Mica LLC is our new, tiny rental company in Duluth, Minnesota. Now that we own property here we intend to build on for ourselves, we knew it was time to purchase an investment property. Rhyolight LLC sold both houses in Reno at the beginning of the year. We thought we could move Rhyolight LLC to Minnesota (read about our rentals in Reno in this post).
Arrive in Duluth
We arrived in Duluth between snow storms and are staying near the Aerial Lift Bridge on the Basin. I would not normally drive through snow, as I don’t think it’s safe and I don’t enjoy the cold. The decision to arrive on April first was to facilitate the search and purchase of the new rental property for Mica LLC. Our realtor, Cody Oakland, told us that’s when we could expect many houses to come on the market. He also let us know the asking prices were rising quickly.
New Lawyer
We found our lawyer, Greg Gilbert, online and easily scheduled an appointment to meet with him. He is very nice and helped us get a better understanding of our LLC situation as well as the Trust we had previously set up. He suggested that we dissolve Rhyoight LLC and create a new one here. So, Mica LLC was born!
The Search Plan
Our preferred price range, and the condition of the homes listed for sale meant there were very few homes we were interested in making an offer on. We are all about completing renovations, and updates. We can repair or replace siding, roofing, kitchen cabinets, and bathrooms. However, we will not buy a house with water in the basement (other than what is in the sump pump), main support beams that have been cut or damaged, or electrical work clearly not done to code. Old electrical panels, and wires are one thing. But a previous homeowner randomly running wires and not connecting outlets to be grounded correctly is another.
We can only see the true quality of renovations from the basement. This is where we spent most of our time as we looked at each property. After a couple nights of seeing houses, we worked out a strategy to save time. When arriving at the house, we would first walk around the outside looking specifically at the main electrical connection, siding, windows, doors, roof, and foundation.
Then we would head inside and directly to the basement. In an unfinished basement we could see the age and quality of the foundation, plumbing, electric, hot water tank, and furnace or boiler. The support beams and floor joists could be inspected for age, dry rot, and intentional cuts previous owners had made. We looked at so many houses with the support beams cut and left hanging – we were shocked. There are so many houses with electrical work changed or added to and definitely not to code.
The Offer
Each of the houses we liked enough to put an offer on ended up with multiple offers. On the first night we arrived in town we saw five houses with Cody. One was perfect and we decided to make an offer. The house is very small and well maintained and on a very small lot (great for a rental-less yard to maintain). The basement was dry, the floor joists were intact, and the neighborhood was on the short list of preferred areas for our rental.
Our offer was pretty strong, but not strong enough. There was no inspection, $5,000 to cover a potential appraisal gap, and escalation clause over any other offer in $2,500 increments up to $30,000 over asking. We’re surprised at the competition and the amount of money people were willing to spend.
Another Offer
For the next several days, we met up with Cody to see about 15 additional houses. Two were in solid condition. The more expensive of the two was nicer and needed fewer updates. We decided to put an offer on the home with the lower asking price which needed considerable work. We learned from previous experience that we needed a strong offer with an escalation clause.
The offer we made had no inspection, $5,000 to cover a potential appraisal gap, and went up in $2,500 increments over any competing offer to $30,000 over asking price. Again, our offer was not accepted. This time the seller took the LOWEST offer! We were left at a loss. We didn’t just get our offer rejected; but we lost the opportunity to make an offer on the other higher priced house. I think our realtor was more upset about the way this went than us though.
The following week we saw several more houses – we ended up seeing 30 houses in all. If we wanted the opportunity to make an offer, we had to quickly get on the viewing schedule with Cody to be sure we could see the homes before the sellers considered and accepted an offer. That meant we had about 3-6 days.
Offer Accepted
We again found a solid house and made our strongest offer yet. Because we closed on the second house in Reno, we had cash. Rather than make the offer with a loan (again) we offered an escalation clause in $5,000 increments up to $45,000 over asking in cash, no inspection, and to close on the date of their choice. Our offer was no where near the highest, but they accepted it.
Cash Offer vs. Loan Offer
That’s the trick with having cash. The sellers had an offer $65,000 over asking with a loan. If they accepted that offer they’d run the risk of the house appraisal falling short. With the buyers’ offers being so much higher than the asking price, the bank providing the loan is likely to decide that the house is not worth that amount. Duluth’s housing market seems to have remained very low until this past year. So, when the bank looks at the houses that have sold recently, they will not see the value being $20,000 or more over what similar homes have sold for. However, when buying with cash, the bank is not involved at all. The buyer is saying this house is worth this amount to me; and that makes the cash offer stronger than higher offers that require a loan.
I’m Excited!
We will close on May 10th. Once we sign, I have a bit of work to do in the house and yard. We are going to be living in it ourselves this summer. We don’t have water and septic at the other property, yet. With the work we will be doing there we will need a place to have reguar (not Navy) showers. We will eventually rent to travel nurses; so I get to shop and furnish the house. Next year, we might consider a second property for Mica LLC. We will have to see what the market looks like and where we are in the process of building our own home!
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