How I Lost Two Houses This Month

contract, pen, signature

So this last month I tried to buy a new rental property: twice! It didn’t quite work out as I planned.  I had such a good experience with my property manager that I had decided it would be a good idea to buy another rental.

Using a property manager has made everything easy – I don’t have to find the tenants or deal with any maintenance issues. I can focus my energy on getting and changing the financing as needed and looking for new deals.  I think the 8% that I pay my current property manager is worth every penny.

The first property I tried to buy was priced at only about $125,000.  The great thing about it was that it had three bedrooms and an updated kitchen.  It was a townhouse style condo in a decent neighborhood – but not great.

It was also within sight of a major road that you could hear from the house.  The estimated rent on the property was $1,500 a month.  There were some strange things about the property with regard to the way the seller was acting and the speed that they seemed to want the deal to close. I understand a seller wanting to close relatively quickly but not immediately. It kind of made the think there was something wrong with the property or the neighbors.

I put in an offer which included 20% down and promise to settle within 30 days. It was a good offer – I didn’t even ask for help with closing costs.

The seller had another offer which wasn’t as good as my offer but was a “cash” offer.  They had such an urgency to leave that they decided to take the cash offer rather than my offer which was higher. That didn’t make much sense to me but who knows?

I decided that there was probably something sketchy about that property and that I would probably find a better property elsewhere.

Property #2

So I went to a totally different neighborhood and price range the next time I looked at properties. This time we went to a nicer neighborhood about 10 minutes closer to the city. The houses here are still townhouses but they range in price from $180,000 to $250,000.

The first two houses we looked at were distressed properties. Having said that, they were still in decent shape.  One was beautiful on the main floor and basement but had some obvious water damage on the roof and on the ceilings of the front bedrooms.  No thanks!

The other property was nice upstairs.  It had a master bedroom with a loft which had a fireplace in it.  This house had a fish pond in the back yard that looked like it was in major disrepair.  The kitchen also wasn’t too great. Because it was bank owned and had a few serious issues with it I wasn’t too excited about it.

But we decided to use the time we had and look at a house close by listed for $225,000.  There was nothing wrong at all with this house.  In fact it was a four story garage townhouse with a completely renovated kitchen including granite counter tops.  The carpet and paint were new as well. It really was all ready to go. I could have walked away from closing on it and given the keys to a property manager to rent it out.

So I figured I should come in close to full price. I decided to offer $220,000 with 3% closing help. This was a slightly aggressive offer but since I was offering 20% down and have strong finances, I figured my offer would be considered strong.

We quickly heard back that there were two other offers on the property. We kept waiting and waiting to hear back from the seller and I eventually figured they had decided against my offer. So when my agent called at 9pm I was pretty sure the answer was no.

But the seller had actually said that even though my offer wasn’t quite the highest, they wanted to work with me because my financial situation was stronger.  I was surprised at that! I would have thought the higher offers would always trump other considerations. Maybe it was clear that those other offers were not that serious.

The downside was that even though they “wanted to work with me” they didn’t want to pay any closing costs. I didn’t think that made a lot of sense – to go from 3% to nothing.  But I also didn’t know what the other offers were. In hindsight they were probably trying to get my offer to match an offer they already had.  I’m assuming they had a higher offer from a less creditworthy buyer and wanted to have me match that offer so they could work with me.

I didn’t think it was worth budging that much as I’d have to commit much more to the property than I originally intended.

The key to succeeding will be making multiple offers until I find the right property and the right seller.  I intend to own this rental for the next 30-40 years and I don’t intend to overpay or rush into doing something that I will regret later.

Do I regret not getting the houses? Sure; a little bit.  But I know from past experience that I would regret paying more than I originally intended even more. Being patient and disciplined will eventually bring the best result.

Do you have any interesting experiences with buying rental properties?


Author: Patient Wealth Builder

I live in the Mid Atlantic region with my wife and children. I am a finance manager for a Fortune 100 Company with over 10 years experience and have an MBA and CPA - but my true passion is investing!

12 thoughts on “How I Lost Two Houses This Month”

  1. I’m just starting to look at rental properties and had a quick question.

    Are you buying these properties with seller financing on the remaining 80%? Otherwise, why is the seller so concerned about your creditworthiness? Wouldn’t that be the mortgage lender’s concern?

    1. That is a great question. It really is the mortgage lender’s concern. I think they believed me to be in a better financial position overall and more likely to get through the underwriting process quickly and with no snags. When someone comes with a 3% down loan they are usually (but not always) not able to put 20% down. This may be a sign that they don’t have as many financial resources or are not as committed to make the transaction work. I am assuming the seller’s agent has seen offers come in and then when they go to settle the person is in poor financial shape and they can’t get the loan funded. This causes them to lose a bunch of time and go back to stale offers or look for new offers again. Ultimately, they didn’t put too much weight into my perceived financial condition because they ended up going with the higher offer anyway.

        1. Exactly. For those who haven’t gone through the horrible process of having a potential buyer fall through it may not seem very significant. I had a buyer who took 6 months to confirm financing and it was very painful. I ended up calling his mortgage broker and telling him the buyer would not be using them and that he would be using the broker of my choosing since they couldn’t figure out how to close the deal. We got it done but it was painful.

  2. A couple months back, I was bidding on a property on Hubzu, an online real estate auction site. My agent had already checked the house out so I knew what I was getting myself into. I ended up winning the auction and was ecstatic since it was such a great deal. By the next day, however, Hubzu came back telling us that unfortunately the minimum reserve price was not met so I didn’t get to purchase the house, despite being the winning bid. It was too good to be true. That same house got relisted on Hubzu and cycled through 2 more auction periods until finally exceeding it’s minimum reserve and actually sold for about $15k higher than what my original winning bid was. Oh well.

    1. Thats interesting thanks for sharing! Also very frustrating. I was curious about people’s experiences with Hubzu. Do you think it is a good site to use, even with that experience? I would feel comfortable using it if the reserve price was published – otherwise I’d be frustrated about spending my time evaluating and discussing properties with my agent or other investors just to win the auction and not hit the reserve! I am more and more convinced that this is a numbers game and I’m going to have to make 20 to 30 offers to get the right property.
      Patient Wealth Builder recently posted…Vacation Rental PropertyMy Profile

      1. My agent shared with me a theory he had for figuring out the Hubzu minimum reserve price. I’m not sure if it works in all markets, but out in KC where we work, it seems to be in the ball park.

        Generally, the minimum reserve is 2/3 of the difference between the LP(list price) and the OP (opening bid price). The OP is what’s listed on Hubzu at the start of the auction. The LP is what you’ll see when you look at the listing on the MLS.
        So here’s the equation:
        Min Reserve = (LP – OP)(2/3) + OP

        For example, say a property is listed at 115k (LP) on Zillow. Hubzu has a starting opening bid of 80k (OP). Therefore, the minimum reserve Hubzu will accept = (115k – 80k)(2/3) + 80k = 103k. Of course these are approximations and needs more data to verify.
        OB @ Out of State Investor recently posted…Buy and Hold Numbers: Cash-on-Cash ReturnMy Profile

        1. Of course, we learned this after failing to hit the minimum reserve and losing a few auctions!

          But you’re right, it starts to become a numbers game. I’ve been trying to pick up a couple this year, but have yet to get any offers to stick or even not fall through during escrow. Staying patient…at least that’s what I have to keep reminding myself.
          OB @ Out of State Investor recently posted…Buy and Hold Numbers: Cash-on-Cash ReturnMy Profile

          1. I keep telling myself (and my wife!) that I may need to look at 100 houses to find the right one. I just looked at one on Memorial day and I have a funny story about it that I’ll post in a couple days. Bottom line: I didn’t put an offer on it. But it was quite an adventure. Let me know if you do get a house through Hubzu – I’m very interested in the concept.

            The house I looked at on Monday did teach me at least two lessons so it wasn’t a total loss. I also called up a great friend and had him come along with me which made it all worth it. I picked up a few nuggets of wisdom from him as well and he showed me some properties he had done some deals with. Very Cool!

        2. That is extremely interesting! Thanks for sharing this. I’ll have to see if that is the same in the Mid-Atlantic. I will have to get on Hubzu and check it out. I’m pursuing a variety of strategies right now to find houses:
          1) wholesalers
          2) MLS
          3) Craisgslist
          4) For Sale by Owner

          I’m thinking about starting to contact the owners of townhomes for rent to see if they want to sell. And now I’m also thinking I will add Hubzu in there as well. Why not? You never know where you will turn up the good deals.

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