Deciding On An Offer Price?
How do I decide what would be a good offer price? I am currently looking at a 6 unit commercial property, 5 of 6 rented, asking price is $140,000. Also, 3 of the 6 units pay there own utilites.
I walked through it last nite with my agent and it is in fairly good condition, but will need a roof along with some other smaller items. Do I need to get my contractor to appraise the total amount of work needed for repairs and base my offer from that?
Is there a rule of thumb or formula some of you use to figure these things out?
Thanks for your help!!
Chris G
What are the last 3 years income/expenses? what are the rents? Absolutely get a price on all deferred maintenance, even if you don't use it in your offer, though you most definitely should. You are on one persons side... yours! Nobody's gonna look out for your interests, and nobody is gonna help you out if you get in trouble down the line, so beware and buy accordingly.
Good Luck,
Shawn(OH)
Before I make an offer, I usually come up with a ceiling price first, ie. the highest figure im willing to pay.
Then I base my offer on that, which is obviously a lower figure.
This way, I know my limits in negotiations.
I've set a boundary, which I refuse to cross.
[addsig]
I saw a 6-family, all rented with long-term tenants, with monthly rent of 4350, asking price was 289k. I offered 265k, he came back with 279k. The realtor stepped in, asked us to settle in the middle at 272k. My wife said our ceiling should be 270k, if we lose it, so be it.
I didn't want to have that hard a ceiling, offered 272k, contingent on inspection. The inspector found some problems, the seller gave me a $2000 credit.
I have very little problem with the tenants, turned out to be a nice investment.
It is just my personal experience. Others may have different experiences.
If your ceiling was $270K, why would you offer $265K?
You left yourself absolutely no room to negotiate the counter offer.
Moral of the story: your initial offer should have been lower.
[addsig]
I was not thinking of 270 as a ceiling. Even my wife thought about 270 when the seller came down from 289 to 279 just like that. If he came down to only 285, we would probably go up. The market is crazy. The realtor who sold me the house called me last week. She has several buyers who would be willing to buy it at a much higher price.
ahmedmu
Now why did you offer $265? How did you arrive at that offer?
I am just curious from a newbie standpoint.
Thanks
Chris G
I looked at the new and old leases. New ones had higher rent. So I thought I could make money even if I paid the full price. Tenants pay all utilities. The asking price seemed low compared to other houses in the neighborhood, probably because there were 2 houses on the same lot.
Then I wanted to make a respectable offer. The realtor told me somebody bought it for $265 a couple of months ago but could not get the mortgage. Mine was the first offer after it came back to the market. I thought I would show him I would be fair and could get the mortgage.
Now these may not be smart things that a sharp investor would consider. But it was my first deal. I thought I would look at it from the other guy's point of view. Since he sold it for 265, why squeeze him
When I was a young man the guy I learned the business from put it this way:
any building anywhere anytime is worth 10 times its true net operating income.
9 times the net is a good deal
8 timest the net is a very good deal
at 7 times the net you come get me.
This is true, of course only for income producing property. and there is considerable room for discussion as to what the true net is. Is there deferred maintenance, etc.?
It does not work for development oportunities where there is some value to the future income-- but my opinion is not much. If there was an easy path to development the seller would have taken it already. Therefore the developer needs those profits to justify his greater risk. Frequently the seller has already calculcated the developers profit and used that to back out his price.
It also does not work for non-income property, houses, etc.
Generally it does not work for 6 flats or smaller because they are bought by amatures who do not consider the value of their time.
It works less well in an inflationary market because the assumption is that the dollars to repay the debt will be cheaper than todays dollars.
In a long-term low interest market the net income numbers may be increased some because you can borrow a great deal of the money at low rates.
There, there are a whole bunch of rules of thumb
Mark
in the late 90s P/E and other accepted criteria were not being followed in buying stocks. Some hot stocks didn't earn anything but were being traded at astronomical prices.
RE is many parts of the country is showing similar symptoms. If I am not aggressive, I may lose it. :-(
"RE is many parts of the country is showing similar symptoms. If I am not aggressive, I may lose it. :-("
Yes, you might. But there are worse things in life than not owning real estate that looses money.
Yes, many people bought hot tech stocks that were producing no cash or whose P/E ratios were enormous. Many of those same stocks are now defunct. In the end we do not own real estate or stocks for the pleasure of it. We own them to make money. (Some exceptions, of course, I may choose to own a vacation house which I believe will never be worth anything except as a balm to my frazzeled nerves, or shares in the Mustang ranch, a whore house in Nevada whose stock sells mostly so you can frame it and hang it onthe wall in the rec room). The worst thing in the world is a property that you have to feed-- put money into year after year because you paid too much.
What kind of property is this? Apartments? or office space?
thanks
Very good point(s) indeed.
I got 15-year fixed rates. Prices are high, but rates are low. 4 houses I own are all cashflow positive. I am buy and hold, won't buy if not cashflow positive.
This is not my main job either, kind of a hobby, much better than collecting stamps