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Real Estate Deals: Know When to Fold ‘Em!

by Sharon Vornholt on July 16, 2012 · 14 comments

  

I recently met with a seller at her house. This house was part of an estate and was in very bad shape. It also been many years since an updates had been done.

She told me that “she knew pretty much what she was going to be able to sell the house for”. This seller tried to put on a show of confidence even though she knew the house needed a roof, kitchen, bathroom and a lot of other repairs. This house also had some mold in the drywall in the basement.

I knew that an experienced real estate investor wasn’t going to pay her anywhere near this amount, but I just let her talk. She also told me that she had multiple investors looking at the house as I was doing my inspection trying to put some urgency into the situation.

Now I’m really good at changing sellers’ “expectations,” but his lady was really putting on a show of confidence. When I was finished my inspection, I went over all of the work that needed to be done and said that it was going to be costly. She said that she knew that. Then I told her that I would go home and put some numbers together and give her a call. Since she said she had another investor looking at the house the next day (which was a Saturday), and he was looking for his first deal.

I decided to wait until Monday to call her back. I knew that my offer was going to be really low. There just wasn’t a lot of room for negotiation due to the sheer amount of repairs that were needed and the ARV. I also knew that if she had an inexperienced investor making an offer, they would most likely pay too much for the house and be above my offer anyway.

The bottom line was that this house needed a lot of work, so I absolutely had to buy it cheap enough to wholesale it easily and leave room for the rehabber to make money on the deal. On the plus side, it was a 3 bedroom brick house with a basement in a mostly owner occupied solid blue collar neighborhood. There wouldn’t be any problem selling this house if the price was right.

So What Happened?

I made a verbal offer and told her that I was emailing her a written cash offer. Since I knew they were short of money, my offer included paying all of the closing costs.

Along with my offer I sent her a list all of the work that needed to be done in the house (a reminder), and I also advised her that she needed to find out what was causing the mold problem regardless of which offer she accepted.

She called me back a couple of days later and said she had sold the house to another real estate investor; the one looking for his first deal. She said that he didn’t want to pay her the amount that she wanted either, but she held out and he eventually agreed. That translates into “he paid her asking price and paid too much for the house”. While we were only about $7,000 apart, the numbers just didn’t work. That $7000 difference on an ARV of $70,000 almost certainly will put him in the hole.

What’s the Lesson Here?

Don’t’ get caught up in “needing to make a deal work”. Let the numbers do the talking and be prepared to walk away if necessary. You will never be sorry you left a bad deal behind. There’s always another profitable deal just around the corner.

Photo: Erik Söderström

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{ 14 comments… read them below or add one }

Melodee Lucido July 16, 2012 at 7:13 am

Hi Sharon,
Thanks for this great article. Yeah, these kinds “deals” are everywhere. I remember when I was reeeeealllly new I wanted that first deal so bad. Then I started taking some experienced investors from my area out for coffee and interviewing them. Boy, did they set me straight with more stories—and worse—than this; stories of having bought such places as you describe : O
I hope your article will save some beginner investor from heart ( an pocket ) ache.

Success to you!

Reply

Sharon Vornholt July 16, 2012 at 8:18 am

Melodee –

It is just so easy to get “caught up” in needing a deal or trying to make a deal out of something you really just need to pass on. Most investors have at least one deal they wish they had walked away from.Thanks for reading.

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Jason July 16, 2012 at 8:12 am

Great advice Sharon. The common saying holds true, sometimes the best deals are the ones we don’t do. We have all been there. We are so hungry for a “deal” that we are willing to overlook basic investing rules just to make it happen.

Jason

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Sharon Vornholt July 16, 2012 at 8:22 am

I agree completely. Hindsight is almost always 20/20. Sometimes it is as simple as having a second set of eyes where that person can say, “hey wait a minute…..have you considered……?”

I think that if you have doubt about a deal, you should trust your gut and walk away. Haven’t you found that to be the case?

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L Gale July 16, 2012 at 5:00 pm

Sharon,

I must be missing something here. You were 7k apart, but you feel like the investor that bought it will end up in the hole? You bid 7k less, were going to tack on your wholesale fee, and sell to a rehabber “without any problem”. If I missed something please set me straight, but by my math it seems that this wouldn’t be very profitable to a rehabber at all. Maybe a couple thousand, and that’s if your wholesale fee was very miniscule. And I’m estimating that the other investor breaks even, but by your words you expect him to be “put in the hole” at asking price.

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Sharon Vornholt July 17, 2012 at 6:30 am

L Gale – Sorry about that. I seem to have left out a step.

I had already gotten her down significantly on the price. The remaining difference between us was 7K. I needed her to come down an additional 7K. The buyer paid her original asking price which was much higher. Thanks for pointing that out. If I can’t leave 30-35% on the top after my wholesale fee for my rehabber, I won’t do the deal.

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Charles Perkins July 16, 2012 at 8:04 pm

Not needing or falling in love with a deal is one of the best bargaining positions to be in.

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Sharon Vornholt July 17, 2012 at 6:31 am

That is absolutely the thing to remember Charles. Once you fall in love with a marginal deal, you are pretty much doomed.

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Arthur Garcia July 17, 2012 at 12:17 pm

I have to echo Charles’ point – “needing” a deal is a very dangerous place to negotiate from. At the end of the day this is a numbers game. You have to play the odds and try not to get attached to any one deal.

nice post!

AG

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Sharon Vornholt July 17, 2012 at 2:18 pm

Thanks Arthur. I agree. When you “need” a deal; when you “need” money, you often make bad business decisions.

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Shane July 18, 2012 at 12:26 pm

Hey Sharon,

Thanks for this. I just recently looked at “my first deal”. The inspection was fairly easy, as was putting together the scope of work & repair estimate. The HARD part, was being tactful and friendly explaining to the homeowner why he was about $10K off base on his asking price, and like you said has seriously wrong expectations. We both learned a little. It’s tough to trust my own confidence with all this being new, when the seller is so confident, like yours (even though wrong).

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Sharon Vornholt July 18, 2012 at 1:28 pm

Hi Shane –

Here is the thing you need to remember; the numbers always tell the story. They are what they are.

I tell folks all the time that if you look people in the eye and tell them the truth with confidence and kindness, the will view you as a professional. They might not like the number you quote, but they will respect you for being honest with them. And most of the time, they already know what the “truth” is anyway.

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Catherine Marie July 29, 2012 at 6:06 pm

The best piece of advice I hear from seasoned investors is this: Don’t get caught up in making the deal work coz there is always another deal just around the corner. Thank you for sharing, Sharon

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Sharon Vornholt July 30, 2012 at 7:26 am

That is truly the best piece of advice out there. Thanks Catherine.

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