Real Estate Investing Tips – Don’t Fall in Love
You would never make the same mistake one of our clients made, would you?
Case Study: The Woman Who Fell in Love With The Property
We had been working with a borrower for an extended period of time who was looking to purchase her first rehab property. Because she was new to the rehab business, she was looking for Pennsylvania hard money lenders. She had formed an LLC and was financially qualified for a loan up to 65% of the after repaired value (“ARV”) of the collateral property, she just needed to find the right property. After bidding on several properties under $90,000 and not getting an offer accepted, she started making offers on more expensive properties. Finally, after much effort, an offer she made on a property was accepted. The property was owned by a bank and listed at $124,900. Her offer was accepted at $112,000. She thought that the property only needed a new kitchen and fixing up of the bathrooms, about $35,000 in total. She also was convinced that the ARV of the property would be at least $275,000.
Things began to unravel fairly quickly. Her own contractor’s bid for repair of the property came in at a whopping $78,000. There were far more issues than just the kitchen and bathrooms. She remained steadfast in her belief, however, that she could still make money on the property, even though the committed amount was now at least $190,000 (purchase and rehab cost), rather than her first estimate of $147,000. At this point, even if the property appraised at $275,000, she would still have to put some of her own cash into the purchase and rehab, as she was approved for a maximum loan of 65% of the ARV, which would be $178,750 for a property valued at $275,000. There are few Pennsylvania hard money lenders that will lend more than 65% of the ARV.
Unfortunately, the property did not appraise for $275,000, but came in at $220,000. When asked why she thought the property would be worth $275,000, it turned out that she had been listening to parties very interested in getting the property sold, rather than doing her own homework. Even with the increase in rehab costs and lowered ARV, she kept insisting that the she could make money from the project, even though she would have to put about $50,000 of her own money into the purchase and rehab. The problem is, she had fallen in love with the property and was not thinking of it as strictly a business venture.
ProTip: Having a house flipping business partner can help you keep perspective during the buying process.
In the end, she did not buy the property. Not because she looked at the economics and determined that based on all of the information available that it was not a good project, but because she could not get a big enough loan to adequately fund the project. It was a tough situation, because she put considerable time, money and energy into the project that did not materialize, so remember, even if you love the property, sometimes you need to walk away if the numbers just don’t work.
Avoiding falling in love with the property will help you save time, money and energy.
Have you made this mistake in the past?
What tools and strategies do you use to evaluate whether a property is a good investment?
We would love to hear your thoughts, comments, and suggestions. Leave them in the comment section below.
The Rehab Financial Team
p.s. have an immediate question? Give us a ring! 877-643-9066