How To Over-Spend On An Income Property

Last week I had a gentleman that belongs to the Kansas City Breakfast Club ask me if I could go to an auction in his place to see if he could purchase this home down the street from his business at a reasonable price.

The potential buyer had to be out of town for some family business and wanted to pick up the home pictured left. The home was being auctioned by Jeff Cates of Cates Auction.

Now in my mind, the home needed;

  • New windows.
  • Vinyl siding repairs.
  • Exterior drainage issues resolved.
  • New garage doors.
  • All flooring replaced.
  • A complete kitchen redo.
  • Two complete bathroom redos.
  • All new interior paint.
  • Probably termite treatments.
  • Exterior trim paint and wood rot repairs.

And there was a host of other small issues. When I arrived at the auction 20 minutes early I found it to be professionally staged. And the auction team was working the crowd trying to generate a good opening bid and discover the bid strategies of those attending. Hey, that’s their job and to their credit they were doing a great job.

I didn’t talk too much to the other potential bidders. I just moseyed around with my cell phone to my ear and listened to private conversations. The two bidders I could hear both had about the same strategy as what I had recommended. Buy this house in the mid-sixtys, MAX. The ARV was capped at about $105-$110,000 in a good market. This neighborhood is a bit static, however, so I figured a $100,000 ARV.

Oh the excitement builds as the auction draws near. And as the auctioneer begins his bidding song that we’ve all heard he starts at $100,000. “Who will give me $90,000? Start me at $90,000 for this fine home. Look at the comps people. Who will give me eighty, do I hear eighty? Eighty, eighty, eighty. Seventy-five, who will give me seventy-five?” (note: not verbatim…I did not record.)

“Thank you, sir. Seventy five do I hear eighty?”

What??? With that I noticed no fewer than about 4 bidders just turn and walk away. I should have, but I just had to know if anyone else would drive the price higher. Five minutes later, it was all over. The auctioneer congratulated the savvy real estate investor who had bid such a high price that no one else even bothered.

You know, this house was going to be a fix and rent for my client. I guess he could have gone to $70,000 and still had it be worth his troubles to do the work. But $75,000 plus a 10% buyer premium? No, thank you.

Did the gentleman not know his numbers? Or was he planning on fixing it all by himself? (He was 88 years old! So I doubt it.) Or did he get caught up in the excitement of an auction? I don’t know. I didn’t ask. All I know is I wouldn’t let my clients buy at that price.

The auctioneers did their job. They sold the house quickly and for more than I would have recommended. Could I have put it on the market at $85,000 and gotten it sold? Maybe. There’s always someone who doesn’t do their numbers.

Don’t let that somebody be you.

1 Comment

Filed under Real Estate Investing

One response to “How To Over-Spend On An Income Property

  1. Chris Lengquist

    Comment removed because it was worthless spam about some stupid stock deal.

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