Real Estate Failures

[Jacob Pereira]

Someone recently brought up how we see so many successes and how great that is, but we also need to see failures to learn from and temper expectations, so I thought I would confess my most recent mistake. I hope other brave souls will share theirs here as well:

Six months ago someone bought a fourplex a few doors down from one I own and ended up with a pretty good deal for the Austin market. The place was listed for $280k, and they bid 290k (it's a hot market right now) and their bid was accepted. However, the appraiser looked at comps, including my property, and appraised it at $225k. The buyer ended up negotiating with the seller and they settled at $230k.

After seeing this, I saw another fourplex with the exact same floor plan one street over go onto MLS for $280k, so I decided to bid $285k with the expectation that I would be able to renegotiate our contract in the same way after my appraiser made a similar assessment. There were some repairs needed, so I talked them down to $275k, but with the expectation that it wouldn't really matter since I would eventually pay a price closer to the $230k the last buyer paid.

Imagine my surprise when the appraiser came in at $290k! They ended up using an income basis, and stated that current rents were under market, the comps were due to distressed sellers, and that the dwelling price was still well below averages for the Austin area (basically all the things investors look for).

I ended up buying the building anyway, mostly because I said I would and I do believe that keeping your word in contracts is important, but I do also still stand to break even and with the potential for appreciation it could still eventually become a less-than-mediocre deal  over time. The opportunity cost hurts, though. I'm a conservative investor, and I think that may have insulated me from some really tough breaks, but it has also meant that I've lost out on some home runs. Is anyone else brave enough to share their recent failures?

[Kelby K.]

Thanks for sharing Jacob. It takes courage to do that. Last year we purchased a handful of 4plex's near a university and it was going great with a really strong cash flow as they were all full, but when the leases came up for renewal 75% of the units are now planned to be vacant and we are scrambling. Last year we failed to check the new construction numbers with the city and low and behold the 4 plex market has exploded and over 30 brand new units hit the market this year alone. Now all of these properties have vacancies.

That is not something I even thought about researching as this sub-market was undeserved. The enrollment numbers are increasing at over 10% annually, and the properties were full when we purchased it. A very large construction player came in and built 20 units alone. We were totally blind sided. 

Any ideas to help fill the units?