Making on offer on an overpriced (multi-unit) property?
September 17, 2016 7:07 PM   Subscribe

Why do sellers overprice a property, and what will convince them to take a lower offer? What should I do about these specific properties that I am interested in?

I'm hoping to buy a multi-unit property in the next year or so (plan is to live in one unit and have the other unit[s] pay most or all of the mortgage). I've been looking online for several months at properties in my East Coast city (Philadelphia), trying to get a sense of the market and the pricing. I recently walked through a few properties that have been sitting on the market for a while, and I am potentially interested in either:


-- This one is large and in a perfect location (walkable to downtown), it has had some modernizing (big closets in particular), and the layout - which is not original - is quite good. Unfortunately it looks like literally nothing has been done to it since a tacky budget remodel in presumably the late 80s, judging by the decor. One of the two units is vacant, and the other is being rented for about 2/3 of what I would consider to be the going rate for a reasonably modern and attractive unit in this neighborhood. A year-long lease has just been signed at that low price, so if I bought this property I'd be locked into losing a fair amount monthly on that apartment for a year before I could refurbish it. As a guide, there was multi-unit a few blocks away that is making a similar monthly amount from rents, and it just sold for 75% of what this property is priced at (that one was significantly smaller, but meticulously maintained, with an excellent long history of full occupancy).
-- I estimate this property needs maybe 60k (???) of work in order to bring it up to a decent standard (refinish the hardwood floors which have deep scratches, tear out the basement tile and level the floor and retile, new kitchens, new bathrooms, new wall and trim paint throughout, some new drywall (?) where there are holes in the wall from doorknobs being slammed into walls etc., new balconies to replace the current wooden ones that are rotted, new windows to replace the ones that are cracked, redoing the patio with brick, new doors through, all new appliances, redoing closets, new boiler, possibly new furnace, putting in recessed lighting or something other than cheap overhead lighting, etc.).
-- This property has been listed off and on for the past decade. Before now, it was last listed a year or two ago for about 10% more. It was relisted about two months ago, but I still think it is maybe 20% overpriced for its condition. Possible additional problems include the fact that it is being listed by a realty company that is ethnic, whose agents don't speak English well, and I don't know how well they understand the local realty culture in my city (my agent said it was hard to actually arrange to see the property). The ad is poorly written but it does say that the owners are "motivated to sell" - but how motivated can they be if it's overpriced and if it's been listed on and off for a decade? I do know that the owners no longer live in this area.

-- The second property (also a duplex) is also in a desirable area, although a slightly less ideally located. This one is also large, light-filled, and quite darling, with quirky historic details preserved (pumpkin pine floors that are original to the house, original fireplaces, etc.). Both units were recently rented as-is, and brought in rents that were approximately the same as Property 1. It is almost as large as Property 1, and none of it is in the basement (Property 1 has half of one unit in the basement), so you don't have to deal with the potential damp issues that can create. Property 2 is priced at around 88% the asking price of Property 1.
- Unfortunately, the layout is a mess. I was only able to see the larger unit, and it's over multiple floors, with the bathrooms being out of date, and literally right next to each other on a floor that no bedrooms are on. The kitchen is almost non-existent except a crumbling tile counter and a few 80s appliances that are poorly laid out (fridge is next to stove and has burn marks). There are basically no closets and the floor is (charmingly?) uneven since the house has settled in the century or more since it has been built. My realtor said that in her opinion you'd need an architect to draw up plans to reconfigure the layout, and then you'd need to move walls/stairs around, and you'd to do new bathrooms and a new kitchen. I have never done any home remodeling before so I have no idea what that would cost, or how the pricing compares to Property 1.
-- This property has been up for three months with no price drop. My realtor spoke with the other realtor, whom she knows and who has been working in my area for a long time. He told her to tell me that they're "motivated to sell", and to "bring an offer".


Basically, what do I do, and how do I do it? If these properties were really well maintained and needed no or minimal work, they both would be a good deal at the asking prices, but that is not the case. I'm interested in either of these properties, but not at the asking price. I have cash (borrowed from my relatives), so I don't need a mortgage initially (I'm planning to pay my relative back and get a mortgage once I'm up and running, but I'm able to make a cash offer now). Being able to pay cash might help my negotiating position? I'd be most interested in Property 1, but wouldn't pay more than 85% of the asking price, and would much prefer to pay around 80% of the asking price. Do I wait until the seller lowers the price, or can I come in with an offer at 80% of the asking price? Will they be insulted? Should I show them properties with comparable monthly rents that sold for 75% of what they're asking? Is there anything I can do to help that offer be accepted? I would be able to pay cash and I wouldn't ask them to fix anything - I would buy it as-is. I'd rather walk than pay more than 80-85% of the asking price, however. I'm not emotionally attached to any of these properties (or indeed, to any property), and really want to get something as affordable/fairly-priced as possible. I'd be willing to go for Property 2 if the sellers of Property 1 were inflexible on the price. Or I can just sit both of these out and wait to see what comes up later. As I said, the one that just sold in perfect shape for about 75% of the price of Property 1 would have been ideal (and it was fetching the same in rent as Property 1 now is). The only thing is that the prices in my city are appreciating pretty quickly, especially in the areas near downtown (where these properties are), so I'm afraid if I wait a year or two, I might totally price myself out. Any advice would be welcome!

Also: why are these two properties priced so high? Why haven't their prices dropped yet? Why has Property 1 been listed off and on over the last decade at 10% more (!), even though it didn't sell? Is it the listing agent who is being unrealistic about the current condition and how much work the properties need, or is it the seller who keeps refusing to consider lower offers? Help?
posted by ClaireBear to Home & Garden (22 answers total) 1 user marked this as a favorite
We cannot know why these properties are priced as they are. Real estate markets can be completely insane. They may very well end up selling for the outrageous prices they are listed at.

This will sound blunt. You seem to be in waaaay over your head. Why do you want to do this? Do you have help? Are you planning on being a landlord? Have you been a landlord before?
posted by pintapicasso at 7:24 PM on September 17, 2016 [5 favorites]

Number 2 is a money pit. Run away.

Number 1. Figure out the numbers that work for you given the existing rents, the work etc. Get quotes from a contractor. Offer them 10% less than that and see. If it doesn't pan out walk away!!
posted by fshgrl at 7:31 PM on September 17, 2016 [2 favorites]

Pintapicasso: thanks for those questions - they are important. With regard to your first questions, my realtor said that the two properties are definitely overpriced and she "wouldn't let" me offer asking price even if I wanted to, but was reluctant to give specifics about a better offer. She said she'd do some research, but I think she's quite busy, and hasn't gotten back to me with numbers about previous properties we've seen, so I'm unsure whether she'll do so with these.

Regarding your second questions: I have never been a landlord before, but I am hoping to move in that direction, and quite possibly eventually acquire more property to rent out of this first try goes well. I do have substantial help, both financial and practical, although my relative helping me is also relatively new to this. I am interested in going into it because I need a place to live and I would like to get some income while I do it. I also enjoy a flexible work schedule, I enjoy working with people, and I think I'd be a fair and responsive landlord. I've been an RA multiple times in the past, which isn't the same thing but seems to have some similar respects. I have been reading a lot about tenant/landlord law, zoning code, and all that stuff.
posted by ClaireBear at 7:33 PM on September 17, 2016

There are a number of reasons why someone will price something higher than a potential buyer may think is fair or sensible. Here are some:

1. The seller is unrealistic and does not understand what their item is worth.
2. The seller is not in a hurry to sell and feels that they can wait to find that magical one right buyer who appreciates the item enough to pay the price.
3. The seller may feel that the current market undervalues the item enough that it's worth overpricing it to wait for the market to catch up.
4. The seller may have no serious intent to actually sell the item, and may be listing it for any number of reasons other than to actually sell it.
5. The item may be fairly priced, and you may be mistaken as to its actual value.
6. The seller may be aiming high in order to have some wiggle room. If I have something that I value at $100, I may price it at $125 so that when someone offers $100, I will get the actual price I want.
7. The item may have attributes that you do not notice or consider that bring the value up.
posted by Slinga at 7:34 PM on September 17, 2016 [11 favorites]

Just offer them 75-80% (and I agree, skip #2 entirely) and maybe bargain up to 85% of selling price. Who cares if you offend them? It's really a buyer's market now for the most part.
posted by jessamyn at 7:35 PM on September 17, 2016 [4 favorites]

In general, you can just put in an offer for what you'd be willing to pay. I've never heard of people including paperwork showing why they made that offer, but we submitted a cheesy letter about how much we love the home with one of our offers, so I suppose you could. Generally, the agent talks to the other agent and tries to get intel and finesse the psychology.

If you want my personal opinion, both of these properties sound like they need a ton of work. I renovated a property; it was a ton of work; the work took forever (= lost rent). I'd consider waiting for an easier first project. If you love the place and want to live there forever, fine, go for it. But I'm not hearing that.

We don't know why it's so high. There's an owner in my neighborhood who periodically lists his properties at ridiculous asking prices. Rumor has it that he does that when he's behind on some payment and needs to show his creditor that he's trying to sell to get their money. ("I didn't even get an offer!") Not sure I believe that, but then again, I have no better idea why he'd list the property at such a ridiculous price.

What jumps out to me about Property 2 is that you'll need both units vacant to do the work. If it helps with your budgeting, $12k was the quote we got for architecture on our triplex. We only got one bid, so I don't know if that's low or high. We were changing very, very little. (We ended up getting by with plans we drew ourselves on graph paper. But I wouldn't do that if you're moving plumbing, electrical, etc.)
posted by slidell at 7:46 PM on September 17, 2016 [1 favorite]

You never know until you make your offer. Your agent will be happy to make the offer. You don't have to explain why, they can only say no. Make your offer low enough, that when they reasonably counter, you can accept it.

The real estate market is a hot mess with prices going up and interest rates down on loans. They may be in more of a hurry than they let on, wanting to acquire a different kind of place for low interest before the rates rise.
posted by Oyéah at 8:38 PM on September 17, 2016

Uh, I think you need a new real estate agent. Why are you asking for advice from unknown internet strangers who don't know the details of these properties when this is the job of the real estate agent who will get paid thousands for closing the deal?

Don't be offended by the title, but I just read "Home Buying Kit for Dummies" and found it super informative. I'd recommend it to you as well.
posted by samthemander at 8:52 PM on September 17, 2016 [1 favorite]

Another reason is that the seller himself may have overpaid, or bought when the market was at the top, and is now trying to avoid taking a loss.
posted by Chocolate Pickle at 9:04 PM on September 17, 2016 [5 favorites]

Don't buy something you don't understand out of worry that you won't be able to afford it by the time you do understand it.
posted by the agents of KAOS at 9:10 PM on September 17, 2016 [9 favorites]

Your agent can and should call the listing agent and ask questions about the history of the property. Why are they selling now? What are they looking for in an offer? Etc. That info will give you more insight into the sellers' states of mind than we can.

It's also a mistake to assume the sellers are rational.
posted by hungrytiger at 1:14 AM on September 18, 2016 [1 favorite]

It struck me that you estimated 60k of work was needed but then laundry listed at least 100k of materials even if you did all the work yourself (assuming you are licensed, or at least extremely comfortable, with HVAC, plumbing, and electrical work and already own all your tools and a workshop). And that 100k is before you encounter the unseen problems (and there are always unseen problems, always). How comfortable are you with the Building Code and Fire Code and what in the present building is out of compliance and needs to be upgraded? What is the local government like in regards to dealing with bylaws and variances?

I've put in lowball offers, and had lowballs offered to me, and there really isn't anything you can do to make the offer more attractive (although I was always flexible on closing and willing to close fast, within the week). Cash or financing doesn't really make a difference but a large deposit made it "serious".
posted by saucysault at 4:20 AM on September 18, 2016 [4 favorites]

Agreeing with saucysault that your list of needed repairs to #1 is going to cost way more than $60K. To get a realistic estimate, bring a contractor you trust to walk through the place with you before proceeding any further. You can't make an informed offer without really understanding what the costs for renovation are going to be and you're just guessing at this point.
posted by Kangaroo at 5:00 AM on September 18, 2016 [1 favorite]

While any realtor can show you the properties and help you make an offer, in any given city usually only a few realtors actually specialize in and know a lot about income/multiunit properties. You may not be working with the right realtor for this transaction, based on what you are saying.

Right now you just don't know enough to make these decisions, from what I can see. For example, with the first place, you need a much better estimate than just your "60k" guess on costs, but with that in hand then you would know what your price limit for the property should be. Without those costs, you are just guessing and could easily over pay.
posted by Dip Flash at 6:35 AM on September 18, 2016 [1 favorite]

I'm actually helping to manage a renovation that sounds not unlike the work you want to have done to Property #2. Moving walls, re-doing floors, new kitchen, two new bathrooms, and a laundry list of other stuff. It's a mid-range, middle-class house in a middle-class town in New England. All-in, the owners will be paying somewhere around $175k for the work. So you might want to get some estimates for the work you want done before you decide what a reasonable offer is for that place.
posted by Anticipation Of A New Lover's Arrival, The at 7:13 AM on September 18, 2016 [2 favorites]

Thanks you for your thoughts, all. Lots to think about, and all very helpful!

Dip Flash -- that brings up another question I have: how do I go about finding a realtor in my city who specializes in income/multi-unit properties? For that matter, how do I go about finding a realtor at all? I was referred to this realtor from another realtor that helped a relative in another city buy a property (the two realtors don't know each other personally - they're just part of the same company). She is a lovely person but hasn't been all that communicative about the process, reasonable offers/expectations, comparative market analyses, etc., so it has been mostly my online research informing me. I'd love to get some professional help here. If I wanted to change realtors, how would I find one who were more responsive to my queries and who specialized in this area?
posted by ClaireBear at 9:53 AM on September 18, 2016

I owned a 2 family house for many years. Make absolutely certain you can deal with repairs and tenants. I lived in my 2 family, so was able to keep an eye on things.

Do the math. Cost of the building, conservative estimate of income, extravagant estimate of repairs. The real estate market has become volatile, but if you invest for the long term, it matters less. Though it hurt when my equity tanked a year after we bought. After 20 years, I made a profit, and had reasonable housing expenses that allowed me to keep the house when I divorced and got no support.

Go visit multi-family properties, lots of them. Talk to a bank and find out what kind of mortgage you'll be eligible for.
posted by theora55 at 10:04 AM on September 18, 2016

I started with a duplex, lived in one of the units. It turned out pretty well. I still own it and rent out both halves now.
It was condemned from a fire, but I had the knowledge and skills to be a small time general contractor for my own property, I also put quite a bit of sweat equity into it. 6 months I could not do again, very tough.

One thing to be aware of, here (US) you can't count the rental income as a part of your income unless there is a signed lease. If re-financing, you also have to have shown that income on your tax returns.
Even with that, it counts at 75% as of last time I refinanced, i.e., 1000/mo signed lease would count as 750/mo additional income for borrowing purposes.
posted by rudd135 at 11:49 AM on September 18, 2016

I think that either property sounds like it would be alot of work. I'm new to the investing world, but this would be a great question to ask on the Biggerpockets forum. If you haven't been there already, its like Facebook for investors and has lots of helpful people. I bet you could easily find an investor friendly agent on the forums.
posted by snowysoul at 1:38 PM on September 18, 2016

Also, memail me if you want some great resources to learn more about how to analyze a rental property!
posted by snowysoul at 1:40 PM on September 18, 2016

I think a good way to find a realtor is to a) ask for references from people who have purchased properties similar to what you're trying to buy, and b) interview realtors and ask them to show you the list of properties that are similar to what you're seeking that they helped buy.

Since you haven't done this before, you need someone who's done this before.
posted by samthemander at 6:01 PM on September 18, 2016 [1 favorite]

I think you are way overthinking the offer / pricing part. The seller can ask whatever they want. You can offer what you are willing to pay, but it's best to lower that a little so you can go back if they counter offer. Why are you concerned about offending a faceless entity over what you can afford?

You also need to be ready to walk. I house hunted in phila a few years ago and I searched for about 5 months, made a few offers and walked away from sellers that wouldn't budge from asking price. Typically those properties were priced as such because the current owners would make more money renting them out than selling them so they were basically searching for a full price buyer or a tenant, whoever appeared first.

You are underthinking the cost, work, and time of those kinds of renovations. Also, in the up and coming areas that are walkable to downtown, I think it would take a good long while to see a return on your investment buying plus putting in 60-100k worth of renovations. At that point you'd probably be better off investing in a townhouse in marlton or mount holly nj and using that as your first landlord experience.
posted by WeekendJen at 12:24 PM on September 19, 2016

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