Sarita Is Sold and Closed!

There are lots of ways to get free advertising. Doing a great job like Dana Wissink, the Realtor® who handled the transaction for us, is the most reliable way.

My mom always said, “Everything always works out for the best.” Even the flooded pasture I used for the background of this meme.

This post originally appeared on the Hermit Haus Redevelopment website on 2019-12-05 and on the Hearts, Homes, and Hands blog on 2019-12-04.

We have learned a lot from the Sarita project. It feels like almost everything that could have gone wrong did…but that’s not really how it was. We had one major pain in the ass, and that was the buyer’s lender. Even the buyer’s agent said she will never use that lender again. Here is a brief rundown of what we learned.

You never know where you’ll find a deal.

I never expected to find a good deal on a property in my own family, but my brother and his wife just wanted out from under a house they could no longer maintain.

People first.

We ended up making a little money outright for handling the sale and taking over the debt, but most of the profits are going into a fund to help take care of my brother and sister-in-law going forward. As I said, they would have been happy to let us take it all, but that’s not how we roll. They actually objected to taking a promissory note to cover their future care, but we insisted on taking care of them.

You need a local team.

Redevelopment is a team sport. You can’t do it all yourself. You need good contractors, which we didn’t have in the Brazosport area.

Since this house is well outside our area of operations, we decided on the prehab exit strategy. We cleaned up the house and maintained the laws to keep the HOA happy. But we did not go looking for contractors. Instead, we offered the house at a substantial discount to its after repair value (ARV).

We offered the listing to an old Realtor friend, but she had also moved out of the area. (I may have mentioned, I grew up there but left as soon as I could.) While we were trying to find a Realtor, we were approached by an investor who found the house while driving for dollars. We couldn’t find a place where the numbers worked for both of us, but we did list the house with her. She turned out to be a great person to work with, and I hope we can do stuff together in the future.

There is a new type of FHA loan.

FHA now offers a loan—the FHA 203(k) Rehab—for homeowners wanting to renovate, either to make the home more affordable or to participate in a homestead flip. I don’t believe the loan is available for investors since it is an FHA vehicle.

Because FHA allows for up to 100% financing, FHA lenders are notoriously hard to deal with. So, we usually don’t accept offers with FHA financing, but we were intrigued with helping someone obtain a family home for renovation, instead of just turning the project over to another investor.

It’s not closed until it’s closed.

We learned that this type of financing doesn’t make the FHA any easier to deal with. In fact, the lender arbitrarily delayed closing now fewer than five times. One of these times caused me to miss a trip to Hilton Head we had planned for more than a year. The next one, move closing out of that trip window and came the day after going on the trip became impossible for me to arrange.

They also refused to authorize closing until seconds before it was schedule for the penultimate time, knowing I had to travel four hours to close. We thanked them very much, and I drove down the next day anyway.

Okay. We’ve already talked about most of that, but it never hurts to go over lessons learned. And as of now, the deal is done. The money is in the bank. We have helped a homeowner get a (soon-to-be very) nice home. We have helped and can continue to help my brother’s family. And we have additional resources to start hiring staff to help others stay in their homes.

What’s the Difference Between Distress and Motivation?

If you have almost $2-million available, have friends in New Zealand, and love the views as much as I do, this village may be the right investment for you. Check out the listing on OneAgency. They have lots more exciting pix. Photo by: OneAgency

This post originally appeared on the Hermit Haus Redevelopment website on 2018-11-19.

You know we’re always looking for our next redevelopment opportunity. We’ve talked about distressed properties and the opportunities they present if you can look past their challenges. I’ve also talked about how the numbers have to make sense and we buy only a small percentage of the distressed properties we look at.

Why is that?

A distressed property is only one indication of what may be a motivated seller. The level of seller motivation rather than the level of property distress is the real driver of what makes a property we can buy.

Some of the things that may motivate an owner to sell include:

• Physical distress arising from deferred maintenance or the inability to pay for needed repairs
• Lack of interest in an inherited property or a second home the seller just doesn’t want to deal with
• Landlord fatigue that comes from not understanding how to manage rental properties and tenants or when the landlord moves away
• Financial distress arising form health problems, job loss, or financial mismanagement

In any of those cases we can help the seller overcome a (hopefully) temporary problem by buying their property and taking on the headaches they can’t or don’t want to deal with.

One of the challenges in our business is understanding the difference between distress and motivation. This article is one of the best example examples of how to tell the difference between distress and motivation. Here are a few salient facts if you don’t want to read the original article:

• An entire village near Lake Waitaki in New Zealand is for sale with an asking price of $1.8-million.
• Once home to almost 3,000 people, it has been “mostly vacant” for almost 30 years.
• In 1995, the village was awarded historically protected state to prevent its demolition.
• The current owners bought the village in 2011 to use as a corporate retreat center.
• When those plans failed, they put the it back on the market in 2015, but it has not sold as of this writing.
• Recent changes to New Zealand laws prohibit foreign investors from buying homes, limiting the pool of potential buyers for this property.

So far, that sounds like a classic distressed property, even without considering the condition of the homes and the lodge it comprises. I know I would be motivated to sell if I had almost $2-million tied up in an investment that generated no income and had been on the market for three years.

But is the current owner motivated?

“It’s simply a matter of waiting for a person to pay the price we are looking for,” is the definition of an unmotivated seller?

So, no. Even though Suna and I have discussed eventually retiring in New Zealand, we would have to walk away from this property.

Inflated ARV: Massaging the Numbers

When calculating ARV, you have to think like a buyer, a contractor, an appraiser, a seller, and an investor…all at the same time. Any question you can ask yourself is probably important.

This post originally appeared on the Hermit Haus blog on 2016-10-07.

One of the easiest mistakes to make in renovating houses is to overestimate their After Repair Value (ARV). In this post, I’m not going to delve into motivations for inflating a house’s ARV. After all, I’ve done it to myself, so far be it for me to cast asparagus on anyone. I’m just going to talk about how it happens, and there are only a few ways:

• Use the wrong comps.
• Make the numbers fit the model.
• Mis-time the market.

I originally planned to talk about all three of these risks in one post, but I soon figured out it would be way too long. Click here to open all posts on this topic.

There are are many ways to tip the scale in favor of something you want to do. Be honest with yourself and let the numbers make your decision.

Make the Numbers Fit the Model

As I mentioned before, wholesalers know our requirements, so it’s easy for them to (intentionally or not) make the numbers fit that model. Most wholesalers understand that their long-term survival depends on their reputation, but there are exceptions to every rule. Rely on your own or a third party for your numbers.

You also have to honest with yourself. We’ve all seen (and some of us have been) someone who says, “My house has to be worth $200,000,” with the implication being “because I need it to be worth $200,000.” Buyers don’t care, and they are the ones who make the final decision about how much a house is worth. If every other house like yours is selling for less than $150,000, nobody will pay $200,000 just because you need that much.

It’s very easy to convince yourself to pay more than you should. “I can pay another $10,000. If I fix it up to be the nicest house in the neighborhood, I should be able to get $20,000 more than those other houses have sold for.” Wrong. You may be able to push the market a little. You may even find a buyer who is willing to pay that $20,000 above market, but, unless the buyer is paying cash, the house still has to appraise. And appraisers work for the bank, not you. They aren’t going to ignore the comps just because you and the buyer agree on a higher price.

Suggestions

Here’s how to avoid these traps:

• Always run your own comps and trust your formulas. Never take the word of a wholesaler, especially when you haven’t done business with them before. Be conservative with your estimates of ARC and overestimate the repair costs. It’s much better to come in under budget and sell the house for more than the inverse.
• Keep your emotions out of it. Whether you are buying, selling, or renovating, your emotions will lead you astray. If you have to, keep a disinterested professional on your team to give you value advice in each stage of the project.
• When selling, it’s okay to be near the top of the market, but don’t try to push the market higher. Price your house just below the top, and let buyers push the price higher if they want to compete for it. Depending on your project, it can cost considerably less to discount a house than to hold it for even a couple of extra months.

Inflated ARV: When a Comp Isn’t a Comp

Just looking at the map, which set of houses looks more attractive? The ones facing the park or the ones facing other houses? I’ll give the answer in the body of this post.

This post originally appeared on the Hermit Haus blog on 2016-09-26

As I mentioned in my last post, 0ne of the easiest mistakes to make in renovating houses is to overestimate their After Repair Value (ARV). In this post, I’m not going to delve into motivations for inflating a house’s ARV. After all, I’ve done it to myself, so far be it for me to cast asparagus on anyone else. I’m just going to talk about how it happens, and there are only a few ways:

• Use the wrong comps.
• Mis-time the market.
• Make the numbers fit the model.

I originally planned to talk about all three of these risks in one post, but I soon figured out it would be way too long. Click here to open all posts on this topic.

Use the Wrong Comps

We rely on comparable properties—”Comps,” for short—to make our educated guesses at a house’s ARV. If we base our estimate on the wrong comps, we can really screw up. The rule of thumb is to only use comps within a mile of the subject property. But even if all the comps are within a half mile, they may not be appropriate to our estimate. We must always consider:

• Neighborhood boundaries
• Major streets
• Age
• Condition

Neighborhood boundaries are often marked by major streets. Any time you cross a major street, you’re likely to find the character of the neighborhoods surrounding the properties vastly changed, and the neighborhood influences property values. We looked at two houses in Temple that were on opposites sides of a road. The neighborhood on the north was 20 years younger than the one on the south, but the properties in the older, established neighborhood were higher than the newer houses to the north where it turns out the ground was more mobile, leading to more foundation problems (condition).

But we also evaluated a house in Round Rock where a very similar floor plan in the house directly behind the subject house—a privacy fence separated the two back yards—was worth about $20k more. Why? The subject house had once been the edge of development. All the houses one street over were 25 years newer and in much better shape thanks to a stronger neighborhood association. The subject house was worth considerably less after renovation than the house directly behind it. This was despite the subject’s proximity to a park and an elementary school. The numbers on the subject property were very attractive if we used the more newer, more appealing houses as comps but not when we only used houses on the same street.

A novice investor once showed me a map very similar to this one to justify the price being asked for a house. I pointed out that the so-called comps were in completely different neighborhoods from the subject. In fact, the only thing the “comps” had in common with the subject was that they were in the same ZIP code.

When evaluating another house in Belton, we were given comps that were on the other side of the Interstate from our subject property. Even though the “comps” had sold for more than $200k, our subject would have been overpriced at half that. Given that we were looking at a renovation budget of at least $60k, the $50k asking price was way beyond what we could reasonably pay.

The condition of the properties makes a big difference, too. When buying, if you only look at houses in similar condition to your subject’s current state, you can under value the ARV. But if the houses you use to price your purchase have already been renovated, you could end up paying way too much. The tricky part of buying a house to renovate is keeping both of these numbers in mind when you decide how much to pay.

Suggestions

Here are some basic tactics that will help you ensure you pay the right price for the houses you buy:

• Ensure your comps are as close to the subject property in size, age, and desirability as possible.
• Keep your comps close in proximity to the subject as you can.
• Don’t cross major roads, but remember to deduct value if your subject or comp is on a big road.
• Try not to use properties more than a half mile away from the subject.
• Mark sure the kids who live in the comps attend the same schools and ZIP code as your subject. I’ve seen the house across the street or next door go to a different school. Certain schools can be a tremendous motivation—in either direction—for parents.
• Always at least drive the neighborhood yourself before you decide to buy. If you can’t, make sure someone whose livelihood depends on your team’s profitability does.
• Keep both the current value and the ARV in mind. Make sure there is enough room between the price you’re paying and the ARV to pay for the rehab, your holding costs, and your profit.

Figures Don’t Lie

Selfie by Suna Last year, Paul Esajian invited Sue Ann and me (and some other investors) to watch the San Diego Chargers from the Fortunebuilders skybox. Paul has given us some great advice in the time we’ve known him.

This post originally appeared on the Hermit Haus blog on 2016-09-24.

Hanging on every word

Believing the things I heard

Being a fool

—Russ Ballard

One of my mentors, Paul Esajian, says, “Always trust the numbers.” By that he means your numbers. Phill Grove, another mentor, emphasizes this concept. He says, “Always do your own due diligence. Run your own CMA. Do your own repair estimate.” In other words, buying real estate is a perfect opportunity to follow the advice of the old Russian adage, “Doveryai no proveryai”—trust but verify.

Trust but verify. Especially when dealing with wholesalers.

We expect homeowners to lie through acts of commission, omission, and ignorance. They, after all, are in dire straits. They really need to get out of a problem house, and they often know what they need to accomplish that goal down to the penny. We expect them to over-emphasize their house’s strong points and ignore or hide its deficits. Further, they may not even know about a termite infestation, a leak in a wall pipe, or countless other problems that can drive a renovation over budget and into red ink. And, to be fair, homeowners expect investors to lie to them, too.

But wholesalers are a different animal. They speak Investor, so it’s easy for investors to let their guard down too much. For example, wholesalers know how to get our attention with numbers. They know the secret formula we use to make sure we have some cushion for the unforeseen issues that arise in every project: .7ARV – R = O. Our Offer should be in the neighborhood of 70% of the After Repair Value of the property less the cost of Repairs.

The Perfect Deal

Asking Price	$100,000
Repairs	$40,000
ARV	$200,000

So when we see an opportunity like the one shown to the right, our immediate tendency is to short-circuit our processes and jump to the conclusion, “That’s a good deal!” Why? Because .7 of $200,000 is $140,000. Subtract $40,000 in repairs and we should be comfortable paying $100,000 for the house. I mean, what could go wrong? Well, there are only three possible reasons why the numbers match our formula so well:

• The deal is a perfect fit to our expectation, and we stand to make about $25,000 after holding and marketing costs. 
• The ARV has been overstated, intentionally or not, which could reduce or eliminate our potential profit. 
• The repairs have been understated, intentionally or not, which (again) could reduce or eliminate our profit margin.

We don’t need to talk much about what happens in the first outcome, where the numbers are correct. Everybody is happy. Everybody wins. But I reckon each of the other two outcomes deserves its own post. As I write them, you can find them gathered here.

Most wholesalers are hard-working, honest people. But especially with the growth of HGTV, DIY, and similar networks, vast numbers of newbies are coming into this profession, and wholesaling is the logical starting point. (We can discuss why in another post some other time.) People in our profession follow the distribution of the general population with roughly 2% falling somewhere along the psychopathy scale.

It’s like one of my favorite bosses (she hired me three times in the corporate world) once said, “Figures don’t lie, but liars figure.”

It's All in the Timing

This house is pulling itself apart as parts of its floating slab foundation move in different directions, like continental drift.

This post originally appeared on the Hermit Haus Redevelopment website on 2016-06-20.

There’s a fine line between buying too high, buying right, and losing the deal. We lost another deal today by only a few hours. There was a REO (Real Estate Owned—it’s a banking term that means the bank owns the property after foreclosure.) house in the same neighborhood as the Ash House. We had been keeping an eye on it for a while, but the bank wanted too much money for the shape the house was in.

We kept submitting offers over time in hopes of eventually landing this deal. Even though the bank had steeply discounted its original asking price, the discount wasn’t sufficient to cover the cost of repairs. The roof was past its expiration date, and the foundation had problems. A floating slab foundation built in the 60’s on highly mobile soil will eventually fail. It’s just a matter of time. When it does we can repair it and bring it to today’s state of the art, which has improved dramatically over the last 50 years.

The picture to the right shows several red flags that indicate a higher than average repair cost.

• The foundation has cracked and is pulling parts of the house in different directions, resulting in the crack running down the wall.
• This has also let water get into the wall, which exposes you to rotted studs at best.
• The window framing has failed, which also lets water into the wall.

We submitted another offer today, expecting it to be rejected. It was but not for the reason we thought. The bank finally relented and sold it for a price where a reputable investor could:

• Repair the foundation
• Replace the roof, fascia, and gutters
• Rebuild the fence
• Retain a reasonable budget to repair the interior of the house

The problem was that our offer came in two hours after the bank accepted another investor’s offer. We don’t know what that offer was, but we were told ours was “in the ballpark.” Timing is everything. You snooze; you lose. Yada, yada—just keep working to find the next one.

What Is Real Estate Wholesaling?

This is a very large sad house offered to us by a wholesaler. We will see…. Photo by: Suna

This post originally appeared on the Hermit Haus Redevelopment website on 2016-05-23.

Yesterday, Carol, Russell, Sue Ann, and I went to look at a prospective wholesale deal we’re calling either the Antelope House or the Home on the Range because of the toy deer in the front yard. This was a frustrating trip. The wholesaler didn’t have the three things you expect a good wholesaler to have when asking you to meet at the property:

• The keys
• A firm idea about what he wants to sell the house for
• An understanding of the redevelopment business model

But there are newbies in everything, and I’m going to put down his performance to a lack of experience rather than to a lack of respect for the business or us.

In real estate investing, wholesaling is a process whereby the wholesaler:

1. Finds a (hopefully good) deal on a sad house
2. Negotiates with the current owner to establish the purchase price of the house
3. Signs a contract to purchase the sad house
4. Markets the contract to other investors at a premium
5. (Hopefully) finds another investor who is willing to pay the price the wholesaler needs for the property
6. Assigns the contract to the new investor who actually closes on the deal

Some people will tell you this process is illegal if the wholesaler is not a licensed real estate agent, It is, in fact, illegal in some states unless the wholesaler actual takes title to the property. This strategy is called a double-close because the title changes hands twice: once when the wholesaler buys it from the original owner and once when the final investor buys it from the wholesaler. In Texas, sale and assignment of the contract is legal because the wholesaler is marketing an equitable interest in contract itself, not the real estate.

You can find blank assignment contracts on the Web. I recommend paying the money to have a good lawyer in your area draw one up.

In this case, Sue Ann and I drove 40 miles each way (Russell and Carol drove farther!) only to waste our time with a wholesaler who was at best unprepared. He offered us the contract at nearly full retail prices without giving us the opportunity to look at the inside of the house. He said it would take about $15-thousand to repair the house, which would place the total cost of acquisition just north of what we could expect to sell it for—if his numbers were right. He said he would fix every flaw we found on the exterior of the house.

Now, there are ways to make an offer on a house sight-unseen. To do so, you must know your market extremely well. You can make the offer based on average cost per square foot of a sad house and your average cost to repair. Then you add in an allowance for worst case.

Also, never trust the wholesaler to make the repairs for you. There are two reasons for this:

• You are responsible for the quality of the repairs that the wholesaler makes without having any control over costs, materials,contractors, or corners cut. What’s the old adage? “If you want something done right, do it yourself.”
• The profit of a redevelopment company comes from the difference in value before and after redevelopment. Needless to say, allowing the wholesaler to reap these profits makes the deal too thin to think about.

The wholesaler wants us to meet back at the house on Thursday, at which time he promises to have the keys. If he still wants to sell us the house and act as a contractor, he will have read our contractor materials by then and understand the way we do business. If not, we will have other things to do on Thursday.

The bottom line is never be afraid to walk away from a “deal.” As my friend Larry says, “Some of the best deals I’ve done are the ones I walked away from.” It’s always better to walk away than to lose money.

Private Money Anxiety

Your lenders are people, too. When they have anxiety about lending money to you, understanding what drives that anxiety can help make your business more profitable.

This post originally appeared on the Hermit Haus Redevelopment website on 2016-04-04.

You hear a lot in this business about private money and hard money—often lumped together as if they are the same thing. Both are alternative financing options to banks. There are advantages and disadvantages to using either private or hard money. Let’s start by talking about what distinguishes the two:

Hard money

Hard money is more bank-like. It involves dealing with a lender whose business is lending money to individuals or companies for the purpose of buying, renovating, and possibly selling real estate. Hard money lenders are “bricks and mortar” operations; they have a building, marketing and collections departments, and strict rules they must follow.

Private Money

Private money is money you borrow form individuals. They can be sophisticated lenders or novices. They can be your lawyer, car salesman, or coworker. They may even make their living by lending money to investors. But they aren’t regulated by the government because they aren’t in the business of lending money. That is they don’t have a building and staff to support.

Investors often lump hard and soft money lenders together, because they serve the same purpose: they provide the money you need to do your business without having to go through the qualification process, wasted time, paperwork, and financial nakedity of a bank loan. The price for this convenience is a much higher cost of money and a shorter loan term. Neither private nor hard money lenders are likely to give you a payback period longer than a year, and you’ll probably pay more points for the loan and a much higher interest rate than you would with a bank loan. For example, we have paid two points (two percent of the total loan) and twelve percent interest for private or hard money as opposed to one point and five percent for bank money.

So why use private or hard money? When you find a profitable deal, you often have to close in a week or two. I have yet to find a bank that can make a decision in less than a month, even when you have an ongoing relationship—as if that meant anything to a bank. The added expense is just a cost of doing business. So what if you pay your lender $5,000 more than you would a bank if you’re still going to make $25,000 or more on a deal you would lose if you waited on a bank to act?

The people you borrow from have their own plans for the money they let you use. We always protect their money first. The lender is a named insured and gets paid before we do. Photo by: Suna

Which Is Better?

So which is better, hard or private money? The answer is it depends. Private money can make a decision faster, but it can also be more skittish. I have known private money lenders to back out at the last minute. I haven’t had that experience with hard money lenders. But because hard money is more regulated, they can take longer to make a decision in the first place, which can cost you the deal.

One thing to remember is that whether you’re using hard, private, or bank money, your lender is taking a bigger risk on your project than you are. You are risking their money, and the only assurance they have of getting it back is your word. Banks don't want the property that secures the loan. Hard money or private money lenders often don’t want it either, but they are in a better position to recoup their investment (plus a little) if you default than are banks.

When you use someone else’s money, you play by their rules. Be patient with them if they get skittish at the last minute. They are just trying to cover their assets. Help them overcome their anxiety and get the deal done. You’re going to protect their money better than your own; help them understand that.

Another thing to remember is that your lender is another set of eyes on the deal. They may see problems you missed or glossed over in your initial analysis. Anything that makes your lender anxious is something you should take very seriously once you uncover the root cause. For example, a private money lender we are working with recently got very nervous just before closing. (That’s usually the most stressful time for them.) They started by questioning our analysis, so we walked them through the deal step-by-step.

Then they asked the question that was really bothering them: “What about insurance? Will we be a named insured?” We always name the lender as an insured on our Buidler’s Risk policy. It’s only fair. But when I reviewed my checklist, I hadn’t checked the box beside insurance. Oops! My bad. Luckily, my lender reminded me a few days before closing. Now that box is checked and we’re moving forward.

Philanthropy and Networking

This ad will appear in the playbill for every performance by the Milam Community Theater this season. Consider sponsoring a community group in your area. It is “doing good” that does good for you, too.

This post originally appeared on the Hermit Haus Redevelopment website on 2016-04-02.

Sue Ann and I attended the Milam Community Theater’s (MCT) “Night on the Town” tonight. It included a nicely catered dinner of roast beast and veggies followed by MCT’s presentation of Agatha Christie’s The Unexpected Guest. I won’t comment on the play here, but Suna was asked to write a review for the local newspaper.

So why am I mentioning dinner out on a business blog? I wanted to point out the power of networking and advertising at these otherwise “social events.” For dinner and the play, we were seated with the Cameron city manager, the host of a local radio broadcast, and two other business owners. In the audience was our insurance broker, a real estate broker, a lawyer, and several other Milam County elites.

All of these local big wigs had at least one thing in common: we had all helped sponsor MCT’s season this year. And we got to mingle with them and revel in that commonality.

While this kind of networking inevitably brings about new business contacts, that isn’t why you do it. As our mantra says, “People first, profits seconds.” In large cities or small towns, relationships are how you get things done. You have to be nice to people first, and you have to be nice to them because they are people—not because of “who they are.” I actually enjoyed the company we were in and only mentioned our business when someone else brought it up. But now when people see my name on a permit application, they have a friendly face to associate with it. When they know someone who needs help selling or buying a home, they know someone who (I hope) made a good impression on them to refer.

And there is the sponsorship aspect. Our ad will appear in every playbill for the current MCT theater season. It is a very low cost form of advertising and networking.

The Importance of Due Diligence

The wall art was the most interesting thing about the house. Other than the artwork, the interior of the hose was a disaster.

Even well-done pretty graffiti scares off retail buyers and drives down the price of an investment property. You can paint over it. It may take several coats of Killz, but you can.

This post originally appeared on the Hermit Haus Redevelopment website on 2015-12-18.

I got an email from a wholesaler today offering a property in Round Rock for $90-thousand. I performed the desktop analysis quickly and became very excited. While I couldn’t find anything that had sold on the street in the last year, two houses on the next street over had sold for just north of $200-thousand. That left a lot of room in the deal to cover whatever redevelopment the house might need.

I told the wholesaler I wanted to make an offer contingent on a walkthrough of the property. The wholesaler said we had to close by Christmas, and I agreed to the stipulation. He mentioned that he had a bid for $7,000 to cover foundation repair. Other than that, he said, all the house needed was paint.Even allowing another $5,000 to cover accidental damage to the plumbing during the foundation repair, I was still happy with the deal.

The house looked pretty good from the outside. The schools across the street made it feel welcoming.

Boots Are Made for Walkin’

Russell and I met at the house during his lunch hour. The first red flag went up as I drove to the house. The comps on the next street turned out to be at least 20 years newer, and all of the houses on that street were much more appealing than any of the houses on the subject property’s street. My comps were not really comparable, but I couldn’t tell that without seeing where the main street had been extended for the newer development. Even the pictures on Google Maps made the houses look comparable.

Location, Location, ... Or Not!

On the other hand, the subject property was across the street from two schools. Location and location.

We walked the property and found that the exterior would need more than just paint. A dog had trashed the back door. Some of the eves and facia were rotten. No big problems but enough to start adding up.

Inside the house was in really bad condition, but the demo had already been started. All the carpets had been removed when a water pipe broken and flooded the house. A note on the kitchen cabinet said that repair was in process.

I won’t go into all the details, but the repair estimate came in at between $35- and $40-thousand.

The final analysis showed that we were likely to lose money on this deal. So we walked away.

To Buy or Not to Buy

When I got back to the office, Carol had run a much more accurate CMA than what I had pulled for the desktop analysis. She estimated the ARV of the house at between $140- $160-thousand. We determined that the deal was just too risky, even if we could get the house for $80-thousand. One of our mentors, Shenoah Grove, agreed. So we walked away from another property.

But the wholesaler said he had two other investors willing to take the property at full price. I wish them good luck. There are plenty of people with money to chase these deals—many of them are too willing to take on a project without fully understanding the numbers. No matter what you see on shows like Flip or Flop, those people are professionals. They almost always know what they are getting into before they buy the house, and they walk away from 20 or more deals for every project they take on.

Here is what I want you to take away from this article:

While I won’t accuse any wholesaler for outright lying, their numbers are almost always overly optimistic. This business is risky enough without walking into a deal without doing your own due diligence. Always include a contingency for unknown factors. Every project has them, but you can’t know what they are before it’s too late.

I’m going to keep my eye on this property to see what happens to it.