We continued our adventures in real estate this weekend, making the trek to St. Louis for the third time in 6 weeks. It’s a trip that I’m starting to get tired of. Now back in Kansas City, my wife and I have had a chance to reflect on how to move forward. We looked at about 5 more multi-family properties this weekend, bringing our total up to about 50. The good news is, we found a place that we really like. The bad news is, we might like it so much that it may negatively affect our ability to effectively negotiate.
Plus, we like it so much that it seems like we might be on the verge of breaking some of the perameters we put in place to give us a large enough margin of safety to justify investment. As I’ve mentioned here before, one of our goals is to have a price to rent ratio of 10 (or lower) on any purchase we make from an investment standpoint. That is, assuming full occupancy, if the yearly rental revenues project to equal 20k, we could justify spending any amount up to 200k. We’re in a situation where we’re already considering breaking that rule and would likely have to in order to get this particular deal done.
The place in question also lacks some of the things we’ve said we wanted all along (for instance – no garage), but it’s a place we really like. The owner-occupied unit has been lived in by the owner for the last 22 years, and they have been the type of owners that take care of the place. They also have a pretty green thumb and have created a very aesthetically beautiful courtyard. It’s a place we could see ourselves living for the next several years. My wife is already emotionally attached, and would probably just pay what they’re asking for the place if I was on board with that strategy.
At the price they’re asking, it doesn’t look like the numbers work. The rented unit is currently only rented at $734/month on a month to month basis. That’s under market for the unit, but the renters have been there over 3 years and I’m guessing they haven’t raised the rent that much during that time. Even if we assume that both units could rent for $1800/month, (which is probably reasonable – giving the bottom rental unit an estimated value of $850/month and the owner occupied unit an estimated value of $950/month) the unit would only yield a rental revenue of $21,600, for a top dollar value of 216k.
The place is currently listed at about 230k, which is probably a little below market for this particular place (we would know at this point, after sifting through the amount of listings we have). We made an offer on Saturday for $200k, with the seller putting 17k into escrow for a new slate roof, leaving the offer open for 24 hours.
We got their counter about 5 hours ago. They agreed to the 17k into escrow for the roof, or, in the alternative, putting the roof on by the company providing the estimate before closing. They countered at 228k. I guess the 2k is progress toward a deal. I don’t know. Maybe we came in too low to begin with and that’s why they didn’t give more leeway. They did give us the roof, which is something. We have until Tuesday evening to take action on their offer. I’m not exactly sure what we’ll do, but we do have our next number in mind. Unfortunately, after this number, if we want to stick to our number (216k), we’re going to run out of rope pretty quickly. That number puts us 12k apart in real terms, and we’ll probably have to decide whether we’re willing to bridge that gap at some point down the line.
Maybe that sounds like an amount of money that we shouldn’t let kill the deal – but we’re buying for purposes of investment…we’re not simply looking for a place we’d like to live (but of course we’re doing that, too). Because of that, it becomes a bigger deal when we exceed our set perameters.
As a buyer in a real estate negotiation, the most powerful tool you have at your disposal, to quote my uncle, is your ability to walk away from the deal. If you lose the ability to walk it away, or make it known or obvious to the other side that you’ve lost that power, you lose all of your bargaining power. You need to play it cool with your real estate agent, too. Most agents are sellers agents, but even if you’ve signed with a buyer’s agent, you need to understate how much you like the place.
A seller’s agent and a buyer’s agent are both driven by the same incentive – to close the deal. They don’t get paid until they do. And I promise you they talk (even in circumstances where they’re legally obligated not to). Although he would never say it, the last thing our real estate agent wants to do is spend 6 more weekends showing us places. His incentive is to close the deal at any cost as soon as he possibly can. We’ve already been the worst kind of client. In any case, no matter what happens going forward, as the buyer, we have a competitive advantage in the negotiation, because we can walk away if we can’t come to an agreement. There’s always another house out there, especially in this market. Don’t relinquish that power by letting your realtor (or the other party), know how much you want a particular property. Thanks for reading.
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I think you have done great so far with “walking away”, albeit with some regrets – like the one place that you waited a little bit too long for and was gone. As much as I would like to suggest that you always look forward, you can look back to get some lessons and encouragement from it. One source of encouragement would be to say that very nice property will always show up somehow. If you get this place, the one you previously “lost” will not matter anymore. Similarly, if this doesn’t work out, another one will come up… in 6 weeks or 10 weeks or… I know you don’t want to wait that long, but if you do, it will show up.
Other thoughts, the past three years are not the greatest to measure properties or rental values. If you buy this place, in a couple of years, the property will appreciate in value, and I would like to think that the rental values will also go up, thus whatever the person who has been living there is paying or has been paying, will change – i.e. go up. Obviously, you will have to eat/cover the difference between now and then.
What I have learnt so far is that financial decisions should be made with the least amount of emotion in it – most of the time – because at the end of the day, numbers and life, don’t lie. The last thing you want is to “resent” your wife because you got into some situation that you cannot get out of for a long time because you wanted to please her. At the same time, you don’t want to be so strict on your parameters that she feels she is not being heard. It is not just your money, it is both of you guys’ money.
I guess I have written enough. Sorry for the long comment.
Overall, I think we found a winner, and maintained our composure while negotiating!