“I was too weak to defend, so I attacked!” General Robert E. Lee talking about the battle of Chancellorsville.
“Dave, you want to buy my house?” Gary (not his real name) asked. I worked with Gary. He was offering me one of his rental properties.
A few days later I saw my workmate Bob who told me, “I took a look at Gary’s house the other day. It’s nice. He got it valued and they said it would go easily for about $495 thousand. But, he offered it to me for only $470,000. But, my wife didn’t like it so we said no.” He practically gave me the entire rundown.
“That’s not a bad price.” I replied. “Maybe, I should have a look.”
So, I called Gary and set up an appointment to see the home. It was nice. Would make a great rental. Four bedrooms, family bathroom, ensuite (bathroom off the master bedroom), double carport, on a nice size block. Great neighborhood, very desirable rental property. He offered it to us for $470,000.
I went home and ran the numbers. At $470k and the current interest rate, the house would be positive cash flow if we could get about $500 per week in rent. Here comes the missing piece of the equation – rent. The rent has to be right to make the deal work. But, I already had a great handle on the local rental market. I already had two rentals and they were fetching historically high rents. $500 for this place would be a cinch.
I discussed the situation with Marieta. She was keen to buy. I then ran the numbers again. It still looked good. But, true to form, I didn’t want to offer him the asking price to allow for some give and take. So, I came up with an offer $5,000 under. I figured we’d have a little back and forth and we may get the property for a couple thousand less than his asking price. Marieta agreed with this strategy.
I called him back.
“Hello Gary. Just getting back with you about the house … I ran the numbers and taking into account stamp duty and other buying costs my wife and I would like to offer you $465,000.” I stated and then waited silently on the phone for the response.
I didn’t have to wait long.
“Naw. We want the $470,000 figure.” Gary replied without hesitation.
Here’s the difficult part. Here’s where the emotions come in. I wanted to tell him, “Ok, $470,000 it is.” But I didn’t.
Maybe, I should have.
“Well, I’ll have to discuss with Marieta. In the meantime, have a think about my offer and if you change your mind get back with me.” I replied with a tinge of disappointment.
“No. We want $470,000.” He replied firmly.
I hung up the phone thinking, “We came right back with a decent offer. Big deal, $5,000 under his asking price. Can’t we discuss? You’re going to let $5,000 stop the sale? Why don’t you even check to see if I’ll come up the $5,000?”
But no, he wasn’t interested in my negotiating gymnastics. He told me the price. That’s what he wanted. He wasn’t interested in talking around it. And, I respect his position. Good on him.
I saw him the next day at work and he told me another couple came to look at the property and were happy to pay the $470k figure. We missed the deal.
I was very disappointed. Marieta was too. But, we’ve missed deals before and we were determined to keep moving. We’d already been looking at another property and I was beginning to think it may work out even better for us. I soon forgot all about Gary’s deal and started working on the next deal!
Swing and a Hit!
At the same time I was looking at Gary’s house, I’d been looking at a house down the street. I called it the perfect rental. Four bedroom, large 2 car carport, relatively new and already leased to the Northern Territory government. The only thing wrong was the deal. There’s always something isn’t there?
Here’s the deal. Asking price $480,000 and renting at only $400 a week. Even at the low interest rates, this is a negative cash flow situation. The lease didn’t expire until Dec 2009; that would be 11 months of servicing this negative cash flow investment. In the end it would run about $10,000 to carry this property until the lease expired. Then I could ask market rent which would be about $550 a week. At market rent the deal would work easily.
I rejected the deal out of hand. After all, I had my pride. Why would I enter into a negative cash flow situation? I didn’t need any more properties. I had plenty.
About a week later, the house was still on the market and I went to look at it again. I liked it. I wanted it. I knew it was virtually “the perfect rental property.” Best neighborhood, neat, organized, already tenanted, right size – “Goldilocks”; not too big; not too small; just right. I still didn’t like the deal.
“Would the owner be interested in working some kind of deal?” I asked the sales agent. I like asking general questions like this to see how the agent reacts. I was really just reaching at straws because I was put off by the deal; the rent was just too low and it was locked in for another 11 months! Yuck!
“Well, what kind of a deal are you suggesting? Responded the agent.
Good answer. Throw it back to me. I liked his style.
“Would he be interested in working some kind of owner financing, where we could somehow take the sting out of this negative cash flow situation?” I asked in a matter of fact way. I was really going way outside the normal realm of residential real estate discussion. But, again I was just reaching as this deal didn’t stack up.
The agent thought for a moment and then said flatly, “No, I think the owner would be looking for total payment on settlement.”
I got my answer. No surprise there. I went home.
My mind started working overtime. I wanted that property but I had to justify the deal. I started running some numbers. The price they were asking was ok. At market rent the deal would work. And, the asking price was fine for owner occupiers too. Yet the house was not selling.
I thought about it some more and it finally hit me. This house represents a great buying opportunity for two reasons. First, investors won’t touch it because the rent is too low compared to the asking price. Next, owner occupiers won’t touch it because they don’t want to wait 11 months to move in. They want to move in now. How could I neutralize the negative cash flow problem and still get the property? That was my challenge.
I made a decision to put an offer in on the house. I dialed the agent. “Is the owner open to offers?” I like to ask that question so the agent doesn’t flip out when I present my low offer.
“Sure, any offers will be considered.”
“Well, the rent is so low I have to take into account the holding costs until Dec. I figure that’ll run me about $10,000. And, I don’t really need any additional properties right now but if I can get this one for the right price, I wouldn’t mind having it. So, I’ve come up with an offer price of $440,000.” I told my story.
“That’s a bit low. But, I’ll take it to the owners anyway.” His reply indicated they hadn’t got many offers.
Later that day the phone rang and I picked up. “You’re offer is too low. The owners can’t sell for that low; they’ll lose too much money.” Explained the agent.
“I’m sorry to hear that. How low can they go where they don’t lose too much money?” I replied. I’ve already stated my price, now I was fishing for theirs.
The agent was on his toes and replied, “Well, how high will you go?”
“I’ve already submitted my offer and it’s based on my situation. I’m not really willing to offer anything more but I would be interested to know what the seller’s bottom price is?” I bounced the ball back over the net. I felt pretty good because I really didn’t need the property and I was adamant about getting a good deal or just let the property go. But, the agent wasn’t going to let me off easy.
“The owner has stated their asking price. That’s what they want. You’ve come in with an offer and it’s been rejected. You’re asking what is their lowest price and I’m asking you what’s your highest price. Why don’t you just tell me your highest price and I present it to the owners?” He held his ground.
“I’ll stick with my offer and if they change their minds give me a call.” Conversation over.
Later that day the phone rang again. It was the agent. I was surprised to hear from him. I thought our negotiating was over.
“The owners say they can let the house go for $450,000.” The agent said flatly.
I became excited. That’s $30k off the asking price. For that house in that location it’s a steal. The $30k discount gives me the deal I’d been looking for. First, $10k of that can be set aside to cover the negative cash flow situation until Dec. Next, the other $20k can be used to cover the stamp duty. Essentially, the owner has agreed to pay the stamp duty and the $10k shortfall until Dec. The deal now worked. I was hot to get it.
“Let me run the numbers and discuss it with my wife and get back with you.” Was my calm relaxed response.
We bought the property for $450,000.
The deal got better. In August 2009, the government tenant agreed to raise the rent to market value if I’d extend the lease through December 2010. They asked me what I though market rent was. I told them $550 a week. Without hesitation the government property manager replied, “No worries. We’ll get the new lease drawn up starting in September.” That meant the property was now paying for itself 4 months earlier than originally planned. A windfall of extra cash flow. Always a good thing.
This deal turned out better than the one we missed earlier. Better house. Better floor plan. Better street location. Newer. More modern. Lower price – $20,000 lower! Same or better rent.
Lesson: Don’t worry about the deals you miss. Move on quickly. A better deal is just around the corner!
Story continues … read Part 4!