What I’m thinking about: Why a deal with a 65% win rate still isn’t worth taking in the nastiest buyer’s market in decades.

We recently evaluated a ~$70K infill lot near a Texas metro.

Even with our high bar for infill lots, it checked a lot of boxes. Established neighborhood, no utility question marks, room to undercut the active market, and a realistic exit somewhere around the $120K mark…netting us roughly $20K on a 50/50 split, covering a few months of overhead in a Real Estate down cycle.

Perhaps a 60-70% probability of that outcome.

That’s the kind of deal we would have taken a swing on a year or two ago without much hesitation.

But the underlying local market metrics (sourced from Reventure) include several brutal detractors…and this is where patience and discipline separate the operators who survive long term from those who fade out.

Sit With These Numbers

Here’s county-level data (nearly identical to the zip code breakdown, which we will often compare to, and utilize county-level data for higher statistical power when appropriate), and I encourage you to really sit with these numbers:

For-sale inventory has surged from 44 active listings in 2022 to 149 today…by far the highest on record. That’s a 238% increase in roughly four years.

The inventory surplus (meaning how much higher current for-sale inventory sits versus the long-term average for that month) is running at +72% above normal…the highest on record.

DOM is pushing 90-101 days, creeping up since mid-2022, and steadily above the long-term average of ~65 days since a short-term dip below that at the start of 2024. Just about tied for the highest on record.

And the salary needed to afford a home in this area sits around $103K…while actual median income hovers around $80K. That gap (you guessed it…the highest on record) alone tells you where buyer demand is headed (or more accurately, where it already went).

Also, the home price forecast is down 6.3% over the next year (Reventure has a positive predictive accuracy of greater than 70% when it comes to annual pricing forecasts), with the collective data indicating a historic market in favor of buyers:

One more thing…the only infill lot that sold in the same subdivision over the past three years closed in mid-2024 for $135K. No active comps in the same neighborhood either to compare against…forcing us to utilize similar, but not 1-to-1 comps.

That thin comp environment combined with deteriorating fundamentals creates real uncertainty around exit pricing and timeline.

When the Math “Works” But the Risk Doesn’t Fit the Reward

So we’ve got a deal where the most likely outcome (60-70% probability) nets us $20K.

But there’s an estimated 20-30% chance the lot sits for six months or longer, tying up capital and adding carrying costs.

And a sub-10% chance we take a small net loss.

Those odds, in isolation, look favorable. Most people would take a 60-70% win rate all day long.

But here’s what gets missed…the opportunity cost of locked-up capital in a market where better deals will inevitably surface (almost every week this year we have been presented with a potential deal more attractive than the last, though some won’t materialize for ~3-6 months), combined with the reality that “six months or longer” can quietly become twelve months in a market this soft (…we lived through that recently with one of our subdivide projects).

We are attempting to get the seller down another ~$10K to create more margin to largely eliminate the risk of loss, and give us a greater capability to undercut in order to move the asset, but it’s a long shot.

(Having to be extra conservative never feels good, by the way. There’s always that voice saying “you’re leaving money on the table.” But we’ve been burned enough times to know that the table has a trapdoor when you’re not as careful as you should be.)

Real Estate Is Hyperlocal…But the Macro Trends Are Creeping Everywhere

Remember, not every market looks like this. Some areas in the Midwest and Northeast have maintained strong seller dynamics, and there are pockets across the country where inventory is still tight and demand holds (or is even increasing).

We’re not painting the entire US market with one brush.

But here’s what we are watching closely…many of those stronger markets are seeing their overvaluation rates steadily climb. The overvaluation metric (which compares an area’s current home value-to-income ratio against its long-term average) is north of 20% in many of those markets, similar to what was seen in many of the COVID-boom markets (and still not balanced out in many of them).

Note the overvaluation data for this TX county we referenced above:

That correction was painful for a lot of people who bought at the top, and the pain is still being doled out from a low-demand perspective, as we noted earlier.

Markets that still look “healthy” today could follow a similar trajectory if when price appreciation tips the balance toward buyers, or we continue to see meaningful job losses, or wage growth that doesn’t keep pace with inflation, or resulting from other macro shocks (e.g. unanticipated impacts of war).

Patience Is Not Passive

From other conversations we continue to have, and from getting visibility into how other companies run their deal underwriting, there’s still a widespread tendency to rush deals and “force” revenue.

We get it. Payroll, software costs, marketing spend…the overhead clock doesn’t stop ticking just because the market got harder. The temptation to take borderline deals to “keep the lights on” is real.

We deal with the same pressures internally, though we can afford to be more patient than most because we relentlessly police our overhead and are sitting on significant cash reserves to ride out turbulence.

Never forget that the rush is imaginary. The urgency you feel to close something, anything, is manufactured by your own cost structure and anxiety…not by the market itself.

The line between emotion-driven deal-making and showing up every single day to move forward (methodically, without shortcuts) is razor thin…but the outcomes couldn’t be more different. One builds a business that compounds over decades. The other builds a business that implodes the moment luck runs out.

And as my business partner Everett routinely says, “People get lucky, until they don’t.”

Having lived through the downside of that approach more times than I care to mention, that lesson is thoroughly ingrained in how we operate.

We constantly see examples of stunningly poor deal structuring (particularly when external capital is involved) and comp selection (or the lack thereof) that make us physically recoil in astonishment. It may have worked to this point, but this market won’t forgive sloppiness forever.

When the Pressure Is Highest

Markets like this are exactly when the underwriting discipline you’ve built gets tested. Not when things are easy and (almost) every deal works. But right now, when the pressure is high, and the temptation to stretch on pricing or get lazy on comps is at its peak.

If you’re a full-time operator with routine deal flow and you want a capital partner who views underwriting mastery as their #1 company value, then send us your best deals. We write checks from $50K+. We close 100% of deals we commit to. And we bring national underwriting experience to every transaction.

Let’s grow together.