Since being involved in investment real estate I have seen an unbelievable amount of disregard to details. At first I was surprised given that purchasing a house was such a large investment. These errors and/or lies range from rehab estimates to after repair values. Sometimes the information is an error like a typo or lack of knowledge. Other times it’s the seller, usually a wholesaler, attempting to hide the truth or sugar coat a bad situation. So like a carpenter, make sure you measure twice, sometimes three times, before you cut.
A few days ago, I received an email from a wholesaler that usually mass emails marginal deals. This time the numbers were horrible. Here is an example of what the real estate numbers looked like:
Asking Price: $110,000
Repair: $15-$20/sqft (usually this is an estimated of the total cost not a price per sqft estimate.)
After Repair Value: $160,000
The home was about 2400 sqft which would mean the home needs $36K-$48K worth of renovation. If you do the math of adding the asking price to the repairs and divide by the after repair you will see that the 91.25% - 98.75% of the after repair value. This means that you only have $14K or $2K to pay for carrying cost, real estate agent commissions, closing costs, etc. To paint a clearer picture, the 6% real estate commission on a $160K listing is $9,600. As you can see the commission alone can drive this investment into the negatives. By the way, from the pictures provided this was a recently flooded home in the Houston area so the price will, more than likely, be closer to the $48K. If you want to make the case that it can be used as a rental, I would ask why not just buy a home rent ready at market value so you can tenant it immediately. You will avoid renovation, time, renovation loan expenses, costs of refinancing into long term, etc. This is just a deal I would not do or recommend anyone else to do.
Here are a few questions I ask when looking into these mass mailed investment opportunities and I encourage you to have a few of your own:
Did the seller commit an error, typo perhaps? In this case no. I never received a correction email that usually follows an email with an error.
Is the seller a newbie or uneducated on the subject? In this instance, no.
Is the seller also an investor? If yes, why did/would he/she not purchase the deal? Usually, it is not a deal and they want to see if someone will buy it so they can make a quick buck. Other times, the property is a deal for someone else with a different business model. I like cash flow as much as the next guy but, if the investment is single family residential, no equity no deal.
Is the seller hiding something? I would say no. This seller obviously stated price per sqft for repairs instead of the actual figure to make the property more appealing at first glance. Historically, figures provided by sellers, especially wholesalers, are aggressive so the deal could have only gotten worse if the value was looked into, so I did not waste my time.
So why even bother advertising this deal? Well, I do not know. Maybe, as I mentioned earlier the seller might just be testing the water to see if anyone bites. If you are not looking into the details and/or do not know what you are doing you may fall for a property like this. This property was easy to see as not being a deal but not all are this easy to spot. Due diligence is key, NEVER, NEVER, NEVER take the word of a seller.
Source: The Devil's In the Details