I made a good mistake!

5 Replies

My fiancee and I are long term buy and hold investors in a small market, and were looking to add another property to our portfolio. We have a private money investor backing us so we were able to make an all cash offer. We were on the hunt for a duplex nearby one of our other rentals. 

So the mistake you ask? We found a property we liked, and made our all cash offer. This offer was accepted without any negotiation. This as any investor knows is a tell tail sign that we offered too much. 

What's the good in this mistake? It is still a good deal. The sellers were asking $65k, we offered $55k cash subject to inspection. After inspection we requested that work be done before closing, the sellers did $8,000 in electrical work, and some roof, and venting work. One unit is already rented for $550 a mo. Which should be raised to $600 within the year, and the other unit is vacant, and we will be asking $600. Which surpasses the 2% rule.

So in closing I feel that even though we had our offer accepted without rebuttal, I feel that it is still a great wealth building deal for our portfolio, which will cashflow immediately after closing in about 2 weeks.

Well done @Luke Harrison - your goal (in the 2019 market) is to get your first offer accepted without a counter. What you refer to is dated advice from the days when we were in a Buyers market. Today we are in a Seller's market.

Every seller has a price range in mind. If you guess the lowest number, that is still acceptable in their mind you probably did better than comming in too low and they counter.

 - Let's say the seller is asking 65k and in their head they have a range of 65k to 60k.

 - You offer 50k, they counter back at 62k, you counter 60k, they accept.

In this case you offered 55k and they thought it's less than what they wanted, but it was high enought for them to take it without a counter offer. Maybe because it was a cash offer.

So, IMO you did not make a negotiating mistake given you are operating in a Seller's market.

I am more concerned about future capex. Properties in this price range are often a rookie trap for young investors in Milwaukee. Cashflow looks great, but over time capex more than exceeds cash flow. They realize the property does not produce enough cash to cover the repairs, so they will bandaid it, and maybe rent it out for a little less, which leads to further erosion in condition, leads to more vacancy, lower rent and lower grade tenants - basically a death spiral. So make sure you evaluate capex items, make a list of all major components and estimate how many years you have left, before you have to replace them. Kitchens, bathrooms, windows, roof, driveway etc. estimate the cost and calculate backwars to establish monthly capex. If capex exceeds cash flow at some point in the future, you best bet might be to sell the property before.

Congratulations! As Theresa said, it doesn't matter if you could have got it cheaper. You buy it based on what works for you; anything beyond that is icing.

@Marcus Auerbach thanks for the reply, I feel I will be safe with this particular property because of the way we are financing through our private investor. It is a shorter term loan, so when the house is paid in full we will be increasing our cash flow exponentially, right around the time any large repairs need to be made. Both the private investor and ourselves are happy with the interest rate he is charging, and we will sacrifice the larger cashflow now for better future returns, around 8 years down the road.

Our area most duplexes/triplexes are older homes within this price range. This particular property is a stones throw from a hospital that is getting millions in additions invested into it each year, this should be a good one in years to come.