First Offer Questions

July 10, 2008 · 3 comments

In yesterday’s post, I discussed the possible exit strategies — and the financial implications of each — for the property I made an offer on the other day. Because this is my first potential deal, I ran it by a bunch of other experienced investors who I knew would provide impartial advice on the deal. The feedback I got was great; there were a lot of questions that I hadn’t considered, and a lot of recommendations on how to proceed on this deal if my offer is accepted.

Here are some of the questions/concerns that were raised that I need to address:

1. What are the rental comps? The most concerning part about this deal is that I have very little information about what my specific exit strategy could look like, because I have very few sale or rental comps in the area. Actually, I do have some rental comps, but because there are a lot of rentals in the area, I also have a lot of competition. New houses in the neighborhood are fetching between $900 and $1500 per month in rent (these are 3/1 to 4/2 sized properties), and the one old house I was able to comp was asking $850. So, on the low side, I believe the rental rates would be about $850, and on the high side, probably around $1000 for a rehabbed 3/2. Unfortunately, that range doesn’t give me enough info, as I would need about $925/month in rent to make this deal worthwhile. So, I would need to nail down rental comps before proceeding with that exit strategy.

2. What are the sale comps? This is where I really need to do my due diligence, and talk to some local agents. This area hasn’t had much transaction velocity in the past year, so it’s very difficult to tell how much this rehabbed property could sell for. My all-in rehab costs would be around $105K, and with smaller places currently listed at around $135, it seems reasonable that I could fetch enough to at least break even on this, but I can’t get into this business making assumptions. I need to find better comps and good local realtor advice on what the ARV of the property would be and whether it would even be possible to sell this place in the current market.

3. What is my exit strategy? Yesterday, I listed three potential exits. But, that’s not good enough. I need to decide an exit strategy before rehab starts, as that strategy will likely guide a lot of decisions that need to be made. A good example is that by adding 2/1 in the basement on a rental (thereby making the property a 5/3), I’m encouraging renters to bring in more than one family to the house, which would create enormous wear-and-tear, and much higher maintenance costs. So, as just one example, I need to know if I plan to rent or sell before deciding what to do with the basement.

4. What are my hidden costs? My potential partner assessed the property, and his estimates of rehab were in line with mine (though a bit higher). This is a good sign, but neither of us have the expertise to assess the electrical, plumbing, HVAC and foundation — each of which could add tremendous cost the rehab. So, before closing on this deal, I need to get a slew of inspectors/contractors out to review the job, make sure there are no hidden costs, and give estimates on the work we’ll hire out.

5. What the big price drop on this place? As I mentioned, the bank dropped the listing price on this property by $50K overnight. Why did they do this? Perhaps it’s not a huge issue, but in general, this should be a red flag, and I should dig into this a bit more.

6. What is my financing strategy? If we move forward with this project, and decide to rent, I need a strategy to get this property refinanced so I can get a good portion of my cash back out for the next few deals. I don’t have that strategy yet, and waiting until the property is ready to rent isn’t the best option.

7. Am I okay with my return? As mentioned, my ROI on the rental is probably 5% or less. While ultimately I hope to sell for a decent profit, I shouldn’t be counting on appreciation and ignoring ROI until sale. It’s possible that I won’t be able to sell for several years (or for much of a profit), so I need to ensure my ROI and cash flow is reasonable in the meantime.

Okay, I’m still waiting to hear about whether the offer was accepted…until then, I’m going to push forward on these tasks, and continue to gather information in the case I need to make a decision on this one…

Stay tuned.

3 responses to “First Offer Questions”

  1. Christian says:

    I wouldn’t sweat the price reduction. I’ve been seeing banks do this lately. They’ve started to get more realistic about getting their inventory sold. Of course you always want to make sure and cover your bases, but for what it’s worth, I’ve been seeing a very strong trend with banks making aggressive scheduled price reductions. If you look I bet you’ll see that it happened at some even time interval…like exactly 4 weeks after it went on the market or something like that.

  2. Christian says:

    I’d be curious as to how you calculate your roi. Surely you and I do it differently, because I wouldn’t even consider 5%. I get a minimum of 40%, and I live in the midwest so I never take appreciation for granted either.

  3. El Guapo says:

    Just when everyone thinks it’s a terrible time to buy we reach capitulation. Isn’t that the best time to buy? However the neighborhood you are describing sounds really risky. I think that gas is not going down and will continue to climb as natural resources dwindle. So I think exurbs are going to become completely undesirable and property values will plummet – becoming ghetto where multiple families share former McMansions in the new slums and grow crops in the front yard. It sounds like you have covered Atlanta pretty well, but why not something in town near mass transit? Just not in Clayton county. Losing accreditation is not exactly a real estate bonus.

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