Looks like we played our cards right, because we got into escrow without an auction nor a duel! Upon hearing the good news, my client asked when he had to deliver the OMD.
“You mean, the EMD?” I asked.
“Oh, sorry, I guess you don’t know the band OMD. Generational gap.” More than just a generational gap, my friend.
My client just emailed me this video to clarify:
With income property, you, the buyer, often cannot inspect the subject building(s) before the seller accepts your offer. The reason is that people live there, and the owner doesn’t want to disturb her tenants with serious and non-serious buyers alike traipsing through their homes. Understandable. You can read about this in my entry Subject to Inspection.
A good listing agent will schedule for us to see the interior of the property the same day or day after your offer is accepted, and before your earnest money deposit (EMD) is due. That way, he doesn’t have to open escrow and take the property off the market if, for some reason, you hate the interior and want to cancel escrow immediately.
Well, the listing agent I’m working with now has taken this idea one step further. He’s asking his top two offers to do our preliminary interior inspection before our offer is even accepted. This could be okay, but it isn’t preferable. My first concern with this preemptive inspection is that there may be something wrong with the interior that the seller is extra worried we’ll balk at. Secondly, having the two top buyers and the seller in one place is very strange (and a little tactless). Perhaps the listing agent hopes we’ll hold an auction at the property, bidding each other up? Or maybe he’s just buying time, expecting another offer to come in higher and with more favorable terms while we’re checking for water damage.
While more than likely this is a good faith measure, this unique inspection feels a little Old West to me, and my buyer and I are bringing our figurative guns. Because the seller will be there, my buyer is bringing his EMD check, and I’m bringing our offer on good old-fashioned paper for the seller to sign. Oh, and a quill and ink bottle. Should be fun.
Read the UPDATE!
Nowadays, with so many buyers, we’ll often see multiple counters requesting “best and final offer.” This is an interesting negotiating strategy because it’s basically saying: we’re too lazy to request something tangible from you, so just tell us what you’ll pay now that you know how many bidders there are. Then we’ll pick one.
When I get this kind of counter I know the seller is not a business person, but rather someone who wants to be done with their property. And that makes my job easier and harder at the same time.
On one hand, my negotiating ability is taken away…mainly because the agent is not negotiating. So I can’t do what I normally do and read the agent to steal the deal for my client. On the other hand, the offer falls on my client’s lap now. What Moses says is: Decide what price you will be happy to walk away from and bid one dollar less than that.
At this point, I go over the spreadsheet with you, look at comparables, and help you figure out what you can afford given the property’s pros and cons. Then, the number is up to you.
I just closed a property in an area I never expected to work: South Central Los Angeles. I have fearless buyers who are focused on the bottom line, and the bottom line pointed them very far south of the 10 freeway. We closed 8306 S. Main St. at $395,000 with rents at $4,120 per month. That’s a GRM of 7.99! You can’t find that in Echo Park, Highland Park, or even Boyle Heights.
What are the trade-offs here? The plus is you have excellent income with nice tenants. Three out of four tenants have Section 8 help, so the government cuts you a good paycheck every month and stays on top of them. We paid all cash and my clients stand to make 9.6% on their investment per year. If they refinance they’ll make over 17.5% on their cash per year.
The negative is that it’s not a high-growth neighborhood and there’s more crime. However, that doesn’t mean there won’t be appreciation. The previous owners bought the property for $250K in 2010 and just saw a 63% return in two years. That’s not bad.
What’s the lesson here? Do what you’re comfortable with. But if your true focus is the bottom line, a good investment is a good investment.
There’s a huge fourplex that went on the market today in mid-city. If you know the area, you know Paper or Plastik café. While it has low-ish rents now, one of the big units is vacant and you could move in and still make cash flow. If you want to live in a 2.5-bedroom apartment and put down approximately $160,000 to own a gigantic fourplex in an improving neighborhood, let me know! It’s going to get snatched up fast so strategy is key.
The best deal on the market right now is a 3-plex in Boyle Heights for only $300K. Good rents. Just came on. Let me know if you’re interested!
UPDATE (3/6/13): This property sold within days at $340K. Also, my broker and I think alike.
I found an interesting fourplex in Echo Park / Angelino Heights just off Sunset. Listing price was 890K, in great shape, two vacant units, and the other units were renting for slightly under market at about $1450. A great recipe for a buy and hold deal with about 8% net cash return.
We put in an offer for my clients and soon learned that an all-cash offer was accepted that same day for close to $1M.
Why buy all cash in a loose money economy? Because interest rates are so low, all the competition is certainly driving prices up. Why not save your cash for a period with higher interest rates when cash speaks louder and you can get better deals?
The answer is simple: Echo Park and Silver Lake real estate is hot right now. This is L.A., after all, and money follows the next big thing.