Real Estate Deals: Know When to Fold ‘Em!

bad deals

I recently met with a seller at her house. This house was part of an estate and was in very bad shape. It also been many years since an updates had been done.

She told me that “she knew pretty much what she was going to be able to sell the house for”. This seller tried to put on a show of confidence even though she knew the house needed a roof, kitchen, bathroom and a lot of other repairs. This house also had some mold in the drywall in the basement.

I knew that an experienced real estate investor wasn’t going to pay her anywhere near this amount, but I just let her talk. She also told me that she had multiple investors looking at the house as I was doing my inspection trying to put some urgency into the situation.

Now I’m really good at changing sellers’ “expectations,” but his lady was really putting on a show of confidence. When I was finished my inspection, I went over all of the work that needed to be done and said that it was going to be costly. She said that she knew that. Then I told her that I would go home and put some numbers together and give her a call. Since she said she had another investor looking at the house the next day (which was a Saturday), and he was looking for his first deal.

I decided to wait until Monday to call her back. I knew that my offer was going to be really low. There just wasn’t a lot of room for negotiation due to the sheer amount of repairs that were needed and the ARV. I also knew that if she had an inexperienced investor making an offer, they would most likely pay too much for the house and be above my offer anyway.

The bottom line was that this house needed a lot of work, so I absolutely had to buy it cheap enough to wholesale it easily and leave room for the rehabber to make money on the deal. On the plus side, it was a 3 bedroom brick house with a basement in a mostly owner occupied solid blue collar neighborhood. There wouldn’t be any problem selling this house if the price was right.

So What Happened?

I made a verbal offer and told her that I was emailing her a written cash offer. Since I knew they were short of money, my offer included paying all of the closing costs.

Along with my offer I sent her a list all of the work that needed to be done in the house (a reminder), and I also advised her that she needed to find out what was causing the mold problem regardless of which offer she accepted.

She called me back a couple of days later and said she had sold the house to another real estate investor; the one looking for his first deal. She said that he didn’t want to pay her the amount that she wanted either, but she held out and he eventually agreed. That translates into “he paid her asking price and paid too much for the house”. While we were only about $7,000 apart, the numbers just didn’t work. That $7000 difference on an ARV of $70,000 almost certainly will put him in the hole.

What’s the Lesson Here?

Don’t’ get caught up in “needing to make a deal work”. Let the numbers do the talking and be prepared to walk away if necessary. You will never be sorry you left a bad deal behind. There’s always another profitable deal just around the corner.

Photo: Erik Söderström

This Article is Copyright © 2004-2012 BiggerPockets, Inc. All Rights Reserved.

Real Estate Deals: Know When to Fold ‘Em!




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