Advice: Did I make the right decision?

Question

Hi all - I'm newer to REI, and am working on my first deal. We were close recently, but lost the deal. Here's the story:

4BR, 2BR property in a B neighborhood with lots of rentals. I estimated the property could rent for $1150-1175 per month. The list price was $74,900. After running comps, I determined the value of the house was around $68,000. We offered slightly lower than that to start, and our final offer was $70,000 with $2k for closing costs. They had multiple offers, and we decided not to go up in our offer. We lost the deal.

I was hesitant because I was concerned about paying more than was I thought the house was valued at. However, the property would have easily had a positive cash flow, and the Cash on Cash return would have been in the ballpark of 16-18%. In a competitive market, did we make the right decision, or do you sometimes have to pay slightly above market value to "get in"?

Looking for insights into our first attempt at investing. Were we too conservative? Was it a good move?

Greg Scott · Answer

Ryan:

At $70K, you were effectively buying  turnkey rental.  That isn't a bad investment.  It usually beats the stock market.

Pat yourself on the back for getting in the game.  You are doing the right things and making progress.   Should you beat yourself up for missing out on this property?   No.   It could be a great learning property, but it wasn't "the one that got away".

Why?  If you want to get rich in real estate, you don't pay retail price for property.   This doesn't necessarily mean you lowball offer everyone.  It could mean you find the property that nobody else wants and you make it pretty.  Or it could be you can close fast and the seller is willing to give a discount because they need cash fast.  Or it could be you help a warring family through the process of selling an inherited property.    You solve those problems and you capture equity from the start.

Take the same property you discussed, but now a hoarder lives in it.  No realtor will touch it.  But, lets say you can buy it for $35K and spend $20K making it beautiful.  Within a couple months, you "made" $15K in equity.    If for some reason you needed cash quick, you could sell it very fast at $5K below market, pay the realtor fees, and STILL make money.  Try that after paying $70K for it.

Also, take a look at the returns.   If you take a hard money loan to buy and rehab the property, you can minimize your out of pocket.   In the first example, let's say you put down 20% plus closing costs or about $17K.   What is your cash on cash return if you only have to put down $12K?   Keep in mind, you didn't buy the property for $70K, you only have $55K in, so you even have a smaller mortgage.  Now what is your cash on cash return?

Keep pushing.  Keep learning.  But, don't let this one get you down.  There is more and better out there.

James Wise · Answer

Loosing a deal over in insignificant amount of money never makes any sense. If you buy the house at $68k or $70k or $73k what is the difference? it's still the same house. Your mortgage has changed by like $30/month. That is irrelevant. In this business you will have swings way higher than $30/month, both for the good & bad. A house is a house. There is no specific set value. It is always in flux and will vary by insignificant amounts depending on who happened to be in the right time right place etc....

The person that outbid you. Perhaps they paid $70k. Does that mean you are wrong on the value of the home? That it's true value is $70k & not $68k. Right now yes, because they were there and ready, willing and able to buy. However if that person happened to loose their job tomorrow and could no longer buy the home that puts seller in a different spot. What is more logical. The seller holds out for the "true value" of $70k or just takes your offer of $68k? Still the same house, cards just dealt slightly differently. At that point I would argue that the "true value" was $68k.