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Analyzing A Failed Real Estate Offer

Analyzing A Failed Real Estate Offer
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Damn. My $1.2M offer for the $899,000 Golden Gate Heights fixer did not win! Time to cry in a bucket of coffee ice cream with sprinkles on top.

Truth be told, I already knew my offer wasn’t going to win after the selling agent summarily rejected my offer that evening. I just wanted to create a little bit of suspense. Given there were nine offers better than mine, he didn’t even accept it as a backup offer.



Let’s do a quick analysis of what you, the ONIG Financial Blog reader, thought the house would sell for as you pretended to go along for the spray and pray ride to real estate mega millions!

GUESSING THE FINAL SELLING PRICE

To recap, the house is roughly 2,400 sqft if you count the unwarranted 900 square feet of downstairs space that requires permits to legalize. It has three bedrooms, two bathrooms, a partial view of the ocean, parking, and sits on a 3,200 sqft lot. The house is a complete fixer with an estimated $350,000 of work needed. Asking price is $899,000, a low ball asking price to entice buyers to go crazy.

Here are the results of over 500 votes:

How much do you think this 2,400 fixer in Golden Gate Heights, San Francisco that needs ~$350,000 sells for?



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I’m pleased to say the first place selection of $1,300,000 was a very close guess! The second place selection was a very rational $1,100,000, my initial desired offer price before my agent told me we’d be in 14th place out of 19 total offers if we proceeded.

The real estate market is hot in SF, but you don’t want to be the last one left holding the bag by being the top bidder. It’s much better to deploy the low ball spray and pray strategy. Real estate and the stock market are entwined. If the recent turbulence in the stock market continues, eventually hot real estate markets cool off.

FAILED REAL ESTATE OFFER

Spray And Praying



Can’t read the image above? The house sold for $1,400,380 (bottom row) after being on the market for 13 days. That’s 55% over a purposefully low asking price.

As a buyer, think about all that could go wrong. A $500,000 spread from asking price to final price is huge. The wider the spread, the potentially higher the bidding because you just don’t have a good idea of what it take to win. What’s an extra $50,000 or $100,000, right? That’s what sellers hope buyers will think.

Good real estate agents are very crafty. They will say a whole bunch of stuff to elicit an emotional bid for the property. For example, when I was bidding on my current home, I toured the storage space under the house to inspect the foundation. Since I’m on a hill, part of the foundation is slanted downwards. The selling agent told me while we were in this windowless, dirty room, “You can turn this place into an office!” What a joke!



My sincere hope is that the person, who bought this house for $1,400,380, is a developer and not a starry eyed home buyer. Instead of spending $350,000, maybe the developer can do all the work for $200,000 and sell the house for $1,930,000+ ($800/sqft). That’s a respectable $330,000 gross profit, excluding selling commission and taxes.

The big X factor is getting the permits from the city to start the remodeling process. A project this large needs expensive architectural drawings for all three levels. The project could easily take three to nine months to approve, and another nine months worth of construction work. During this time period, the market could turn sour, and the buyer could be screwed if he doesn’t have enough liquidity to hold him over.

My original maximum estimated value was $1,550,000 if someone was desperate and capable enough to do all the remodeling work for free. At $1.4M, even if the buyer isn’t a developer, it’s not that bad if they can successfully fix everything for $350,000, or $1.75M all in. But for me, $1.4M doesn’t provide a wide enough profit spread to account for all the work, stress, and risk.

HOLD ON TO YOUR CAPITAL

Spraying and praying in real estate is awesome because there is no capital outlay. You just spend a minute e-signing an offer document, and let your real estate agent do the rest.

I’m relieved my offer was not accepted. Knowing that $1.4M was the winning offer in this market, I wouldn’t want to pay more than $1.1M now. Remodeling is extremely stressful. Meanwhile, the state of the US economy now seems more uncertain.



A number of folks have asked me whether I’ll be following my investing game plan of deploying more capital since the S&P 500 is correcting by more than 2% again. I’m not until the S&P 500 corrects by 2% or more beyond the recent 10% correction. Otherwise, the market could go down 2% and recover multiple times and I’d run out of ammo before my next monthly tranche of excess capital gets accumulated. Never run out of bullets!

I encourage everyone reading to join me in dialing up their respective savings setting to MAX MODE through the end of the year. As we go into a new interest rate cycle, it’s highly unlikely the volatility will suddenly disappear. Even if the markets march back to new highs, generating as much new cash as possible is going to feel incredibly amazing.

Recommendations

Explore real estate crowdsourcing opportunities: If you don’t have the downpayment to buy a property, don’t want to deal with the hassle of managing real estate, or don’t want to tie up your liquidity in physical real estate, take a look at Fundrise, one of the largest real estate crowdsourcing companies today.

Real estate is a key component of a diversified portfolio. Real estate crowdsourcing allows you to be more flexible in your real estate investments by investing beyond just where you live for the best returns possible. For example, cap rates are around 3% in San Francisco and New York City, but over 10% in the Midwest if you’re looking for strictly investing income returns. Sign up and take a look at all the residential and commercial investment opportunities around the country Fundrise has to offer. It’s free to look.

Fundrise Due Diligence Funnel

Less than 5% of the real estate deals shown gets through the Fundrise funnel

Shop around for a mortgage: Check the latest mortgage rates online through LendingTree. They’ve got one of the largest networks of lenders that compete for your business. Your goal should be to get as many written offers as possible and then use the offers as leverage to get the lowest interest rate possible. Interest rates have finally started to tick higher post election.



Updated for 2021 and beyond.

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