I just purchased two houses for 23% over asking price in a slow market. Here’s why.

Two months ago, a property came online in my local market of Roswell, New Mexico…okay, so ‘local’ is not to say it’s in my backyard as I live 5,500 miles away in Barcelona at the moment.  Nevertheless, Roswell is the market I understand and where I feel confident in estimating cost, finding contractors and getting work done.

Since I began investing in Roswell in the beginning of 2016, I’ve purchased single family homes for 31, 39, 51 and 84 thousand dollars.  Each had been abandoned for more than a year and required significant work to get market ready. Initially scared about the condition of these homes, I quickly gained more confidence with this type of property and now, I see opportunity.  These are places with great upside but two giant barriers to entry for the average person. Cash needed and extensive repairs required.  

The listing was for two homes on one lot.  The primary residence was a 3 bed, 1 bath house with an additional 2 bed, 1 bath dwelling as well.  They were located on a huge corner-lot in a nice part of town with separate entrances for 36k. In an instant I was reminded of why my poker career never took flight.  I immediately got excited. My heart began to race. Sweat beaded on my forehead. Hands trembled (of course I’m exaggerating just a bit for dramatic effect…yea, let’s go with that).  I then immediately dropped everything to look up the property on the county website and searched for any helpful information I could find. Next, I called my wife, then emailed my realtor  (perhaps if it hadn’t been 3 in the morning in Roswell, the order of operations would have differed slightly). I knew this place wouldn’t last long.  The next day, I woke up to a series of facebook messages from my realtor that read as follows:

 

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For some, this might not have seemed all that positive.   To me, it was an affirmation that this place was a great deal.  Immediately, I phoned my realtor to ask about the place. He thought it was a great deal.  We discussed the numbers, necessary repairs and rental value and I was sold. He explained that I might have to rewire an entire house, replace both hvac systems, replace all flooring and paint as well as a few other significant expenses.  When I asked him if he thought it was a good deal, he said he was looking into buying it himself but decided not to once I emailed him. Seeing as how Jesse has become a mentor and friend this conversation, practically sealed the deal.

After discovering that there had been 6 offers and 2 more were expected, we were told that we were in a 3-day Best and Highest Offer situation.  I began to deliberate about how much to offer. On the one hand, I’d always made low-ball offers on our houses in Roswell. On the other hand, I thought that even if this deal was sold for 60,000, it would be an amazing deal.  Not wanting to lose this opportunity, we decided to bid 45,000 cash, no inspections, no contingencies and a 3 week close hoping that was enough to get the deal. And it was!

So why did I bid significantly over asking price on this property in a market where the average home sits for 117 days?  It basically boiled down to three simple reasons. First, my realtor Jesse McDaniel is very conservative. When he says 900 and 600 for the rental values, I know that those are conservative numbers.  The reality is I should get that or more.  Second, Something like rewiring an entire house doesn’t scare me because I’ve done it before. The first time this particular fix popped up, I about lost my mind but now, I know how much it will cost and I’m okay with that.  And finally this is a property I’m planning to keep for a long time. In fact I have no plans to sell it.  Ever. Assuming we can get all of the repairs done for under 60,000, this will be a steal. We will be all-in for around 100-110k and after 6 months I’ll refinance.  If things go as I anticipate, we’ll be able to pull the same 100-110k back out and basically have these two houses for free. At that point, taking into account my mortgage, anticipated repairs and capex, property management fees, taxes and vacancy, we should still net around 400 dollars a month from this property.  Forever. So when looking at whether or not we could have possibly purchased the house for a couple thousand dollars cheaper I simply wasn’t concerned to offer 23% above asking.  This experience helped me understand that finding a great deal doesn’t necessarily have anything to do with the listing price.  

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