Why we passed on a good deal
Last week we received a call from a wholesaler looking to sell two properties. In case you’re unclear on what wholesaling is, investopedia provides the following definition:
In real estate wholesaling, a wholesaler contracts a home with a seller, then finds an interested party to buy it. The wholesaler contracts the home with a buyer at a higher price than with the seller, and keeps the difference as profit. Real estate wholesalers generally find and contract distressed properties.
This wholesaler was under contract on two properties, right next door to each other, and he needed to find a cash buyer for both houses in two weeks (he had a 30 day closing window with the seller). He emailed over a market analysis that highlighted comparable properties, what the homes would be worth after a remodel, what they could be rented for etc. He was thorough and his research piqued our interest.
We walked through the first property and it wasn't too bad. (After walking around the second property, we noticed some major foundation issues so we didn’t even go inside.)
On the drive home, Levi and I ball parked some numbers for a potential remodel: $20K in the kitchen, $10K for the bathroom, $2K to paint, $5K as contingency for the issues we can’t see. He was asking $90K for the house, let’s round up to $40K for remodel, so all in at $130K. The comps would support a resale value range of $150K-$165K. A potential flip profit of $20-$35K for a fairly simple remodel isn’t bad.
Alternatively, we would want to keep the property as a rental, so if we refinanced and pulled out our initial investment we would be looking at a mortgage of ~$800/month (conservatively). The market would support a rental price of $1200-$1500/month, which would yield a cash flowing property of $400-$700/month. Again, not a bad investment.
One of the most important components of a good investment property is knowing the numbers and in this case, the numbers made sense. However, neither of us had a hell yeah feeling about this house. Additionally, we have a few other projects going on so we have to weigh out how this project would fit in our schedule and we weren’t willing to reprioritize some other opportunities for this property.
So, we passed on the deal.
The wholesaler reached out trying to understand why we didn’t want to pursue the investment and asked where his numbers were wrong. His numbers weren’t wrong, but his numbers don’t matter.
Our numbers matter.
There’s a lot that goes into buying an investment property and this scenario reminded me of that. Your numbers, your schedule and your gut feelings on the property are all that matter. It could be a home run deal on paper, but if it doesn’t make sense for you, it isn’t worth pursuing.
Our most recent investment is a rental property that we’re currently remodeling. On the day that it was listed, Levi and I spent 2 hrs walking through the property and on the drive home I wrote up an offer. Full price. It felt like a homerun instantly, and this deal did not.
If you’re looking to get started investing, that’s a good place to start. Walk through some properties, look at the numbers, pay attention to how you feel about it. One question that’s important for me to answer yes to is “would I live here.” I know that if I would live there, others like me will too.