Decisions? Mistakes?

Every meaningful decision you make has risk. Each one benefits you, whether emotionally, spiritually, or educationally. No regrets! Photo by Suna

This post originally appeared on the Hermit Haus Redevelopment website on 2019-12-25.

Author and publisher Michael Hyatt—who apparently has nothing to do with hotels—thought enough of a quote from Catherine Cook to put it on page 99 of his Full Focus Planner, which I have been using for a full quarter now. (It is just the best!) That quote is, “If you’re not making mistakes, then you’re not making decisions.”

While I kind of agree with the sentiment of Cook’s statement, I have a couple of issues with it, including a superfluous “then.”

At the risk of making a semantic argument, you can and do make decisions every day without the risk of making mistakes. Should I wear the dark blue shirt or the black one? Which sides do I want with lunch? Coke or Pepsi? Maybe iced tea.

For most of us, there are no wrong answers to these questions—setting aside the Coke employee whose job was jeopardized when his wife brought him a Pepsi with lunch because she didn’t realize that’s what the fast food place served. Only someone with a very fixed, authoritarian mindset—like a fashionista or a marketing executive—would consider any answer to these questions wrong.

What I like to think Ms. Cook and Mr. Hyatt meant is: you’re either not taking risks or you’re not making important decisions—probably the former. After all, rewards are usual corollary to the risk. Higher credit risks pay higher interest rates. Federally insured savings accounts (usually considered low risk) pay almost nothing.

On the other hand, you don’t want to take unwarranted risks. You’ve heard me and thousands of other investors say we take only about 1% (sorry, Bernie) of the deals that come our way, but we compete very hard for the deals we accept. I try not to take risks that outweigh the potential rewards even though you really can only how big the risk was in hind sight.

The takeaway is this: Weigh your options. Judge the risks against the potential rewards. Make your decision, and only look back to see what you could do better the next time. Ever decision you make—no matter how it turns out—contributes to the person you become. And remember, batters can get into the Hall of Fame hitting only 30% of their times at bat.

Another One Bites the Dust

Failure to do your own due diligence is a trap that can reduce your profits to single digits or even to a loss. Photo by Free Images

This post originally appeared on the Hermit Haus Redevelopment website on 2016-06-10.
 

And another one gone, and another one gone

Another one bites the dust

—John Deacon

We had to back out of another wholesale deal today, even though the numbers looked pretty good at first blush. I’ll call the wholesaler Dick for this post. You have to be really careful when dealing with professional wholesalers. They know the business well enough to know what you are looking for, and they can make the numbers look good—often by inflating the after repair value (ARV) or underestimating the cost of repairs. You have to do your own due diligence and trust your own numbers.

In this case, Dick was going to make enough money on the deal to require a double-close. That is where the wholesaler actually takes title at one closing and then sells the property to the wholesale buyer at another closing. These two closings can take place minutes apart, enabling the wholesaler to make a tidy profit in a very short time without disclosing the amount of that profit to either the original seller or the wholesale buyer.

Because a double-closing incurs two sets of closing costs—one when the wholesaler purchases the property and another at the sale—this exit strategy is generally only viable when the profit on the wholesale is at least $20,000. Now you may say that’s a lot of money.

Why wouldn’t I have a problem knowing the wholesaler is making at least $20,000? Because it all comes down to the numbers. If there is still room for me to make a reasonable profit, I don’t care how much the wholesaler makes. Dick found the deal, after all. If he hadn’t found the deal and sold it to Hermit Haus, we wouldn’t make any money at all. And 30% of something is better than 100% of nothing.

Hail damaged shingles can be difficult to spot unless you climb up on the roof yourself or hire an inspector to do so. Photo by Home Standards Inspection

In this case, the numbers worked only on the surface, and this is another reason why I recommend hiring an inspector on every house you buy. The inspector’s job is to find hidden problems. In this case, the problem wasn’t so much hidden as missed. The roof looked fine: 30-year architectural asphalt shingles in reasonably good condition to my eyes. But the inspector found signs of hail damage, which would require replacing the roof before any bank would finance it for the new seller.

The estimated cost of the roof was about $10,000. That would move the deal from a fairly reasonable profit range to the danger zone. There would be no contingency repair budget left, given the ARV. We have learned to never go into a deal without a contingency budget of at least 10% of the repair estimate. We could be placed in a position of either having to cut corners or lose money, neither of which is in our vocabulary.

When confronted with the bit about the roof, Dick said, “That’s a good roof. I don’t have to replace it. Nobody can make me replace it.” We all agreed. But there are two things to consider:

1. A new roof is the single best investment you can make in a property. It relieves new buyers of an expensive contingency to their purchase, making them feel safer about the purchase.
2. And while banks don’t require a new roof to finance a property, they do require an undamaged one. If you want to sell a house with a damaged roof, you had better fix it.

Since we couldn’t come to terms with Dick about the roof, we backed out of the purchase during the option period. It’s not that I expected him to replace it; I simply needed to have room in the deal to replace it myself.

Replacing the roof was the right thing to do. I believe in doing the right thing. In this case, scrubbing the deal was the right thing for us to do. We could have gone forward if we could renegotiate the purchase price downward to account for the unforeseen cost, but that didn’t happen. And Dick may still be able to sell the house to an inexperienced, unsuspecting purchaser, but we won’t be put in the position of choosing between taking advantage of someone or losing money.

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.