Making an offer on a SFR

[quadzilla]

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]

This makes like no sense at all.

[quadzilla]

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]

[ 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]

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]

[ 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.

[Thremp]

[ 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]

[ 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]

[ 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

[spex x]

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.