A conversation with a speculator
I had a phone interview with someone who was considering hiring me. I hope I talked him out of real estate, at least for now.
He wanted to buy an investment property. He wanted to buy cheap, clean it up, and sell high. He had an agent who was terrible, he said. He didn’t get anywhere. Can I help him?
ME: OK, how much capital do you have and what is the return rate you want to achieve?
HE: I have about $300,000 that I’ll be borrowing and I don’t know how much I can make.
I smelled trouble. There is no business plan there.
Once I established that he was looking in towns I know, I started fishing around for some examples of successful strategies here. I mentioned the economy of buying a two-family and converting to condos. He didn’t want to do that because it involved lawyers and condo docs. Instead, he wanted to buy a single family house. I gave him a handful of examples of unrehabbed properties for sale and the sale prices of rehabbed properties like them. I pointed out that there wasn’t much profit to be had. I don’t think it is worth it, given the risk.
There is a sweet spot where rehab will bring a property to a condition where it will sell well. The rehab needs to be relatively cheap and it needs to be on the visible part of the property. The property has to be well located and/or intrinsically nice.
Examples:
1. A beautifully renovated house that abuts a gas station is also unlikely to fly off the market at a great seller’s price. The location cannot be compromised for a flip. If it is, the price is compromised, too.
2. A house with hideous wallpaper and carpet everywhere is easy to strip, repaint, and polish the floors. Buyers respond to those changes. But, if the house still needs systems work, like upgraded electricity or windows that work, the cosmetic changes are not enough to lead to a bidding war and quick sale. The house needs to be ready-to-go in both functional and cosmetic terms.
3. A house that is typical and boring is not going to stand out in a town or price range where buyers expect style or elegance. There is a price tag associated with charm and grace of a house. If the flip lacks hominess, it may lack resale power.
Flipping a single family house is a neat trick in the current market. Can any of you boast of recent success? Should I have encouraged this caller?
