Realizing when to sell & Deal #2 – We buy a REO

As outlined in blog post #1 here, our focus had been to obtain doors. 10 doors and one of us could quit our day job. This goal of doors was misguided in our nascent understanding of how to calculate true holding costs and profitability. The goal was also fixated on methods rather than the end state of financial freedom. Obtaining houses is one way to be financially free, much like investing in a small business, buying stock or hoarding cash in mattresses. All can get you there, but none are an end state. Simply put, if we had 10 crappy deals we might be only half-way to being financially free. We needed to reconsider the end state, but we didn’t realize that fact yet. We did realize we needed to sell the Seattle condo and move on to deals that would help us push the snowball down the hill faster and gain momentum.

The condo was a legacy of early adventures in real estate back in the run-up of the 2006-7 era, pre-crash. It worked well as a rental in the early years, but had recently fallen behind rules of thumb and was actually costing us money each month. We held it as a deal in our early books towards our 10-unit goal, but it was a bad deal. The looming threat of HOA assessments for large repairs to the roof and lobby, while waiting for the market to recover pushed us to the decision to sell and reapply the remaining equity into the VA Beach market where we had positive cash flow and decent cash-on-cash ROI.

The decision to sell wasn’t easy nor though was losing money each month. We realized our strategy was maligned towards actual financial freedom by levying our current selves with monthly negative cashflow. Our money must be working as hard while we sleep as we worked in our W-2 jobs during the day.

Deal #2 - We buy an REO

Proceeds from the sale went into a REO we found in VA Beach. We had a team now, since the seller of Deal #1 for us had a daughter who recently became a RE agent yet had been working on his flip crew. She brings an unique view to jobs as she can help us see repair issues faster than us and knows vendors who can give estimates.

What we didn’t know or do right on Deal #2.

1.  VA had a law (maybe still in effect) that on REO’s the banks cannot pay more than 2% of closing costs. Our analysis to mass units meant we needed to come out of pocket at closing with less cash. We would adjust our purchase price up to effectively trade the cash since it matters not to the seller as much as it does to a buyer bringing personal funds to the table.  By leaning in asking for 3% and yielding on the bank's requested purchase price we exposed our price and lost negotiating power.

2.  We probably sacrificed a bit too much on price. During the walk-thru it was apparent the unit had been vacant for some time. Easiest indicator was the checklist style sheet taped to counters and toilets that showed the days maintenance personnel had been through the unit while it had been winterized. The unit had been on the bank’s books for awhile, we should’ve offered less earlier and adjusted up slower. We became focused on winning and sacrificed our metrics a bit.

In the end, this deal is our worst performer, yet it still performs. Part of the problem was the riding and tempering the momentum swing from spending money each month to making a profit. We use this property as a reminder to not sacrifice our investment performance metrics for cashflow and CoC ROI. Once the gates are open on those ideas it is too easy to tweak other calculations (reserves for repairs or Cap-EX) to make the deal look better. Those adjustments only punish our future selves when maintenance is required.