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The Cheapest Way To Invest In Real Estate

The Cheapest Way To Invest In Real Estate
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Recently, I got blown out of the water by an all cash buyer for one sweet property in the Sunset District. The asking price was $1.2 million, the median home price in San Francisco, and I offered $1.38 million. Given the agent representing me was the son of the listing agent (!), he gave me the inside scoop that $1.38 million wouldn’t cut it because the pole position offer was at $1.8 million! Although part of me thought he was just talking bullshit, I raised my offer to $1.5 million, hoping that the first place offer would drop out.

At the time, I thought to myself, what kind of crazy idiot would offer 50% over asking on a block where the next highest priced home was $1.4 million max? It turns out that his $1.8 million offer went through. Not only that, he proceeded to gut the house and spend another $250,000+ remodeling!



For a month I was feeling a little melancholy because I envisioned myself spending the next 5-10 years of my life in the home. You start thinking about what type of art you’ll put up on the walls, and which room is for whom. The house was in great condition as is. Buying property can get pretty emotional.

Still getting over my loss, I stumbled across another sweet property in Golden Gate Heights, a nicer neighborhood with more expansive ocean views. The asking price was $1.35 million for this 3 bedroom, 3 bathroom, 2,300 sqft house. It had two great decks, but the views were partially blocked by a massive pine tree out back.

The property was swarming with perspective buyers when I visited. Figuring I had no chance in hell to win, I didn’t even bother putting in an offer this time. I guessed it would easily go for at least $1.7 million if the other house went for $1.8 million. And I hadn’t sold enough books to have $1.7 million lying around.

The house went into contract in two weeks, and after a month of waiting, I found out the selling price was only $1.48 million! Holy crap! It went for $220,000 under what I thought it would sell for. Now I was even more dejected.

WHAT HAPPENED?



I called the selling agent to ask how the competitive bidding situation was. She told me that they received three offers, four less than anticipated. What happened was that everybody else thought the house would go crazy over asking so they didn’t bother to submit.

The situation is analogous to never asking out an attractive somebody or a very important person for help. Since everybody thinks they’ll get rejected, nobody ever tries.

This situation really got me thinking about the “Spray and Pray” investing methodology where you just invest in a whole bunch of startups, hoping that one will hit and make you stinking rich. This strategy worked for angel investors like Ron Conway, who is now worth over $2 billion dollars.

The difference here is that the Spray and Pray strategy in real estate investing requires NO CAPITAL COMMITMENT! All you’ve got to do is fill out some forms. If your offer is accepted, you usually only pay a 3% earnest money deposit. Furthermore, you always have at least 24 hours to change your mind.

THANK GOODNESS FOR DOCUSIGN



In 1997, two things didn’t exist: 1) An online version of the common application for college and 2) DocuSign.

Once an online version of the common application became available, hundreds of universities began signing up. And once hundreds of universities signed up, high school students started applying to many more schools. All they had to do was check boxes to where their application would be sent instead of spending hours creating a new application for each school like I did in 1994.

High school students sprayed and prayed! And I bet some students got into better schools than expected.

So what is the downside to the common app? Many more applications to sift through by admissions officers, lower college acceptance rates, and more application fees to spend. The upside far outweighed the downside for applicants.



If you have never experienced DocuSign, you’re in for a treat because you no longer have to print, fax, and physically sign any documents. All you’ve got to do is press some keys after you’ve scribbled your signature with a mouse or finger, and you’re good to go!

What used to take 24 hours to submit a bid, now takes me literally one minute on my mobile phone or laptop to sign a eight page offer.

If you’re looking to buy property in a competitive environment, you might as well bid on as many properties as possible with a low offer price, even if you don’t think you have a chance because your cost is next to nothing.

TIME TO BUY ANOTHER PROPERTY

After buying my fixer in the summer of 2014, I promised not to buy another piece of property for at least five more years. It’s taken a year to fix up the kitchen, floors, both bathrooms, roof, and garage, and I’ve still probably got another six months to go if I want to build a couple decks, change the windows, and landscape due to the long permit process.

But of course, I can’t resist looking around at neighborhood comps for buying opportunities or validation I didn’t overpay during the meantime. After looking high and low for the next great property, I finally found a gem in my neighborhood for an incredibly attractive price.

Cheap Property In San Francisco Spray And Pray



Underpriced house. Time to spray and pray

Here’s a 1,550 square foot, two bedroom, two bathroom, fixer with a garage, small deck, and partial ocean views on a decent 3,271 square foot lot. The downstairs is another 900 square feet that’s unwarranted, but can easily be converted to legitimate living space consisting of a third bedroom and bathroom.

Property for this area with this quality view sells for around $800 a square foot in good, not excellent condition. In other words, we’re talking about $1,900,000 if we include the entire 2,400 square feet of space.

The property needs about $350,000 in fixing as the pest report indicated a cost of $80,000 alone. We’re talking new windows, new bathrooms, new kitchen, rewiring, new plumbing, permits, roof, paint, foundation, electric garage door opener, and refinishing the floors. All this work will probably take one to two years to complete. Hence, if you were willing to work for free, you’d be willing to pay up to $1,550,000 for a brand new house given the $350,000 cost.

The amazing thing about this property is that the seller is only asking $899,000! Clearly, this is a low ball asking price to get tons of people interested. But the risk of pricing so low is that it becomes mind-boggling difficult for buyers to bid 70% over asking ($700,000) to get to my perceived maximum fair value of $1,550,000.

The second risk of pricing so low is that fewer people will bid because everybody will think they have no chance of winning. We’ve seen this story before as was the case with the Golden Gate Heights property I thought was going to sell for $1.7M+, but only ended up at $1.47M.



Given the details I’ve provided, I’d like you to now guess what the house will actually sell for in this poll below. I’ll find out the sales price by September 1 and report back in this post. Pretend you are a homebuyer. What offer would you submit?

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

View Results

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If you want to see what the house ultimately sold for, check out this post.

EVENTUALLY YOU MIGHT GET LUCKY

Maybe there’s only a 5% chance they’ll accept my $1,200,000 offer for the property above, but if they do, I’m hundreds of thousands of dollars in the money for one minute worth of work. I’ll remodel the place with my crew and attempt to sell it within 18 months for a $200,000 – $500,000 gross profit.

And if my chance of winning is really only 5%, all I’ve got to do is submit 20 low ball offers to potentially win. This is the same attitude I’ve taken with applying to various accelerators and incubators for a startup idea I have in mind.



It is very easy to overbid in a hot property market. Emotions run high and you just want to crush your competition because you’re sick of losing. But if the market ever turns, and you don’t have enough liquidity to hold you through, your finances will get crushed. Please be careful!

Spraying and praying is the only way someone will ever get a deal in a hot property market. I strongly suggest underbidding on properties and going after “stale fishes” instead. You don’t want to be left holding the bag.

Note: The words “bid” and “offer” are used interchangeably in real estate. But if you are buying and selling in the stock market, it’s a little different. “Hitting the bid” means one broker is agreeing to sell a given security at another broker’s bid price. From the buyers point of view, he is hitting someone else’s bid. If you are the other broker who buys the security, you are “lifting the offer.” Confusing, yes I know.

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.

Updated for 2021 and beyond.

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