Making an offer on a SFR

[spex x]

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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.

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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.

[quadzilla]

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]

Here is another one that I stumbled across.

For sale $1,495,000

$3750 Rent

[DesertCat]

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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?


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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.

[spex x]

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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.



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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.