Deal or No Deal: 3 Problems Price Can't Fix
He was standing on the outer fringes of the crowd.
I don’t remember his face, only the writing on his T-Shirt. The words read…
There is no problem price can’t fix.
The man was a bidder at the Maricopa County Trustee’s sale. Held daily on the courthouse steps in downtown Phoenix, this auction attracts a crowd. At least it used to. Immediately following the real estate market crash of 2008, you could find 40-60 active participants, and just as many spectators.
But, with the real estate market crash behind us, not many homes are sold to third party bidders anymore. Nowadays, if you want to buy a distressed property your best bet is to buy directly from the property owner, or from a wholesaler. You may also find the occasional deal on the multiple listing service.
Regardless of what source you use to find your first (or next) fix and flip deal, remember this…
Sometimes there are problems price can’t fix.
When Free Still Isn’t a Low Enough Price
We have passed on a lot of opportunities because, even if we were given the house for free, there was no profit margin.
How is that possible?
Here are three reasons:
Major foundation problems
Non-functional floor plan
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Major Foundation Problems
Houses in Milwaukee have a lot of foundation issues. The extreme temperature swings put massive pressure on the basement walls. Check out the photos from this basement:
A wholesaler brought us this deal. The buy price was $40,000 and the after repair value $150,000. Sounds like a nice margin right? After having the foundation evaluated by our basement expert we determined it would cost $70,000 to fix it all.
No thank you.
Last month, I wrote a post called Google Maps: A Fix and Flip Investor’s Most Important Tool.
I use Google Maps everyday when evaluating prospective fix and flip deals. Location matters and can have a huge impact on after repair value. It’s difficult to know for certain what impact busy streets/intersections, proximity to businesses, schools, freeways, etc., can have, but there’s always a breaking point.
I’ve seen a busy street affect market value by over 30%. So if you’re considering a property in a poor location, be sure to factor in an additional discount.
Non-Functional Floor Plan
Today’s homebuyer desires a clean, open floor plan. Furniture and accessories (rugs, tables, etc.) define the room spaces, not walls.
Occasionally, we’ll look at a home that is so compartmentalized the cost becomes too high for a reconfiguration. If structural engineering is required to add or remove beams for support the rehab price can skyrocket.
Don’t Be Afraid To Walk Away
It’s easy to get excited about a fix and flip opportunity when the margins appear juicy. The difficult part is being disciplined, and experienced enough, to walk away.
There is no problem price can’t fix may sound clever, and make for a good T-Shirt.
But, the reality is if free isn’t a low enough price, it’s a problem.