Sometimes your best investments are the ones you don’t make.
—Donald Trump
When I buy a renovation project, I’m upside down on the place as soon as the deal funds. To make matters worse, about a week later I am even more upside down.
Last Monday, we started demo on the Tudor street property in Argyle, TX. This stage of the project is one of the most uncertain times. You never know what you will find once you start opening up walls, taking out cabinets and tearing up flooring.
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Join Kosen each Monday on TraderPlanet as he details the progress in his latest real estate investment.
Read last week’s story here.
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Up until you close and demo begins, you have everything in your control. You can inspect the deal, get contractors and labor lined up, and analyze all the numbers six ways from Sunday. And most importantly, you can back out if you want to. Sometimes deals don’t make sense.
JUST LIKE TRADING
As in trading, just because you spend a lot of time looking at a trade or analyzing a stock, that doesn’t mean you should end up getting it.
In fact, I spend a lot of my time looking for reasons to not buy a house.
CUT YOUR LOSSES
And, after all that work, expense in inspections and yes even earnest money (fancy term for deposit); sometimes it makes sense to not buy the property. If a deal is bad, having spent 2, 5 or even 10 thousand dollars in time and expense doesn’t make it better. The amount of sunk cost in a bad project doesn’t make a bad house worth doing.
That means, the more due diligence you do before you buy a project (or place a trade) both on the job itself, in the submarket and in yourself in terms of education and experience, the better off you will be when it comes time to write the check.
And that brings us back to what I started with. As soon as you do write that check, escrow funds and you take possession; you’re upside down. You just bought a risky project. (This is a bit like paying a commission on a trade, or risking the spread.) You paid more than the next highest bidder (otherwise he would have gotten it). You saw something in the property that the other fella didn’t see. Sure, you paid market value, but the very definition of market value is subjective when you buy something that other people don’t want and aren’t willing to pay for. In actuality, if the market was willing to pay what you paid, you wouldn’t have gotten the job. Once the deal funds: in for a penny, in for a Pound.
And then the fun starts. Demo day!
In all the houses I’ve done, I think I kept two bathrooms semi intact. (And even those didn’t have vanities or toilets). This means, if you were already the highest bidder on a house with bathrooms and a kitchen think of how much less the place is worth after a few days of demo. For the first few weeks, the property is invariably worth less than it was when you bought it.
When I bought Tudor for example, the property had five workable bathrooms (and one pink bathtub). It had carpet in the bedrooms. It had kitchen counters, tile here and there, and a mantle over the fireplace etc. It had a lot more going for it than it does now.
And I paid more than the next guy was willing to pay. Now it has a dumpster in the driveway full broken tile and torn carpet that is worth less than nothing. I have to pay to get rid of it. But, it is one week closer to being a beautiful property, hopefully worth a lot more than it was before I got it. And that speculation is all part of the job.
PS. We signed papers last Friday for the sale of a San Diego renovation project that should be funding this Monday or Tuesday. Sometimes speculations pay off.
