how can i handle this seller?

General Real Estate Investing
1

i have found a nice investment property…

LP: $279,000

The property is to be purchased “as is” with no professional inspections. i think the proprty is a good investment at 279k, but it’s a no brainer at 250.

Last week I offered 240,000 (80% from bank 20% from seller) with inspections. He refused the offer and said: no seller financing and no inspections.

So, yesterday I offered $230,000 cash (from the bank, obv) as is, no inspections.

Today he tells me that he will not repsond to that offer as the property is worth much more, and to come back with an offer “closer to 279,000”

The building needs some minor cosmetic work, and is in good condition. It will cashflow at 280, but i don’t want to pay retail since it needs work and prlly won’t apraise over 265.

So, tomorrow I will offer 250k and hopefully get a counter. My question is: How do you handle these hardball negotiating sellers? Don’t you think he should have countered?

I know that I am not providing much detail, but details aside, how do you handle these negotiations with tough sellers?

2

If you’re paying retail, THIS IS NOT A GOOD INVESTMENT PROPERTY!!! The vast majority of properties purchased near retail will not cash flow (unless you’re using some of that new math).

Why not post the numbers and let’s see what you’re looking at.

Good Luck,

Mike

3

Definitely new math, Mike, if you purchase a $265K prop for $280K and it cashflows!

Personally, I’d have a serious problem with a seller refusing to allow inspections.

As to dealing with hardball negotiating sellers, the answer is simple; you don’t. Obviously, the only motivating factor that this seller has is getting top dollar (or above). Hardly the motivation that you need to get a discounted price.

Raj

4

4 3-bedroom apts.

3/4 rented at $675
market rent is $900
section 8 is paying $1150 for the 3br’s in the area
After about 10k in repairs (paint, carptet, lenolium) I can get at least $875/ unit… which brings my gross rents to at least $3500-3600.

taxes 2700
insurance 1500
260k 100% financed at 9.4%- PI- $2160; PITI- $2510.

There is no lawn, and I’llhave to pay for snow removal. All seperate utilities. Unless my inexperience is blinding me, it would apear that even after vacancy/maintenence, this property will cashflow nicely.

TIA

5

You can not turn a disgruntal seller into a motivated one.

Before you even make an offer on a property, always find out the sellers situation. Why are they selling? Do they have a mortgage and how much?if its a rental, are units occuppied and for how long? any security deposits taken, etc?? How long has it been on market(MLS will show this)
The key is find out why they are selling and what they owe on the property. Once you find that out you will know how motivated they are to sell. Some will come right out and say I need to sell because I bought something else and 2 notes are killing me ,but doesnt mean they are motivated to sell below FMV at the time.

If you dont know all those answers find out…Then you can offer him 250K again, but even if the place is worth 280K, your not in a strong equity position but still if it cashflows you be okay. You have a high interest rate in your example though (9.4%). If he doesnt want to counter…leave him alone…wait about 1 month and offer him less or the same…dont go up though…
Many times they become desperate over time and will sell to you. If you have a business card, give it to him and tell him if your ready to sell it today for 250K, give me a call. But always checkback.

6

TIA,

This property will not cash flow. Throughout the entire United States, operating expenses (including capital expenses) run 45% to 50% of gross rents. You can verify this statement by doing a little research. Start with the National Apartment Association website. In your case, $1,800 would go to operating expenses and you would have $1,800 left for the mortgage payment (P & I). Unfortunately, your mortgage payment is $2160 which means that you would be losing $360 each and every month.

Good Luck,

Mike

7

anyone disagree with this, after reviewing the numbers?

i dont think there is a rental property listed in the hartford area that will have gross rents at double a PI payment. this property should net 10k a year. where is that going to be spent?

8

I know Mikes fornula would not work here in SFL on anything purchased currently or over the last 10yrs probably considering our high tax and insurance rates. Since the vast majority of the ghetto is east of I95 this is where rent is cheap, many section 8 in homes but yet ins is the highest. Avg home over there is renting for 1200-1300 a month, sale price if u get a rehabber can be about 140K…but with taxes and ins pushing about 7000+ a yr over there, the only way it work is if u bought for cash outright…

9

this property should net 10k a year. where is that going to be spent?

Your Quote: “After about 10k in repairs”

'Nuff said?

Raj

10

in the first year, but i should be making money on this by year 2.

anyway, I posted an ad on craigslist. 3br. apt. for rent for $995. That would bring gross rents to $3980. Based on the formula above, that would leave $2189-1990 for PI.

If I could gross this much rent, and stomach the 12-18months it would take to get there, what would you say then?

11

in the first year, but i should be making money on this by year 2.

You’ll spend at least that much each and every year unless you get young stellar tenants that plan on dying there (highly unlikely). If you don’t plan for it, then plan to pay for it from some other source.

Mike is dead on as far as actual costs go with landlording. 40-50% of gross rents will be eaten up by expenses associated with the business. Sure, you may have 3 years of little to no cost, but year 4 will be a real eye-opener.

You don’t have to convince us to let you buy it, mistapaants. If you want it, go for it. Right now, though, you’re playing the “what if” game. What if I could get it for this? What if I could get the rents to $1K a month? Real questions are can you get it for your price, and can you actually get that kind of rent?

Raj

12

…another thought on this one. The formula Mike is using is very accurate and takes into account long term unforseen costs such as eviction and resulting vandalism. It also includes all maintainance and management costs.

That being said…if you are planning to do all maintainance and management yourself, this would obviously save in cash flow.

However, in REI, a judgement about whether an investment is good or not should assume management and maintainance is outsourced. Your time is money and should not be tossed out in the calculation.

After its all said and done if you want to save on expenditures and do mx and management yourself, then by all means do so.

The way to calculate the proper amount to pay for this property is to work backwards with the numbers.

I would like to cash flow at least $125 per room in a small 4 to 6 room building. In this case that means about $500 per month in cash flow. Knowing that my long term average costs will approximate $1800, then I know that my gross rent minus $1800 and minus my mortgage should equal about $500.00.

Turning this all around using my “genius” math skills…If you can gross $3800, then subtract $1800(expenses)-$500(cash flow), then you know that your mortgage payment can not exceed $1500 dollars a month.

See this clears everything up and ignores what the seller is asking. You don’t care what he is asking.

You now know that the total amount you pay for the house, considering how much you put in as a down payment, can not result in a mortgage payment of more than $1500 to achieve your desired cash flow.

This means at the 9.4% nothing down rate you are using, you can not pay more than $180,000 for this property to get your desired cash flow. Of course this is assumming a 100% leverage.

In other words for this deal to work using your interest rate, even if the seller agreed to $230k, you would have to put down around 50K to get a solid long term cash flow of around $500 a month.

I hope this helps keep it in perspective.

Mark

13

i value your opinions, but what else should i do? i have 1 3-fam that i live in and no cash.

i am ready for more properties, and this is the cheapest i’ve found in the area in 2 months of searching… maybe im searching for properties the wrong way? or maybe there are no cash flowing properties left in greater hartford ct?

it would take me probably 2 good years of saving to get to 50k for a down payment.

i put my offer in for 250k today, and if i don’t get a favorable counter, i will so no thanks then check back in a month as recommended above. if i can get it for 260k i’m sure i can make it work… i’ll keep you posted…

14
i value your opinions, but what else should i do? .... i am ready for more properties, and this is the cheapest i've found in the area in 2 months of searching... maybe im searching for properties the wrong way? or maybe there are no cash flowing properties left in greater hartford ct?

None of this matters in the real world. It doesn’t matter if this is the best deal you can find. It doesn’t matter that there are no cash flowing properties left in your area. It doesn’t matter if this is the cheapest property in a 100 mile radius. From a business standpoint, the ONLY thing that matters are the numbers. Either you will make money or you will join the other 80% of newbies who fail. All you have to do is decide which group you want to be in.

Good Luck,

Mike