What I learned from my first offer process

Last week I finally hit one of many milestones to come: I made my first offer on a house. I didn’t know what to expect. I had a rough idea of the process, but I didn’t really know the finer details. After a few counter offers back and forth between I and the seller, we finally agreed on a price and I had a signed my first purchase agreement!

My excitement was soon replaced with fear. The prospect of having to actually put down a considerable portion of my hard-earned savings and work with a team several states away; it all became too real. What if I was wrong? What if I lost my money? Was this house really a worthwhile investment?

I get the feeling here is where most people looking to invest turn away never to return, but I said nay. Fear is good. Fear keeps you from doing stupid things. Yet, fear must be tamed. Not by ignorance or wishful thinking, but through knowledge and understanding. I looked through my numbers again and pressed on with a home inspection. I needed data.

After crunching numbers and learning more about the property, I started to realize I made some mistakes. There were holes in my due diligence. Holes too large to ignore. For example, I expected the rents to be $950, but could not find sufficient data to back this price up. Rent-o-meter gave me mixed results. Some homes rented for 800, some for 900, and others for 950. CL showed very few properties for that area for several blocks. Zillows’ Zenstimate shows $750. I had to pull back on my hubris and go with a more conservative rent estimate.

My other mistake was understimating the repairs on the house. Although the house is actually in solid shape, it still needed new flooring, a fresh coat of paint, a new AC unit (the current one is 24 yrs old!), and likely a new furnace. Once I accounted for all these costs, the deal didn’t quite look as good, which brings me to the next point.

I wasn’t aggressive enough with my offers. I only reduced the saled price by 9%. I think I should have placed a lower bid on the house, especially since it was on the MLS for about 170 days. I attribute this to lack of experience with negotiations. The worst that could have happened is the seller’s would have said no to my offer.

After dissecting this experience, I realized a few things. I fell into the trap of losing some patience and wanting to do a deal already. I wanted the deal to work out so I fudged some of the numbers. I tried to seek confirmation bias and luckily caught myself doing it. Could it have turned out to be a good deal? If rented at $950, yes. I believe that it would be a decent deal at that price especially since the property is in good shape and would likely contribute to lower maintenance and repair costs over the long run. But at this point, $950 was more of a gamble than an educated guess and my due diligence period was nearing an end.

After some thought and sighs, I decided to follow the advice often given here: it’s better to let an deal go instead of buying into it and having it turn out to be a bad deal. Even though it didn’t work out, I learned a lot and will apply what I've learned on the next properties I look at.

Happy hunting folks,