Invest in Real Estate

The Real Estate Deal that Wasn't.

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This past week, I stumbled upon a real estate deal that could either be the deal of a lifetime, or just another property for sale. The problem was, I couldn’t assess how good of a deal it really was because it was an auction. But, it was located on the outskirts of civilization a town over, and in an area bordering the suburbia transition to rural Alabama. Being an auction on site, I was hopeful that there wouldn’t be much competition. There were 7 duplexes in a row, so 14 total units. This could be a game changer on our path to FI.
The property itself was surprisingly in good condition, they had plenty of pictures online, which is uncharacteristic of an auction. All the units were 2 bed 1 bath and were currently rented (with a waiting list), 2 units for $375 and the remaining 12 units for $395 totaling $5,490 in monthly rents. Looking pretty good so far. First step in the process was to reach out to the auctioneer and see what the criteria were.
I called and spoke with a good ol’ boy from Athens, Alabama and he explained to me that the properties used to be 7 duplexes on one tract of land, but they didn’t think that would garner enough attention, or competition, so they split the properties into 7 individual tracts with one duplex on each. The auction would be on Saturday morning and they would begin by starting with individual prices, and whomever won that auction could take their pick of the duplexes along with how many they wanted for that price, and then the process would be repeated until all 7 were gone. For example: if I bid and win at $40k but I only have the money for 3 properties, then I’ll take my pick of 3 out of 7. They will then sell off the remaining 4 to the highest bidder, whether that’s one person picking up the remaining 4 or 4 people buying one apiece. Then after all that is done, they’ll add it all up, and give the opportunity to buy all 7 for a price higher than the sum that the individuals sold for. It’s a complicated process, but essentially, they are trying to get the best price they can, whether its selling them individually or all in one package. And, they required 10% down, with the remaining due at closing in 30 days. Not too big of a hurdle so far.
Next up on the list, I reach out to our lender that has worked with us on rental property in the past. The problem again is that we still don’t know the purchase price, so we don’t really know how much financing we will need. We shoot her over all our pertinent financial info, and the night before the auction, she lets us know that we are approved, but they’ll require 25% down. The good news is that the 10% down at the auction counts toward that, so 10% down on the day of auction, and an additional 15% down when we go to close in 30 days.
Now we are pulling out the calculator to see how much cash we have, and can access for the sake of putting 25% down. At this point, we genuinely don’t know whether the properties will go for $200k, or $500k. But, our top bid is based solely on the financial information we have. We know the properties rent for $5,490 ($395×12 + $375×2), but the landlord is paying the water bill, because while the auction company has split the tracts, they haven’t footed the bill to have individual plumbing lines and meters run. The landlord is also paying $200 a month to have all the lawns maintained, and then there’s the insurance (which she’s getting a deal on because her daughter is an insurance agent), and taxes. 10% of the rent should be saved toward maintenance and repairs, along with another 10% for vacancies (which may be high due to having a waiting list, but it’s better to be safe than sorry), and if you don’t plan to manage the property yourself forever, its good to go ahead and factor in 10% for the property manager.
$5,490 – 30% (repairs, vacancies, management) = $3,843
$3,843 – $300 (water bill) – $200 (lawn maintenance) = $3,343
With a purchase price of $300k (who the hell knows what it’ll go for), and $75k down leaves you with a mortgage amount of $225k.
$3,343 – $1,278 (mortgage at 5.5%) = $2,065
And we still haven’t taken out insurance, or taxes. Estimations leave you with a hair under $1,600, which ain’t too shabby, could be better, could be worse.
Here’s the kicker. Since they split the property into 7 different ones, with financing, you’ll have to pay 7 different closings. Unfortunately, closings are more of a fixed price regardless of the purchase price of the property. So, tack on an additional $4k per property, that doesn’t count toward your 25% down, or another $28,000.
Anyway, at this point, we are a little nervous, we’ve never been to an auction, and definitely haven’t made a purchase of this magnitude before. We got there two hours early to walk through the property, and barring the outdated HVAC units, they were actually all in pretty good shape. We got to meet some of the tenants, who were equally nice. It was cold, and rainy, so I was hoping that would keep most people away, but come auction time, the place was booming. The auction finally began after a bunch of talking and salesmanship. Between the cash we had on hand, and the amount they were renting for, our goal was to get the properties for somewhere under $43,000 (remember, they’re selling them individually, but that adds up to $301k). Ideally, much lower, but that was our stopping point, we wouldn’t go a penny over that.
Based on the title, I’m sure you can guess the end result of the auction. Bidding started at $30k and the auctioneer asked if anyone had $35k, some asshat in the back goes straight to $50k, and that was apparently more than almost anyone wanted to pay because at that point, he only had one old man bidding against him out of around 20-30 people. They went back and forth and drove the price up until eventually the idiot wore the old man down and bought them for $62,500 apiece. Our first auction experience was short lived. But, we met some people, and exchanged information with another investor in our immediate area, so that we may be able to work together on a deal in the future.
What could’ve been a windfall for our retirement plans ended up being a wet cold morning in the middle of nowhere. But, we got our first auction under our belt, and are eager to make our next move on a rental property. Our goal this year is to at least buy one property as a pure rental, and another property as an owner-occupant hopefully giving us the opportunity to house-hack a multi-family home.

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  • CashflowKat

    Ah…the excitement, the nerves and the dashed hopes, like a good episode of Storage Wars! I’ve been involved in only one live auction, which believe it or not was me bidding on my own wedding ring at Christie’s in NYC. As for real estate, I’ve only participated in on-line auctions and recently got a screaming deal on Hubzu. I loved the whole on-line process and recommend keeping an eye on Hubzu while you look for your next rental. It’s hard though these days…lots of competition and tough to get the cash flow you’re looking for. But good luck! Persistence will pay off!

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