As investors, or just people with a genuine passion for real estate deals, we have a tendency of noticing properties that might be good deals along the routes of our daily activities driving around town. Starting in August of 2010, I noticed a house for sale along the way to bring my kindergartener back and forth to school every day.
This house is on Skagway Avenue in Tampa. There was a broker’s sign out front so naturally, I wrote down the phone number and address and looked it up when I got home.
It is a 1,314 square foot, 1972 single family home with 3 bedrooms and 1 bathroom.
The asking price was somewhere around $50,000 – A decent property that could have easily generated a nice cashflow rental income anywhere from $300 – $600 a month if managed properly with a good tenant. I figured the only way we would turn a property like this over to one of our VIP Investor clients would be for no more than a $45,000 purchase price, which would NET $400 a month after all operating expenses were paid.
However, on the broker’s listing page, there were several strange stipulations for the purchase of this property. One of which stated that the buyer would have to sign an agreement that the house would have to be owner-occupied in order to buy it. It was immediately chalked up as “Not A Good Deal”, because any deal that has some form of extended control over what the buyer can or cannot do with said property after he or she purchases it, adds an extra level of unnecessary risk that can cost you lots of time and money. It’s smarter and better to just simply walk away and let someone else deal with it.
I drove past that house each and every day, twice a day. Each time I saw it, I would always imagine a happy family living there on a nice corner lot, paying a reasonable rent to one of our happy investors, or even a happy “Me” if I decided to keep it for my own portfolio.
It sold on March 22, 2011 for $47,000, which is not a bad price for the property.
Immediately after the broker’s sign came down, construction began. There were trucks and vans outside every day with a small crew of workers doing their thing. The sliding doors out front were closed in with concrete block and are now a bedroom window. I was imagining that some savvy house hunter found a great deal for himself and was fixing it up to move in. They added some wood or stucco accents around the windows and doors to make it look a little more high-end. I must admit, the place adds a bit of elegance to the neighborhood.
As soon as the construction was complete, a “For Sale By Owner” sign went up. Turns out I was wrong about the buyer. Instead of it being some happy family moving in, it was a Capital Gains house flipper. I shuddered at the thought because I know this is not a very good market for that strategy right now.
The house was bought for $47,000. The cost of repairs is estimated at about $20,000, so there’s already about $67,000 in overhead. The square footage hasn’t changed, it was 1,314 sq ft as a 3 bed / 1 bath, and it’s still 1,314 sq ft as a 4 bed / 2 bath. Either the living room was cut in half or part of the back yard got enclosed because the front of the house has not changed and the records do not show an increase in square footage, but the estimated value has now increased to about $65k. In order for a profit to be made, this house will have to be sold for more than it’s actually worth – A strategy which hasn’t worked since early 2006.
It was originally listed on June 2, 2011 for $108,000 and has already been reduced to $99,000 on June 29. That would have been fine if this was 2004. Just knowing that in 2011, there is barely a retail market in Tampa due to the large number of prospective home buyers who cannot qualify for a conventional bank loan as a result of bankruptcy and foreclosure, and also taking into consideration a very high inventory of cheap houses, makes this property not very competitive at all. With $100,000, a qualified buyer can get a much bigger and much newer house in a much more desirable neighborhood than this one.
It is now early July, 2011 – the house is still vacant and the “for sale” sign is still there. If the market goes up, the chances to turn a profit will increase, assuming someone actually buys the property. That sounds a lot like gambling.
But let’s run some of these numbers. Let’s be generous and say we buy the property at $75,000 which is still way overpriced when you consider the square feet, the neighborhood, and the current housing market conditions.
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The numbers in the chart on the left side illustrate what would happen if a “Buy & Hold” investor buys this property for $75,000 to add to his or her portfolio. Again, in 2004 this would look like a great deal, but in 2011 it is certainly not very attractive at all. For a 1.29% Capitalization Rate, you’d just as well put your money in a savings account to watch your spending power get eaten away by inflation.
The numbers in the chart on the right side resemble the types of returns our clients are receiving on every deal that comes through our office. This is how we operate. We will not allow any our investors to make mistakes like this. We will never let them even look at a property that won’t make them at least a 10% return on their investment. 10% is definitely not our “best case” scenario. Some of our VIP clients are earning as much as 30% on some of our deals.
Buying this property at a low price, financed with a low downpayment, your investment money is recuperated within the first 3 years. Any longer than 3 years to make your money back is not a very good investment. Any money collected after that is all profit. Once the loan is paid off, the returns become infinite. If this property can’t get sold for at least $75,000, and it probably won’t, then there will be very little profit, if any. In the world of investing, there’s no room for hope and luck. That’s gambling.
Even with all the information that’s available today, from books to websites, to audios and videos that actually educate people on what to do and what to avoid, some people are still trying to squeeze a dollar out of an age old strategy that hasn’t really turned a decent profit in years. We get people just like this calling the office a few times every week. They all have the same story, “I’ve been doing this game for 40 years, you can’t tell me how this is supposed to work, blah, blah, blah…” And they’re still not rich yet. I tell them all the same thing: “If you want to make money, we’re here to help. If you want to lose money, you don’t need our help, you’re doing just fine on your own.”
When properties like this one fall into foreclosure our team of professional house hunters will be right there to pick it up and turn it over to one of our investors for the right price. Will you be one of them? Or will you be watching from the sidelines?
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