If You’re Not Embarrassed by Your Offer, it’s Too High: Here’s Why
Although it seems like yesterday, it was September 1995 when I attempted to purchase my first real estate deal with none of my own money. I had just completed a real estate investing course as credits towards my broker’s license, where my instructor had taught us about using OPM (Other People’s Money) to buy real estate deals.
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At the time, we were using credit card advance checks, and this was before the banks had figured things out and increased all the cash advance fees like they do today. Now that I knew how to buy a house with no money, it was time to pull the trigger.
Know Your Exit on the Way in
They say you should know your planned exit before you enter any investment, and I couldn’t agree more. So, my plan was to use a credit card advance check to deposit into my checking account, and I was going to purchase my next property for all cash. (Today, I’d probably just use private money.)
Since I was handy and in construction, I was going to fix the property up with a couple of friends, and I was going to put all the materials on another credit card. Then, I was going to rent it out before going to a local bank for a home equity loan.
So, prior to purchasing the property, I paid a visit to the bank in order to understand the terms and loan-to-value I could expect, as well as to discuss my options for paying down the credit cards. They agreed to make the credit card debt part of the settlement, and so my intent was to pay off my credit cards at closing and hopefully still cash flow.
At that time the FSBO (For Sale by Owner) ads were in the paper. Today, those ads may be in several places, including online sources like Craigslist. But I’ll never forget, there was a two-bedroom row home listed in an area that was right on the brink of change. The ad said, “As Is,” and they were asking just $19,900, so I decided to go take a look. I know what you’re thinking; $19,900 seems so low. And to be quite honest, that was still a pretty low number even for way back then.
My Embarrassing Offer
If you’re like me you’re thinking, how low can they go… right?
The irony was when I went to look at the house, it was occupied by relatives of the health inspector for the borough, but the place was in horrible condition. There was no real kitchen, the roof leaked, and there was junk all over. I looked at the place and told the guy that I couldn’t give him $19,900.
He said, “Well, what can you give me?” I told him $8,000.
Then the older gentleman literally went ballistic for about 10 or 15 minutes. I thought he was going to have a heart attack.
I let him vent, and once he finished, I explained that his numbers didn’t work for me and started mentioning what I would need to fix. Then, we proceeded to settle for $12,000.
(I later found out they paid $2,500 for the property back in 1945.)
Know Your Numbers Make Sense
Here’s how it shook out.
The house was only worth approximately $35K to $40K fixed up. I was all-in at $18,000 with a used kitchen, paint, and rugs, and I rented it out for $650 a month, initially.
My payment was only around $450/mo. on a $26,000, twenty-year home equity loan (which was 80% loan-to-value). I was able to still cash flow and walked away with approximately $8,000 tax-free (since it was a loan) on my first property with no money out of pocket.
I was then able to use the capital towards the down payment on my next deal.
Over the next several years, I continued to make low offers, especially with letters of intent, but on this particular deal, I was pretty lucky. Not only did I purchase the deal with none of my own money, I walked away with some tax-free cash and continued to cash flow a couple of hundred dollars a month for the next nine years, until I sold the property for $58,000. Although the numbers weren’t large, it was a solid deal.
So the moral of my story is go find a deal, know your numbers, have a plan, know your exit, and by all means make an offer that’s embarrassing.