16 Mar Pandemic Real Estate Buying – Offer, Offer, Offer, Lose, Lose, Lose
It was a ripe spring market in May and we were about 80 days into the Coronavirus saga in the united states, interest rates were low and my wife had just started back at work so we celebrated by getting hungry to buy our 3rd rental property. Our cash had been sitting on the sidelines for the potential Franchise business we were working on until I moved $24,000 of cash into retirement accounts and still had a good chunk set aside for reserves along with a HELOC we’d recently secured. I updated my MLS alerts and a great opportunity popped up that we were excited to go see.
This was another twin home which is the same style as my first rental property and a 3 bed 2 bath design that was move in ready. It didn’t need anything done to it unless I wanted to paint it for one color, otherwise the place was good to go. The price was listed at $199,900 and we knew we could get at least $1650 in rent which does not meet the 1% rule that is generally followed but we had accounted for he power of interest rates. I’d just secured and closed on two refinances that were 30 year fixed mortgages at 2.75% on my personal residence and 3.12% on my rental home respectively with our previous rates having been 3.65% & 5.125% we were elated. In any case the ability to borrow around 3.25% on this and any other potential deal made room for the .8% rule to be in effect in our market and we knew we’d get at least $1,650 in rent but were pretty sure we’d get between $1,725-$1,800 based on market value.
In the background I even had a sneaky plan in our back pocket to offer my other twin home tenant an opportunity to move into this house once we closed on it at market rent which would save them $50 a month, get me a long term awesome tenant in place in this beautiful new property and allow me to get a rent increase at my 4 bed 2 bath they were currently occupying. This would have allowed me to get a new tenant at $1,950-$2,050 in my 4 bedroom that they were currently paying $1,775 on because I locked them in with a 2 year lease and didn’t raise the rent enough last time around. While I’m happy with the $1,775 rent, this was an opportunity that may make sense for my tenant because they didn’t need the 4th bedroom necessarily, they used it for a play room of sorts but they may have been willing to give it up and move to save money and the style of this home completely fits their décor.
My sister oddly came with me to look at the house as she had recently moved back to Minnesota from having lived in China for several years with her family and had just closed on their home which was a similar size and price point in the City next door. The home was as advertised, a great layout, and move in ready as mentioned above. We didn’t hesitate to make an offer at full asking and waited for the inevitable “last and final” call that would be a multiple offer situation. To make our full asking price offer more enticing we actually raised it to $206,000 with the seller “paying” closing costs which really just allowed us to roll our closing costs into the new mortgage and the seller netted their full asking price. Additionally to make our offer more appealing we said we’d have an inspection done in 72 hours, $10,000 in earnest money (most common would have been around $2,000 in this case) and finally ensured our realtor communicated to their realtor that we had just closed two other notes effortlessly which was valuable during the pandemic.
As expected, we got the call that there were 7 total offers on the house and they wanted best and final to come through. I had spoken with my property manager and she was very confident we’d get $1,750-$1,850 so I re-ran my numbers and said to heck with it, we aren’t getting outbid on this house and we can do the deal at $210,000 and it will still make sense. We knew we’d look back in 5 years and never regret the decision to get locked into the lowest investment loan interest rates in a fantastic suburban market that we already owned another property in that was just 5 miles from our primary residence.
We were outbid, and emotional buyers remain the worst to compete against, ha! We continued our hunt and found another property we were interested in that was in a commuter market, meaning it was about 25 minutes outside of the traditional suburbs, and then another 18 miles to Minneapolis. I liked the deal but the town had some rent restrictions to ensure their ratio stayed balanced in some key areas of town. While gaining an understanding of those regulations we decided to move forward and look at the house but then got a call from my realtor that the former house we’d just lost out on, the contract might be falling through because the buyers were dragging their feet on inspection. The sellers agent went back to the top two remaining bidders and asked if they were still interested, and to be prepared for a call. The call came a day or two later and the deal had fallen through, they wanted to ask if either of us wanted to raise our offers. I decided to bite and play the game, unemotionally as it was really simple math and the previous offer of $210k still made really great sense so surely $216,350 would also make sense. I don’t remember why I picked the $350 but it might have been the same concept of closing costs being rolled in and the seller netting our previous offer. Additionally the seller absolutely had to close in 26 days at this point, so we called all 3 inspectors we knew and said we’d do the inspection the following morning at 10 am which was a whopping 14 hours from submission of offer.
We lost the bid again. In the middle of a pandemic, we were outbid on an initial listing of $199,900 that we were outbid at $216,350 with absurd earnest money, rapid inspection, and we’d just closed on two refinances. When the record went public I saw we lost out on the bid by $650, what a racket. We continued to pursue the commuter market property which we liked, would be a solid rental with minor rehab needed pre-move in but an opportunity to finish about 650sq ft of unfinished basement that would add instant equity and allow for a cash out refi that might not make sense so at a minimum build nice equity to pull a sizable HELOC on the property. We offered at asking with all the same terms and were outbid. Another twin home popped up on the market in the city my sister had just bought in, it wasn’t as nice as the previous twin home mentioned in this post but it was a 4 bed where the aforementioned was a 3 bedroom, we made nearly the same offer with all the same terms and went in at $216,000 on a list price of $197,900. We lost the bid.
I never thought interest rates could be so powerful but thus is why buying on MLS is incredibly difficult even in a pandemic market. We still haven’t found the 3rd rental property yet and are currently looking at a Laundromat as well but we’ll buy whichever right deal comes across our desk first understanding that there is a cost to letting your capital sit to the side, and we can continuously raise cash at the savings rate we are currently at. In addition to cash we have access to HELOC money that can be used, and if needed bring in a silent equity partner on anything we might find, we’ll have an equity partner within our friendship network without any concern. As a result, we keep looking yet unfortunately nothing like those 3 deals has come on the market since early May. Right now would really pay to have figured out the off-market strategies to bring deals to me but we’ve not invested the time and money to make that happen yet aside from some driving for dollars. We’ll find somewhere to park this cash and get it working for us in the near future but for now we are stuck with eyes wide open and a hunters mentality ready to take down our next opportunity.
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