't want to feel that pressure from my agent and I don't want her to not try hard to push the listing agent to sell if she thinks the offer is ridiculous.

I have an idea that will get an agent to fight harder than the investor for a lower price.

First, the plan works on a case-by-case basis. The investor must decide the desired cap rate and CoC return and whatever other metric he wants to use to decide the price at which he wants to acquire the property. This is almost always below the listed price. We will call this price point the anchor point.

Lets say I want my next MFP to have a 12% cap and with my type of financing a 22% CoC return. I do my due diligence on an MFP down the street and see that at $100,000 , this MFP will give me a 12 cap and 22% CoC return, but its listed for $112,000. So 100k is the anchor point you want to pay, and anything less is bonus.

I will then go to my agent and say, "OK, the anchor point is $100,000. For any amount lower that we close on this property, I will cut you 33% of the difference. So, you get your 3% from the seller as a buyers agent of course, but within 30 days of closing, I'll cut you a check for $333 for every $1k less than $100k you can get me this house for."

This is the agent's pay scale for this house.

This does a few things:

1. It gets the agent completely on your side. He wants to get below your desired price... Even at 2000 below your anchor, the agent will make more money than if you get the house for the asking price of $112k

2. As long as the anchor point is reasonable, the agent wont get discouraged at your lowball offers. They will really want to push the reasons why property isn't worth near the listing price. The relationship will be far better.

3. This allows you to let the agent do the paperwork and negotiating without you having to micromanage the deal.. In fact, you can just tell the agent, "Offer and negotiate whatever amount you want on the property, but only call me if negotiations approach the anchor.

4. You can do multiple properties at a time and the agent will work the hardest on the property that makes you and him the most money (most often the property where the agent can get the furthest below your desired anchor.

5. This plan opens you up to all of the deals than never make it to the MLS. Established agents that gobble up really good deals before the seller lists them could get kicked to you at wholesale prices.

This is my plan to fully align investors agents with investors. You can change the bonus plan to, say, 20% or 15% below anchor or whatever.

What are your thoughts?

@Kevin Nichols Trying to reach even a 30% CoC with my setup puts the price I should offer at just over $40k. This is a significant discount to owners $65k asking price. The owner has had it on the market for at least a year, and he lives on the other side of the country now, so is this a wise offer? Is there a problem with the financing end of this deal that is hurting my CoC?

I should be able to reduce some of my costs such as initial repair costs estimate, and even reduce maintenance estimates by a little because the place looks pretty solid (mostly hardwood floors and tile and lots of renos in '09 and '12) But even still, the valuation is under $45k.

As far as appreciation goes, I've come to peace with a 0% appreciation rate. Or at least match inflation, since duplexes are often valued at a price/income basis and I plan on raising rent to at least match inflation.

Thanks for your Input Kevin, I hope to read your answers to my questions soon!

Hey everyone! I am new to REI and new to this awesome BP Nation, but I am absorbing everything like a sponge I hope! I am a well-seasoned equities investor, so that background makes the finance and numbers learning come easy. I modeled my excel spreadsheet after the analysis sticky on this forum… thanks Dorkins!

OK here we go

This property (among 5 others) could be my first purchase and I would like BP Nation’s wise opinions.

Town’s population is ~20k. This duplex is in a working class neighborhood. It is definitely not a junky ghetto, but not middle class either.

I haven’t gone in the duplex, but I have had some conversation with the owner. I will go in the duplex this week.

Below the spreadsheet are explanations for some of my assumptions. Please check those out while you scrutinize the numbers.

Rent per unit – Fair for the neighborhood. Both units are 3+1. The tenants also just redid their 1 year lease 1 month ago so I can’t raise if I wanted to.

Vacancy – assumed 12% but this town has renters beating doors down to get in places

Management/mowing – I will be managing the property, so this is really just a mowing estimate

Maintenance and repairs – est. this place has some nice stuff in it like almost all hardwood floors, some vinyl.

Utilities – water estimate. I believe this is all the owner pays, but I will verify this week.

Closing costs – estimated 2% of house value

Repairs – only estimated because I haven’t been in them. New roof in 2009 so after this week I may be able to write this one off as $0.

I don't really like the CoC and the cap rate right now. I think I would like to see at least 20%/12% CoC/Cap but I'm not sure. That would put my offer just below 60k I believe. What's your opinion on these figures?

BP Nation, am I going the correct path on this analysis, or am I way off track?

I am very willing to learn, so criticize away!