house hacking my single family house

Protecting Yourself After Accepting a Purchase Agreement

Erik Financial Education, Real Estate, Thoughts of a Mastermind 20 Comments

THIS POST MAY CONTAIN PAID AND/OR AFFILIATE LINKS.

I’m a big fan of house hacking, which has helped me earn a substantial amount of income on the side. I have used house hacking as a tool throughout my experience as a homeowner, and this post is the story of how the thought of leveraging my paycheck even more led me to look into buying another property as an alternative way to earn more income. In the end, I learned a lot about the real estate game, what to put in a purchase agreement, and ultimately (spoiler alert!) what it’s like backing out of a purchase agreement.

Real Estate is a Great Asset Class for Investing

I love real estate for the following reasons… Real estate is:

  • Accessible – Anyone with the means and/or credit can buy it
  • Appreciable – Can increase in value over time
  • Leverageable – You can buy on margin and borrow against equity
  • Rentable – Cash flow baby!
  • Improvable – Through sweat equity or contracting out
  • Deductible/Depreciable/Deferrable – Amazing tax benefits

If you can handle the time spent collecting checks, dealing with tenants, and using the bank’s money, real estate can be a great way to build wealth.

So with these considerations in mind, I went searching for a new property.

Playing the Real Estate Investor Game

Over the preceding months, I had been watching the market, and had a decent understanding of the prices in the area. Following the advice from The Millionaire Real Estate Investor (book review), there is an appropriate and recommended way to go about generating leads and making offers on properties.

5 Laws of Lead Generation

There are 5 laws of real estate lead generation:

  • Never compromise
    • You’re only looking for properties that meet your criteria and motivated sellers who will meet your terms.
  • Be a shopper not a buyer
    • It’s better to miss a good one than to buy a bad one
  • Timing matters
    • Be the first or last person to make an offer
  • It’s a numbers game
    • The quality is in the quantity
  • Be organized and systematic
    • Protect your time and your money

Following this advice, I found a house backed out of an accepted purchase agreementon Zillow that looked promising for $149,000. It was a 2 bedroom, 1 bathroom house with 879 sq. ft. It needed some repairs, but the bathroom and kitchen were recently redone. I called an agent and we scheduled a showing for the next day.

The Showing

I showed up the next day and was ready to check it out. Coming up to the house, it looked okay. Since it was spring, most of the plants and trees hadn’t bloomed yet. As a result, the yard looked a little barren but I wasn’t too worried about it.

bedroom textured paint

Bedroom with Textured Paint on Walls

Walking into the house, I couldn’t help but think about all the work that needed to be done. The wood floor in the living room had a hump in it, and the bedrooms needed to be repainted. The floors needed to be refinished and the ceilings could use some work as well. Most of this work would be cosmetic and a good learning experience for me, but I was still skeptical.

Nice Bathroom, Kitchen and Garage

Moving through the house, I admired the newly remodeled bathroom.

The sink, tub, and tile combination was very nice and modern. If I were to move in, I wouldn’t touch these rooms until the bedrooms and living room were finished up.

Another bright spot of the house was the garage. The garage was two stalls and the wood seemed to be relatively new.

Questionable Basement (Crawl Space)

One big downside of this particular property was the lack of basement. There was a trap door leading down to the crawl space and the house was literally on dirt. This was a little concerning, but given the house was built in 1913, I figured it was probably safe.

All in all, the house seemed to be in pretty good shape and I was on the fence.

Making a Decision

After leaving the showing, I had to make a decision: did I think this house was a great deal OR should I walk away? There were many things running through my mind at this point: my criteria, my goals, my social life, and my financial situation.

The house fit within my criteria: it was in a great location and neighborhood, the price made sense, and it would give me a great opportunity to work on my handyman skills.

At the time I was looking at this house, I was reading The Power of Broke (book review). It’s truly amazing how “you are what you eat.” In the Power of Broke, there are many stories of people who were in survival mode and had nowhere to go but up. For some reason, there was a burning desire inside of me that wanted to become broke so I could force myself to crush my goals.

Lastly, I wanted to play the real estate game a little bit. I was looking to work on my negotiation skills, and what better way to do that than to make an offer on a house!

Old Habits Do Not Die Hard

The first time I bought a house, I pulled the trigger on the 2nd house I looked at. Well, old habits do not die hard. I made up my mind later that Saturday and called my agent. I was ready to make an offer on the house….

My Initial Offer

Initially, I wanted to get into the real estate game, but not go too hard. At the time of making the offer, I had about $12k in cash. Putting 5% down on a mortgage and paying 3% closing costs would result in about $11k out of pocket. I did not want my bank account balance to drop that low.

My initial offer was $149,000, seller pays 3% of closing costs, earnest money of $1,000, contingent on inspection and contingent on financing. It wasn’t the best offer, but wasn’t too bad either. I wasn’t thrilled about the house, but wanted to see what would happen. One last thing to note: I wouldn’t need to submit my earnest money until after the inspection (more on this later).

My Follow-up Offer

The next day, I got a call from my agent and she said the seller’s agent called and mentioned they had received multiple offers and were calling for the final and best offer by noon Monday. My agent asked if I wanted to change my offer and I told her I would think about it. I asked my agent want price she thought would be the winning price. She said around $160,000 given it was a multiple offer scenario and this property was on the low end of the market.

In this situation, I was willfully making several key mistakes and breaking more than one of the Laws of Lead Generation. I was compromising AND I was not being organized. If I was smart, I would have said, “Nope, this house is not worth more than $150k (or whatever price I thought it was worth)”, and walked away.

But I’m not smart I guess…. I raised my offer to $161,000, increased my earnest money to $2,500, and kept the contingencies and 3% seller paid closing costs. In addition, I wrote a letter to add a personal touch to my offer.

Going All Out With a Letter to Seller

One way to improve your offer on a house is to write a letter to the seller. Since I was already playing the game, I figured why not write a letter…

Dear Seller,

I’m interested in the house because I love the natural light coming into the kitchen. I can imagine you hanging out with some friends chatting there over coffee or tea and having a good time. I can also see you with your friends hanging out in the back of the house, grilling and enjoying the summer times.

I’m very interested in seeing the flowers bloom in the Spring and Summer time. I’m guessing you were quite the green thumb!

I currently live in a house which was built in 1900. I love the old woodwork, both in the trim and floors, and will look to keep that tradition on 42nd Ave S. I’m excited to get to work polishing the floors, painting and making the rest of the house get on the same level of beauty as the bathroom and kitchen. My plans are to balance both modern times and the early 1900s.

Finally, I’m looking forward to move into a neighborhood near Minnehaha Park and the Mississippi River. I will be riding my bike and running all over the park to take in the beautiful scenery.

For you, I want to make my offer a convenience for you and can be flexible. I may not have the best offer, but I will take care of the house like you have for the past 25+ years. I’m 24 and looking to build my skills as a homeowner, DIYer, and repairman. Being able to work on this house will bring me great joy. To build on my earlier comment, I’m going to look to take what you’ve done with the bathroom and kitchen, and combine modern and traditional elements to create a great living space.

Thank you for considering my offer,

Erik

Let’s just say I went way too hard with the letter, especially for a house that I was originally on the fence about… keep reading to see the result!

Offer Accepted

I wasn’t the highest bidder, but my letter won the sellers over. My agent texted me “We won the offer!!!” I was at lunch with some co-workers when I looked at the text and my stomach did a flop. My first thought was, “Oh shoot, what did I get myself into.”

There I was, about to take on another $150k in debt, and acquire another property. I was experiencing a crazy mix of emotion – I was feeling both excited and scared at the same time. I was fulfilling one of my goals for the year: buying another property! At the same time, I was throwing away my summer to work on a beat up house.

After work, I got home and thought about what I was getting myself into. I was excited to live alone, to work on a house, and to get going on my real estate business. At the same time, I was worried I’d be missing out on quality time with friends and family. Also, I have big dreams for The Mastermind Within, and while I could blog about my house projects, I wouldn’t be able to read books and deliver the same high quality content consistently…

Experiencing Serious Buyer’s Remorse

That next weekend, I was not happy with my decision to make an offer on the house and I was experiencing serious buyer’s remorse. The week after the purchase agreement was signed, I had an inspection. This could potentially be my saving grace if there was anything structural wrong with the house. If everything was good to go, I would go through with it. BUT if something was wrong, I was going to get out of there as fast as I could!

The Inspection

The inspector showed me around the house and commented on a bunch of minor points and issues. For the most part, the improvements would be cosmetic and there was nothing wrong with the house itself from a structural standpoint.

Then, we went down into the crawl space and I saw the light at the end of the tunnel (no pun intended). As you can see in the pictures on the right, the floor joists were held up by shims and were not professionally done.

The inspector commented while there were no issues currently with this set-up, he could not comment on the future. I had found my way out.

I called up my agent and said I wanted to chat about the foundation. I asked if she could call the seller and see if they would be willing to fix the joists. The seller came back saying they were selling the house as is. I had to make a decision. Do I take an old house with a suspect basement, or do I back out of the purchase agreement and walk away?

I Backed Out of the Purchase Agreement

Thank goodness for the contingency on inspection!!! Sorry, better luck next year sellers!

The foundation issues were my saving grace. I was ecstatic to get out of the purchase agreement and on with my life. Not only did I gain valuable experience in the real estate game, but I also potentially saved tens of thousands of dollars on the foundation problems.

In addition, I would not be tying up a bunch of cash and time. I would have spent a lot of time fixing up the house. I was excited by the freedom that backing out of the purchase agreement allowed me – freedom to spend my summer with family and friends and working on other goals instead of working on home repairs.

At the end of the day, I spent $300 for the inspection and that was that. I didn’t lose my earnest money because the terms of the contract said I’d pay it after the inspection. Also, I didn’t spend anything on the mortgage application. Like I said, the total expense was 10 days of chaos, $300 and this post!

The learning experience was great. I interacted with lenders, real estate agents, and learned a lot about the entire home buying process. I’d say it was $300 well spent!

Conclusion

My advice for you when it comes to what to include in a house purchase agreement and how to go about deciding if an investment property is really the investment you’re looking for:

  • Always have a “Contingent on Inspection” clause in your purchase agreement. You never know what will be uncovered during the inspection.
  • Write a letter to the seller if you really want the house. A letter adds a personal touch and sets your offer apart from other people’s offers.
  • Make sure you actually like the house and can imagine yourself living in it before putting an offer in!

Thanks for reading!

Do you invest in real estate? What are your thoughts on buying a fixer-upper? Have you ever had to back out of a purchase agreement?

Erik

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Comments 20

  1. Funny about the letter: when my mom sold her house two years ago she had multiple offers on the first day on the market. The one she took was from a guy named Doug (that’s also my youngest brother’s name) who wrote a sweet letter about how much he loved the house. Apparently the letter thing does work! BTW, I think you made the right choice. You’ll know in your heart when it’s time to buy. Go with your gut. 🙂

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      Author

      Thanks for stopping by Laurie 🙂

      A letter that is well written seems to get the job done if you really want the house. I’ve wrote two letters for my two offers and had both accepted! I think I made the right choice as well… time will tell though!

      Have a good one,
      Erik

  2. Hi Erik I’m early 40s with around 20 rentals. I had buyers remorse on a property a few months ago. Multi offer scenario. Probably over bid but the area was good . Builders report revealed $70k in repairs. Vendor would only knock an extra $10k off the price . I got out quick smart for the cost of the builders report.

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      Author

      Thanks for the comment Chris. A 70k bill vs. a few hundred bucks is much better. Also, you already have a great portfolio and don’t necessarily need to take risk at your point in the game!

      Have a good one, I appreciate your support.

  3. Excellent read! I like the way you framed it as if you were telling a story, that kept me intrigued so I read the entire piece! I would not have thought about writing a letter to the seller; that’s a nice touch.

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      Author

      What’s up Dan? 🙂 Thanks for the compliment – I appreciate it!

      Yeah, it seems a letter does the trick… though I’d be careful using it!

  4. An excellent learning opportunity this was. I’m glad you were able to get out of the deal and with it gain some clarity on the rest of 2017 and your future goals.

    While I don’t invest in real estate, all of my homes have been fixer-uppers. Thus, I feel we’ve profited nicely when selling them due to our DIY improvements and a good market timing. I like to find a diamond in the rough.

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      Author

      Yeah Amy, I agree. I’m happy as well – now I can focus in on the things that really matter to me!

      It’s great you are handy and have been able to find some good deals. I’m glad you’ve been successful with your houses!

  5. Hi Erik,
    It’s great that you were able to learn from this experience and also avoided a costly transaction! This only makes you stronger the next time around.
    I find house ownership quite stressful – I’m sure if I were single I’d be living in a hotel or something!

    Building up a secure foundation before taking the plunge is definitely a wise move since you never know what might happen. And I suspect your finance foundation will never need any shims 🙂

    Best wishes,
    -DL

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      Author

      Thanks for the comment DL – glad you could stop by 🙂 I’m very happy with my decision and glad I got out of it.

      I’m very excited about the future! Also, nice pun! 🙂

  6. We looked at a fixer upper this past weekend. I was looking around it trying to figure out if it had good bones or not. It became evident when I went upstairs that the house was slanted. At that point I said there was too much work in this money pit so we walked out. I have no idea how the seller is going to sell it but the agent kept telling me unsolicited she’ll accept all offers. No thank you!!!

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      Author

      Wow, in my current house, the floor at the top of the stairs is slightly slanted, but that’s the only place in the entire house where there is a little bit of an issue.

      Nice one not pulling the trigger!

  7. Good save on the inspection. I’ve only bought one house so far in my life, and made my offer “as is” but contingent on inspection.

    Good thing I did! There were lots minor things but one major one found during inspection. They fixed the attic and we closed the deal. My home has almost doubled since then, partly due to my excellent purchase price, and partly thanks to being in close proximity to Apple.

    Good luck with your next purchase!

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      Author

      Nice work on the Attic. It’s great when the seller is willing to take care of a few things. For my current house, I asked if they could trim the trees and they did. All in all, the inspection is a great thing to do.

      Thanks for stopping by Jack! 🙂

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      Author
  8. I had also also been searching for an investment property earlier this year,but the market was crazy. I was trying to by a new construction condo,but I did not get an appointment at the beginning. I got it about a month later and the price I was being offered at was at least $50,000 more than the price that I saw a month earlier. Suffice to say, I decided to take the risk of missing out on an opportunity rather than getting ripped off and regret later.

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      Author
  9. How do you get in touch with the Seller to send the letter? Do you give it to your agent to pass onto them??? Thanks!!

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      Author

      Yes Jessica, you talk to your real estate agent, and then can give them the letter to pass along 🙂

      Thanks for the comment!

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