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 Financial Samurai 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:
Loading ...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
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.
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 2019 and beyond.
You dodged a bullet on this one… Even your $1.2MM, while not the ‘winning’ bid is very high. The only real way to make money on this property as an investment is to nearly double the square footage which in San Francisco is no small project.
One other thing, there’s a very fine line between ‘Spray & Pray’ and wasting people’s time. I tend to think it’s a strategy more appropriate in a buyers market which this, at the moment, is clearly not.
My initial concern in your early post about this was buying in a frenzied market involving a bidding war. It just does not seem logical to be buying when real estate prices have little or no negotiation, other than up.
I do believe in your statement: “you don’t want to be the last one left holding the bag by being the top bidder”
This is ok to get stuck with the bag if you want to be in it for the long haul. Understanding you do have the crew, experience, and planned on flipping, that is still too risky for my taste.
Haha that was an interesting article. I live in Toronto and the real-estate price is going totally insane lately thus I cannot afford to buy one at this point even though I have 130K in the bank. How ironic. Thanks for sharing!
Cheers!
BSR
$130K ain’t bad! What about buying a $500,000 place with $100,000 down and having $30K left as a buffer?
I can’t believe Canada CUT rates recently. Nuts!
Flip.
That’s where the money is right now if you can get it.
The market spoke at $1.4M. My offer was at $1.2M. The key is to not win a bidding war by bidding the highest. It’s about finding a disconnect in the system and low balling.
I need to do a better job writing these articles, or making them easier to understand. Here’s a section from the post.
“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 spray 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.”
Do you think it would help you if I wrote much shorter articles, and did more bolding?
No, not at all. Longer in depth articles are what makes this site worth reading. There are a million blogs with 2 paragraph “posts.” Don’t dumb it down.
But for guys like SFrentier, it might be good to dumb things down. I’ll experiment! :)
It has nothing to do with that. Pro flippers reduce their risk by 1- having low contracting coasts and 2- work quickly on permitting and construction. As a noob you can’t compete on those factors. So you end up spending more and taking longer to complete your flip. Plus your renovations need to be spot on for your specific market. Many a noobs have lost their a$$ on flipping in complex markets like SF’s. But kinda like your uber driving experiment, it would be fun to read about your flipping experience here, that’s for sure :)
I’ve got a crew and a permit expediter. Remember, I just finished building a master bathroom, along with pretty much everything else over the past 14 months since I bought my fixer. I’m dialed in and my crew is ready and waiting.
Did you have a really poor experience flipping a house? If so, can you share what went wrong? If not, are you trying to flip as well, hence your interest?
What would you do with $1.5M in cash instead? I’d love to hear about your real life experiences. Thanks so much!
55% over list is crazy. I couldn’t image the stress involved in being one of the serious bidders in a field of almost 20. I can this strategy making sense for an extremely unique property or for a seller that needs an instantaneous sale. Bringing in dozens of offer ensures they can pick and choose the right buyer, which may take other things into account than just the total price. Ie, a cash offer and immediate closing could be seen as a much better buyer than someone getting a mortgage. This type of marketing makes it extremely difficult for normal buyers to understand the housing market and what they can and can’t afford. About what percent of listings do you think in SF employ this strategy?
I would say any serious buyer is already conditioned that all new listings will go over asking. As such, I would say over 70% of listings deploy his strategy. Hence, if you price too high, it may really hurt your sale.
Double, double toil and trouble; Fire burn, and caldron bubble…
The stock bubble drives the housing bubble drives SF. Google, Apple, Facebook, Twitter, et al.
Our Silicon Valley real estate is crazy also, but SF is in its own special place. It’s never made sense to me, but I’m not a city person. I like some elbow room, and some peace and quiet to come home to every night.
I only hope when this bubble pops, and it will pop, that it doesn’t take us all down the drain with it.
A 15% correction is what the Bay Area went through during the financial crisis if those people had to sell.
Hence, a 15% correction is probably a realistic back stop if there is another correction. Lots of people are paying all cash now. No need to sell if you don’t have debt.
I bet 50% of the 19 offers were all cash.
What is the listing agent’s thinking in asking 899k, when it is worth 1.4mm? Seems like you see this in coastal California, but not in most of the rest of the US.
Creates a lot of interest and an style auction market? Why not start at one dollar? Or it seems like it would have had just as many offers if it had been priced at 1.1mm.
Listing artificially low is one of the biggest frustrations buyers have in this market.
The price you list should be the price you accept. Listing agents make the whole thing a game. And it can be dangerous if you are the winner in a field of 18 other offers.
Lures in people who have a lower price range and gives them hope.
I could not agree more….causing a pricing war is ridiculous and watch out, someone will find a way to sue the britches off these guys.
This article really created some perspective for me. I grew up in California, and know that the real estate market is insane out there, but never like this. In Ohio, it’s absurd to think of bidding wars on properties. People do the opposite here – they price high and hope for a sucker. It’s crazy to think that people strategically price properties that low, knowing a bidding war will begin. I guess SF is a much more desirable place to live than Cleveland, though! That same house in our market would probably top out at maybe a third of what it sold for in your area, and that’s assuming it’s in a great school zone. Just interesting to see some of the dramatic differences from one end of the country to the other.