Flipping House Series: The “No Deal” House
Missing out on good deals can be painful. The ‘lost’ income is hard to replace and the experience can be frustrating. New investors tend to miss these deals because 1) other investors hear about them first because they have better networks or 2) the new investor takes too long to analyze the deal. That being said, getting into a bad deal can be crushing. Most people can’t withstand the mental and economic toll that losing tens of thousands of dollars can take on your investing career. This apparent paradox begs the question, “how do you move quickly and avoid disaster?”
The answer is to 1) have good systems, 2) have a good team, and 3) remember that real estate is about control not ownership. The first two items should be obvious, yet many wannabe investors skip over these ‘soft’ items. Poor results ultimately lead them to give up claiming this doesn’t work where I live or some other phrase that places blame squarely on something other than themselves.
The sad fact is that the first 2 items are incredibly easy to do and can provide tremendous value. Using a Property Repair Estimate Checklist and Deal Analyzer will help you make sure the numbers are in line. Having a solid team (agent, contractor(s), inspector(s), mentor) increases the speed and quality of decision making.
The third item often requires a paradigm shift. Many people think you have to have everything worked out prior to submitting an offer. This is not true. If you get an accepted contract, you control the property. The seller cannot offer it to anyone else until you release the contract. Meanwhile, you can use inspection, financing, and other contingencies to protect your interest if you discover the property is not a deal.
Does this mean you should put every property under contract and then do your due diligence? Absolutely not. However, if it passes your initial screening, then secure the deal under your terms and proceed knowing you have a way out.
I recently had an agent call to tell me about a property. The house was in a decent area, it fit my normal buying criteria, and it was priced in a way that allowed for nearly $50K in repairs. Due to other obligations, I knew I couldn’t get to the house for a couple of days. So, I walked through the PREC with the agent. The repair cost seemed to be in line, so I made an offer.
Living Room
Front of House
Bedroom
Bathroom
Basement
A couple of days after the offer was accepted, I went to the house and instantly knew the numbers were going to be tight. As I expected, my inspector turned up significant items that I hadn’t accounted for in my initial estimation. Since the numbers no longer worked and the sellers were unwilling to renegotiate, I released the contract and my escrow money was returned.
By having good systems, a good team, and using contingency clauses correctly, I gave myself the opportunity to get a great deal and to avoid a terrible one. This time, the latter option was the correct decision. Total loss = $225. Loss Avoided = $10-$15,000. That’s a smoking good deal!
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