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-   -   Making an offer on a SFR (http://archives1.twoplustwo.com/showthread.php?t=558403)

quadzilla 12-01-2007 12:50 AM

Making an offer on a SFR
 
I need help from real estate guys. A SFR is listed at $589,000 on the MLS. Another site (realtor.com) has it listed as a rental at $1900/mo. I see people talking about cap rate etc. and I don't get what that means. Based on the situation what would you offer.

I have read spex x's rough offer plan and I wiil try but, in my area I will be suprised if it works. I think spex lives in a small town.

Thanks for any any insight.

Thremp 12-01-2007 01:01 AM

Re: Making an offer on a SFR
 
This makes like no sense at all.

quadzilla 12-01-2007 01:48 AM

Re: Making an offer on a SFR
 
SFR listed at $589,000

It is also listed at as a rental at $1900 a month.

Spex made a post about making offers at 50% of market value.

Desert Cat made a post about rental analysis and I don't know wtf he is talking about. It is all in this thread;

thread

I work for my $ and am not interested in making $ from RE transactions. I just want a good deal on the next place that I buy. Doesn't the situation listed above seem odd?

haakee 12-01-2007 02:52 AM

Re: Making an offer on a SFR
 
[ QUOTE ]
SFR listed at $589,000

It is also listed at as a rental at $1900 a month.

Spex made a post about making offers at 50% of market value.

Desert Cat made a post about rental analysis and I don't know wtf he is talking about. It is all in this thread;

thread

I work for my $ and am not interested in making $ from RE transactions. I just want a good deal on the next place that I buy. Doesn't the situation listed above seem odd?

[/ QUOTE ]

Doesn't sound like a good deal unless you're a renter, that's for sure. If you want to buy it give a serious lowball offer. DesertCat is always right.

Thremp 12-01-2007 04:12 AM

Re: Making an offer on a SFR
 
It depends on your market, but most homes should be selling at >90% of their list price (uncertain about current plummeting markets, maybe someone with MLS access in a big metro area can chime in). Most realtors aren't gonna submit offers that are a gross waste of time. Spex doesn't pop open the MLS and offer each person 67.84% of the fair market value on each home.

50% for a home listed on the MLS is absurdly low. I think you're looking for for distressed sellers when making lowball offers. Or properties that may have some inherent issues. (I found one recently in my locale like this. Exciting. Should rent out for around 2350 a month, cost like ~230k(?) as a bundle, but it has deed issues, though a lawyer is purchasing it so he can get the work done himself much more cheaply. Regardless it was interesting to see an actual example of this type of stuff)

haakee 12-01-2007 05:51 AM

Re: Making an offer on a SFR
 
[ QUOTE ]
(uncertain about current plummeting markets, maybe someone with MLS access in a big metro area can chime in)

[/ QUOTE ]

Definitely very dependent upon markets. My friend bought a place for 65% of original list price in the east bay/northern California (and I question whether it is a good deal still). Know your market before making an uneducated offer.

DesertCat 12-01-2007 01:15 PM

Re: Making an offer on a SFR
 
[ QUOTE ]
SFR listed at $589,000

It is also listed at as a rental at $1900 a month.

Spex made a post about making offers at 50% of market value.

Desert Cat made a post about rental analysis and I don't know wtf he is talking about. It is all in this thread;


[/ QUOTE ]

Your gross rents would be $22,800 per year, or 3.9% of the purchase price per year. If you owned it, your net rental income after expenses (taxes, insurance, maintenance and vacancy costs), but before financing costs, is likely to be around $10,000 to $20,000 per year, for purposes of this example let's assume you net $15,000. Divided by purchase price gives you a 2.5% cap rate.

The cap rate allows you to see how much of your financing costs are covered by rent. In this case assume you can get a 100% loan at 6% (you must have great credit). You will be losing 3.5% a year (6%-2.5%) on this rental, so you need appreciation to average over 3.5% per year plus another 6% for transaction costs when you sell it in order to make a profit.

If you buy a property with a cap rate of 7.5%, you can actually make a profit of 1.5% per year on 6% mortgage, and any appreciation would be gravy. Any cap rate below 6% in my mind is foolish, unless you have a solid reason that rents will increase. I say that because once you take on negative cash flow you risk being forced to sell at the worst possible times if you ever end up needed money. And note that cap rates are based on todays rental rates, if rents decline because more properties come on the market, your rate will decline as well.

As you have described this property, it's expensive. If you want to live there, renting is much cheaper than buying. For example, even without having tax deductions, renting is probably $500-$1000 cheaper per month. If the property didn't start appreciating for five years, the renter would be ahead of the owner by at least $40,000 and maybe $80,000 by that time.

And the renter would always have the flexibility to buy a good property at the right time and price. The owner is stuck trying to make this deal work.

'Chair 12-01-2007 01:49 PM

Re: Making an offer on a SFR
 
[ QUOTE ]
[ QUOTE ]
SFR listed at $589,000

It is also listed at as a rental at $1900 a month.

Spex made a post about making offers at 50% of market value.

Desert Cat made a post about rental analysis and I don't know wtf he is talking about. It is all in this thread;


[/ QUOTE ]

Your gross rents would be $22,800 per year, or 3.9% of the purchase price per year. If you owned it, your net rental income after expenses (taxes, insurance, maintenance and vacancy costs), but before financing costs, is likely to be around $10,000 to $20,000 per year, for purposes of this example let's assume you net $15,000. Divided by purchase price gives you a 2.5% cap rate.

The cap rate allows you to see how much of your financing costs are covered by rent. In this case assume you can get a 100% loan at 6% (you must have great credit). You will be losing 3.5% a year (6%-2.5%) on this rental, so you need appreciation to average over 3.5% per year plus another 6% for transaction costs when you sell it in order to make a profit.

If you buy a property with a cap rate of 7.5%, you can actually make a profit of 1.5% per year on 6% mortgage, and any appreciation would be gravy. Any cap rate below 6% in my mind is foolish, unless you have a solid reason that rents will increase. I say that because once you take on negative cash flow you risk being forced to sell at the worst possible times if you ever end up needed money. And note that cap rates are based on todays rental rates, if rents decline because more properties come on the market, your rate will decline as well.

As you have described this property, it's expensive. If you want to live there, renting is much cheaper than buying. For example, even without having tax deductions, renting is probably $500-$1000 cheaper per month. If the property didn't start appreciating for five years, the renter would be ahead of the owner by at least $40,000 and maybe $80,000 by that time.

And the renter would always have the flexibility to buy a good property at the right time and price. The owner is stuck trying to make this deal work.

[/ QUOTE ]


very well put. this made a lot more sense than the wiki article on cap rate. ty

quadzilla 12-01-2007 04:15 PM

Re: Making an offer on a SFR
 
Thanks DC. Based on what you are saying shouldn't this place be worth closer to $250 - 300K if you were looking for 7.5% cap rate?

I have been tracking SFR's in an area of Northwest Chicago since June. A realtor sends listings for SFR's between $450 - 700K. When I started in June there were 48 listings. As of today there are 39 (Many have been pulled for the winter I assume). Only 6 houses have closed since I started tracking them and 4 were for less than $500K. The asking prices are dropping on some but, most have stayed at the same price.

I saw DC's post about rental analysis and I decided to check to see what these places are asking for as rentals and I was pretty shocked to see how low the rents were in comparison. Here is an example;
For sale
For Rent

If I put 20% down $117,800 and had a 6% rate my PI would be $2825 (Doubt I would get 6% on a Jumbo right now though). Taxes on the place are $4000 but, will be getting reassesed in 2008. So lets say $3300 with 20% down. They only way this could make sense was if you felt that would see some decent appreciation. Based on what I said at the begining of this post I can't see how there will be any increases any time soon.

The guy bought the place for $347,500 on April of 2006 and he did rehab the place.

When I read spex post about making 50% offers at first I thought it wouldn't work but, there has to be someone in that group of sellers that is willing to take 50-70% of list price. I have been shown a lot of these places and I could surely single out 5-10 of them that I would be willing to live in. Unless the climate has changed I will be doing what spex talked about in the other post and will post a trip report if anyone is interested. If I don't get anywhere I'll just rent and invest my money elsewhere. Can anyone see a reason not to?

quadzilla 12-01-2007 04:31 PM

Re: Making an offer on a SFR
 
Here is another one that I stumbled across.

For sale $1,495,000

$3750 Rent

Thremp 12-01-2007 05:26 PM

Re: Making an offer on a SFR
 
[ QUOTE ]
[ QUOTE ]
(uncertain about current plummeting markets, maybe someone with MLS access in a big metro area can chime in)

[/ QUOTE ]

Definitely very dependent upon markets. My friend bought a place for 65% of original list price in the east bay/northern California (and I question whether it is a good deal still). Know your market before making an uneducated offer.

[/ QUOTE ]

List price or original list price? These could be worlds apart.

DesertCat 12-01-2007 05:59 PM

Re: Making an offer on a SFR
 
[ QUOTE ]
Thanks DC. Based on what you are saying shouldn't this place be worth closer to $250 - 300K if you were looking for 7.5% cap rate?


[/ QUOTE ]

Well, I want a 7.5% cap rate because I'm cheap and want a positive cash flow deal so good I can't screw it up. There is nothing golden about 7.5%. It all depends upon what you can reasonably expect in appreciation. If a property appreciates 10% per year and you can afford to fund negative cash flow, paying even a 2.5% cap rate starts to make sense. That's how lots of these prices got this way and why I think they are due for more correcting.

The only other way around it is if you can increase rents. I had a friend pay a cap rate that must have been around 5% on an old home. He knew it was zoned commercial, rehabbed it, and rented it commercially for about 4x it's previous rent, and made an absolute killing.

haakee 12-01-2007 07:37 PM

Re: Making an offer on a SFR
 
[ QUOTE ]
List price or original list price? These could be worlds apart.

[/ QUOTE ]

Original. 72% of final list price.

spex x 12-01-2007 08:49 PM

Re: Making an offer on a SFR
 
[ QUOTE ]


I have read spex x's rough offer plan and I wiil try but, in my area I will be suprised if it works. I think spex lives in a small town.



[/ QUOTE ]

That scheme will find you the most motivated seller our of 5 properties (or whatever) properties that serve your needs. Living in a small town has nothing to do with it.

And it may not work. It works because it creates the fear of losing a buyer. I've tried it many times with mixed results.

spex x 12-01-2007 08:55 PM

Re: Making an offer on a SFR
 
Are you buying this home primarily for an investment or will you be living there? The tenor of your posts has led me to think that you wanted to live there - am I mistaken?

In either case, my opinion is that cap rates are not usually the best way to judge the viability of a single family residence for investment purposes. And if you're not renting out to someone then I think that there are probably other better ways to decided whether to buy than cap rate.

spex x 12-01-2007 09:12 PM

Re: Making an offer on a SFR
 
[ QUOTE ]
Are you buying this home primarily for an investment or will you be living there? The tenor of your posts has led me to think that you wanted to live there - am I mistaken?

In either case, my opinion is that cap rates are not usually the best way to judge the viability of a single family residence for investment purposes. And if you're not renting out to someone then I think that there are probably other better ways to decided whether to buy than cap rate.

[/ QUOTE ]

Another thing - any seller would be insane to take an offer of 50% under fair market value. Don't get your hopes up. You should go down to the county courthouse and figure out how much money is owed on each property that you submit offers on. That number is likely the absolute bottom line. Not too many sellers will bring money to the closing table.

Thremp 12-01-2007 10:48 PM

Re: Making an offer on a SFR
 
[ QUOTE ]
[ QUOTE ]
List price or original list price? These could be worlds apart.

[/ QUOTE ]

Original. 72% of final list price.

[/ QUOTE ]

This does bring up a good point though. Prices with price slashes are sometimes perceived as undesirable. You'll see a house maybe knock like 4-5% off the price and if it still doesn't take... get unlisted instead of just getting "trash" offers. But it all depends... Its a huge field and each situation is different :x

dknightx 12-02-2007 03:05 AM

Re: Making an offer on a SFR
 
wait ... im a little confused. So if we see a house on sale, but also for rent. We should offer the rent price * 12 / .075? I can't imagine this works in every market ... or does it?


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