Paying over asking in Houston and making a profit?

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Paying over asking in Houston and making a profit?

Shaun Calloway
Flipper/Rehabber · Kingwood, TX · Member since 2015 · 35 posts · 9 votes
I found a deal the other day that looked like this: $100k for 3/2, 1600sf, decent yard, decent location, comps could maybe get to $150-175k, no mortgage - house is paid off. Whats the problem, right?! This house needs a ton of work! Like, you can't pay over $45k and make a decent profit(15-20%) kind of work - foundation issues, new roof, new siding, new bathrooms, new kitchen, etc etc etc. I'm a former contractor, so this doesn't scare me, but I talked with the REA and he tells me he's got an over asking offer O_o So I'm thinking he's just fishing. Next day house goes under contract! With all the repairs there's no way they're getting a mortgage on this place and its heir property that the widow owns with her kids, so she doesn't want to owner finance (trust me, I checked all the boxes to try to make this deal work). So someone paid over asking in cash on a house that needs more work than they can sell it for. All I can assume is they bought it to rent and let appreciate or they plan on leaving as is and slum lording! What's y'alls thoughts on the matter, I'd be interested to hear some Houston investors as well as other areas take on this. Thanks in advance for your feedback!
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  • Alex J.
    Investor · Tarzana CA and Houston, TX · Member since 2015 · 326 posts · 130 votes
    7y

    those type of homes are all throughout houston... id believe the agent 

    i went to see a house once that was listed 100k, it got done 105k ... about the same 1600 sqft 3 bed 2 bath ... the house had a tarp on the roof, it was raining and leaking in, foundation problems all over... whoever bought that would need to put in 50k at least if not more.

    but if it rents for say 1350-1400 a month, then there will be an investor willing to do that deal and roll with the risk

    cap rates in houston are pretty low and in most major metros are much lower while there is still a ton of money everywhere looking to find yield

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  • Christopher Giannino
    Real Estate Agent · Hamilton, NJ · Member since 2013 · 464 posts · 311 votes
    7y

    I see some people overpaying for properties in my area too but I chalk some of it up to someone inexperienced dying to just get into the game.  Although I admit I like watching them, these HGTV shows showing how the flipper just made $125,000 profit and overpaying for the property are very deceiving for someone with no experience.  They think they can replicate what the show is doing and maybe some of them can but I think for the majority it just ends bad.  

    Let all the others overpay for properties... when they are underwater pick them up for pennies on the dollar :)   

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  • Shaun Calloway
    OP
    Flipper/Rehabber · Kingwood, TX · Member since 2015 · 35 posts · 9 votes
    7y
    @Christopher Giannino man I hear you! Its either that or a larger company who can afford to over pay and pick it up over the long haul or flip a group of properties in one deal.
    1Reply
  • Shaun Calloway
    OP
    Flipper/Rehabber · Kingwood, TX · Member since 2015 · 35 posts · 9 votes
    7y
    @Alex J. Thats true. I have to assume they are picking it up to hold, but man. They're going to have a ton of $$ tied up in it while they wait!!
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  • Cody L.
    Rental Property Investor · San Diego, CA · Member since 2013 · 3k+ posts · 4k+ votes
    7y
    Originally posted by @Shaun Calloway:
    I found a deal the other day that looked like this: $100k for 3/2, 1600sf, decent yard, decent location, comps could maybe get to $150-175k, no mortgage - house is paid off. Whats the problem, right?!

    This house needs a ton of work! Like, you can't pay over $45k and make a decent profit(15-20%) kind of work - foundation issues, new roof, new siding, new bathrooms, new kitchen, etc etc etc. I'm a former contractor, so this doesn't scare me, but I talked with the REA and he tells me he's got an over asking offer O_o So I'm thinking he's just fishing. Next day house goes under contract!

    With all the repairs there's no way they're getting a mortgage on this place and its heir property that the widow owns with her kids, so she doesn't want to owner finance (trust me, I checked all the boxes to try to make this deal work). So someone paid over asking in cash on a house that needs more work than they can sell it for. All I can assume is they bought it to rent and let appreciate or they plan on leaving as is and slum lording!

    What's y'alls thoughts on the matter, I'd be interested to hear some Houston investors as well as other areas take on this.

    Thanks in advance for your feedback!

     Maybe they'll leave it as is to keep it as an affordable rental for someone that's willing to rent something that has issues in exchange for less rent.  Not everyone looking to rent WANTS something that's fixed up and costs more.   This whole "slumlord" label for people who lease out cheaper housing is one of the things that bugs me.   Yeah, the housing is not up to the standards that you or I would live in, but you always have two choices:  Upgrade and charge more, or don't and charge less.  Both are totally fine as if the place sucks and someone rents it THAT MEANS it's the best option for that person at that price point.

    I've bought slums that were renting for $500/m, fixed them up, and leased them for $800.  Exactly 0 of the old tenants stay.  So I sure wasn't doing them any favors by fixing it up.  

    Okay, rant over. 

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  • Shaun Calloway
    OP
    Flipper/Rehabber · Kingwood, TX · Member since 2015 · 35 posts · 9 votes
    7y
    @Cody L. I hear what your saying brother and agree that might be what's happening. I would say if all mechanical systems are working, there's no leaks, and some sense of integrity in performing the work: then someone could potentially be ok not completing all the fixes required to make a place market ready and rent for cheaper. But I also think part of the investors job should be to improve the community while adding value to his/her portfolio. This house happens to sit in a decent area so having too low a rent will pull the wrong caliber of tenants to the neighborhood. I believe investors still have a moral standard to uphold and have integrity in their approach to each deal. I agree though that not pricing the house/apt out of the neighborhood standard is an acceptable approach in a neighborhood where lower rent would be the standard. Thank you for your comment, as it made me think about my position on the buy low keep low premise.
    1Reply
  • Cody L.
    Rental Property Investor · San Diego, CA · Member since 2013 · 3k+ posts · 4k+ votes
    7y
    Originally posted by @Shaun Calloway:
    @Cody L. I hear what your saying brother and agree that might be what's happening. I would say if all mechanical systems are working, there's no leaks, and some sense of integrity in performing the work: then someone could potentially be ok not completing all the fixes required to make a place market ready and rent for cheaper. But I also think part of the investors job should be to improve the community while adding value to his/her portfolio. This house happens to sit in a decent area so having too low a rent will pull the wrong caliber of tenants to the neighborhood. I believe investors still have a moral standard to uphold and have integrity in their approach to each deal. I agree though that not pricing the house/apt out of the neighborhood standard is an acceptable approach in a neighborhood where lower rent would be the standard. Thank you for your comment, as it made me think about my position on the buy low keep low premise.

     I don't think they have a moral duty to do anything as the market will tell them if they're doing their job correctly or not.  If you have a shi**y product, it's going to be empty, or you're going to be leaving money on the table by collecting less than you could (rather, giving up a high return on your capex improvements).


    Whenever I defend 'slublords' people think I am one.  Actually I do buy crap properties and fix them up.  I've also been the 'bad guy' for doing that as it displaces people.  One property I bought there was almost an all out race war.  It was in a black area and I had a bunch of hispanic guys working.  The people that lived in that area do NOT like people buying these places and fixing them up because they know the long term residents can then no longer afford them.

    A few black dudes came out and said some racist stuff and said "we'll show you ***** who's neighborhood this is, we're calling in all our n****"."   Then my workers called in their friends.  I was thinking "oh sh**". 

    Oh memories of my early days.  So glad that I just hear about these stories now from my home in SD vs being on the ground to live them :)

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  • Dan H.Pro Member
    Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
    7y
    Originally posted by @Shaun Calloway:
    I found a deal the other day that looked like this: $100k for 3/2, 1600sf, decent yard, decent location, comps could maybe get to $150-175k, no mortgage - house is paid off. Whats the problem, right?!

    This house needs a ton of work! Like, you can't pay over $45k and make a decent profit(15-20%) kind of work - foundation issues, new roof, new siding, new bathrooms, new kitchen, etc etc etc. I'm a former contractor, so this doesn't scare me, but I talked with the REA and he tells me he's got an over asking offer O_o So I'm thinking he's just fishing. Next day house goes under contract!

    With all the repairs there's no way they're getting a mortgage on this place and its heir property that the widow owns with her kids, so she doesn't want to owner finance (trust me, I checked all the boxes to try to make this deal work). So someone paid over asking in cash on a house that needs more work than they can sell it for. All I can assume is they bought it to rent and let appreciate or they plan on leaving as is and slum lording!

    What's y'alls thoughts on the matter, I'd be interested to hear some Houston investors as well as other areas take on this.

    Thanks in advance for your feedback!

    I see a few possibilities: 

    1. They are inexperienced and over paid.
    2. They are experienced and can rehab the property for less than moderately experienced.  I have seen this in my market.  Experienced RE investors purchasing RE that I could not make my desired profit but because of their greater experience in rehabs (own teams) they can rehab a lot cheaper than I can.  They seem to be able to make their desired profit.
    3. They are wagering on market/rent appreciation.
    4. They see a hard to identify value add.  Maybe it is zoned where they can put more units?  Maybe the lot next to them is also available providing some flexibility.
    5. Some combination of the above items.

    We have a duplex in an expensive area (Far over $1M for a little tiny duplex - maybe 1100' total).  The lot next door was purchased over value (or it seemed).  What I had not realized is that it was purchased by the person who owned the lot next to it and that they were to combine the lots into a large multiplex compound (8 units total).  He did a complete tear down or both properties.  Condition of existing structure was irrelevant.  I think he did quite well with his investment.  I suspect his combined property is likely worth ~$4M.

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  • Shaun Calloway
    OP
    Flipper/Rehabber · Kingwood, TX · Member since 2015 · 35 posts · 9 votes
    7y
    @Dan Heuschele those are realistic and good points. I'm thinking #1 or #3 :)
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  • Dan H.Pro Member
    Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
    7y
    Originally posted by @Shaun Calloway:
    @Dan Heuschele those are realistic and good points. I'm thinking #1 or #3 :)

    Don't know. 

    There are many creative value adds. 

    I recently looked into teaming with another successful, but still fairly small - about the same size we are but more active than we are, San Diego BP investor on a mixed use purchase.  I admit he is more creative in the value add thinking than I am.  The plan (his plan) was to take the upstairs of a large, beautiful, historic building and convert it to 4 dorm style units.  There would be a common kitchen. social area, and bathing area (a few baths/showers) but each unit would have living space, bedroom, 0.5 bath, and a small kitchenette.  It was thought that students from a nearby school would be the primary tenants.  Bottom of unit would remain commercial.  The two out buildings had one that would remain unchanged the other was a easy to see value add.

    The most extreme and creative value add I ever saw occurred in Germany (near Kalkar).  A nuclear facility was built including the nuclear tower.  Protests prevented it from ever being turned on.  The destruction of the facility would be very costly.  The RE was purchased by a Dutch investor.  The Germans thought he was crazy and had significantly overpaid.  He did not destroy the nuclear facility but incorporated it into one of my favorite amusement parks.  The nuclear tower stack had 3 climbing walls approaching 100M.  The underneath part of the tower was rides.   Inside the bulk of the tower opening up out the top was a German seat swing (the type that your seat is attached via a chain and it spins, raising you up).  Well this swing raises you up all the way out of the nuclear tower (close to 100m up).  As you exit the tower, the wind hits you and you are looking down on the Rhine.  One of the more memberable rides I have ever done.

    We have done quite a few rehabs.  Our process is somewhat down.  Yet there are investors in town who I suspect can complete a rehab for ~50% of the cost it would take me to do the rehab.  I recently lost a bidding war on an RE when the price got to where it did not meet my profit expectations.  The person/group who purchased the RE was able to turn it around in ~50% of the time I had budgeted.  I suspect their cost of the rehab was also ~50% of my projected cost.  They did a fabulous job.  It went on market at ~$400K above purchase (I do not know what it sold for).  I guarantee the purchaser made a good profit and a much better profit than I would have achieved.

    But there are also many overzealous RE investors who may overpay relying on appreciation.  I will also admit I have purchased a cash neutral RE but it had a $50k to $60K value add that worked out very close to plan.  It is now cash flowing fine and I was able to extract most of my costs (ended up ~$20k short of extracting all of my costs and that was mostly due to a low refinance appraisal).

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  • Russell BrazilBusiness Member
    Moderator
    Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
    7y

    Every single day I hear from people who say, no one can buy that property at that price and make a profit....yet every time, someone buys that house at that price and makes a profit.

    [email protected]301-893-4635Podcast Guest on Show #192
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  • Aaron Beauchamp
    Lender · Houston, TX · Member since 2018 · 87 posts · 53 votes
    7y

    @Shaun Calloway I work with flippers as a lender and we are seeing that this market does not want to discount anything. People want exactly what there home is worth and not a penny less I speculate that it has to do with people understanding real estate a little more than past years. 

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  • Shaun Calloway
    OP
    Flipper/Rehabber · Kingwood, TX · Member since 2015 · 35 posts · 9 votes
    7y
    @Aaron Beauchamp thats a good point. Never before has more information been available to anyone who wants it. But with that, the seller's should be aware then that much $$ and time has to go in to get it to what they think its "worth" and the discounted price is there to make it valuable enough for someone to want to buy it. Otherwise it's just an overpriced item that may sit on the shelf for a long period of time. I see this problem with a whole myriad of different products/commodities. There are those who are either too confident, ignorant of the product, or whathaveyou to wait until the property is priced correctly, telling the seller's, "Oh this must be the accepted market value", and thereby creating the climate we're approaching, where everything is overpriced due to poor buying practices. No different than people accepting poor service at a place of business by continuing to patronize it and creating a sense of norm around accepting poor service. Obviously the freemarket decides where prices go, as long as the govt doesn't interfere too much, and when too many folks buy too high and can't make a profit, they'll either lose or learn and hopefully it'll even out before a crater in the market.
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  • Shaun Calloway
    OP
    Flipper/Rehabber · Kingwood, TX · Member since 2015 · 35 posts · 9 votes
    7y
    I just want to thank all who have replied and shared your time and comments. It is much appreciated.
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  • Mark Sewell
    Investor · Houston, TX · Member since 2017 · 1k+ posts · 871 votes
    7y

    Every RE Agent has multiple offers in hand.  Always.  EVERY SINGLE ONE.  Just ask them, they will tell you.

    I think they must learn this on day 2 of RE school.

    And then you find out that the thing sold for full asking price, and you are floored.  I think the same thing when I watch these places sell on the online auctions.  It's nuts.

    I suspect there are still some funds out buying up assets, and I know that there are some creative financing types, doing the old 'dueno a dueno' thing, owner financing, which might be a lot more prevalent these days, in our area, than any of us think.  

    But I'll leave you with this -- somebody else's crappy risk management practices do not need to dictate yours. Let the market go. I know a lot of big names in REI that are already sitting it out and waiting.

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  • Mark Sewell
    Investor · Houston, TX · Member since 2017 · 1k+ posts · 871 votes
    7y

    Another goofy thought -- if you suspect that the market is near the top, and there might be a correction, then you probably also figure that this correction is going to be way more volatile out on the coasts, where properties also tend to appreciate more.  Would you consider moving your RE holdings to someplace less volatile?

    In H-town, we had appreciation average about 6.1% a year over the last 10 years or so (or so I learned at a meetup over the weekend).  That's not a ton, compared to CA and NV and NY and FL, but it also doesn't lose much, if any, when things go south.

    Also we really don't have a ton of supply around here, as the big building uptick has been only fraction of what they used to be.   So even with a big economic downturn, I have a hard time imaging that prices will fall, at least for properties under the median.

    So if you got a few million bucks in RE out in FL or NJ, do you hang on it, or do you start to cash out now and go buy something in the Midwest or TX where prices are flat... and way less likely to tank hard...?

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  • Shaun Calloway
    OP
    Flipper/Rehabber · Kingwood, TX · Member since 2015 · 35 posts · 9 votes
    7y
    @Mark Sewell oh I hear you brother and was thinking the same until I saw it go under contract the next day. I'm sure there's some big players from those coasts trying to secure their investments.
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