Even though I have looked at 100s of houses in my career, I still get excited about finding an Investment Property that could be beautiful after a rehab. Maybe I am still stuck in 2002 when you could flip houses and sell them as fast as you could buy them. I suppose some would say it is because I am passionate about MN Investment Properties.
About 5 days ago, I was out with a customer looking at bank-owned properties in Minneapolis. We looked at about 15 houses and found 3 properties that looked like good candidates to “flip and hold” (rehab and rent). Our contractor was with us reviewing the houses and preparing estimates. Most of these investment properties required $30-40k worth of work, including bathrooms, kitchens, plumbing, windows, and general repairs. The three finalist REO properties were priced under $50k.
Both my customer and I were excited about Investment Property #1. It was a large 4 bedroom house (in Minneapolis) with beautiful hardwood floors throughout, large pictures windows on each side of the house, original dark woodwork, and the leaded glass windows were intact. After discussing the type of flip we wanted to do on each property, I was crushed when our contractor told us Investment Property #1 was the worst rehab deal of the three.
As we went through his estimate, I agreed with all his numbers and rehab suggestions. Despite being almost move-in ready cosmetically, the house needed 20 windows @ $400 each, all new plumbing @ $8000, the heating system reconnected @ $2500, new kitchen @ $4000, etc.
I forgot all my school of hard knocks training, my years of experience with flips and rehabs, and all my preaching to my customers to analyze the property’s financial numbers. I tried to argue with him about the value of the neighborhood, the number of bedrooms, the size of the backyard, the fact that it was a 1/2 block from the school, etc. Despite my best efforts, he whipped me back into reality like a freshman on the school yard with the following comment: “I don’t get emotional about properties, its all about the numbers”. Ouch! I was hearing my own words coming back to haunt me.
So here I sit licking my [ego] wounds. He is right, though. You must stay unemotional when analyzing investment properties. You can get excited about them when the numbers check out and you put in the offer. Analyze the numbers, use conservative estimates, get good quality bids from trusted contractors, and if necessary, bounce the deal off a trusted advisor. When you fall in love with a house, it make it difficult to stop thinking about it (even when it is wrong for you)! Staying emotionally detached will allow you to walk away from a property or deal when it doesn’t make sense.
3 comments
#1Chris LengquestJanuary 1, 2008, 7:55 pm
Scott – I’m going to respectfully disagree with you here…if only to a point.
First, your job in arguing a different property is good for your client. It makes him/her defend, think, figure. That’s part of your job.
Second, raw numbers alone simply cannot tell the story. Sure, maybe you’ll enter with more equity on Property A than you would on B. But if B’s neighborhood is turning around, has new development by it, just had a major infusion of school district money, and a major employer landed a major contract…well, I’d take that over A.
At least sometimes. I guess what I’m saying is that I agree with you. But that I also know that same experience that keeps you focused on the numbers should be flexible enough to let you see what most can’t see. For better or worse.
Am I making sense here?
#2Scott FicekJanuary 1, 2008, 8:08 pm
Hey Chris-
Great points. I do agree. In the post, I guess I implied everything else in the equation was the same. The properties in the article are within 2-3 blocks of each other, so neighborhood variables are moot.
As I looked at the properties on paper this weekend, the one variable that we didn’t take into account is that the property we liked (#1) has 4 bedrooms versus the “best deal” house only had 2.
So now, the customer needs to chose between larger capital appreciate or larger cash flow. (Neither is really a wrong answer, it just depends upon what he prefers/wants).
Thanks for the comment and your thoughts.
#3Jeanie Hoholik ~ Twin City Real Estate ChatJune 28, 2008, 12:33 am
Lucky me! I have the opportunity to just enjoy North Minneapolis, along with my client. We cruise around in our convertibles (TT and Miata)… black and red, respectively.) We cross the lines when it comes to being creative and tough. We are the chicks that people wonder about. Yee Ha!
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