“Top 10 Mistakes that Make Deals Go Bad” Series – Part 2

#8 Having a Greed Attack

Webster’s Dictionary defines greed as “A selfish and excessive desire for more of something (as money) than is needed.”  The two words that stand out seem to be more money.  It is interesting that money is the example Webster’s chose to use.  To a rehabber, more money sounds like a pricing decision for the finished product (the house) whether it is for sale or for rent.  That decision could come as early as the acquisition stage when you are trying to determine a comparable price for the finished product.  Eventually, if greed bears its ugly head, it will come to roost when you list the finished house for sale or for rent.

What’s wrong with more money?  A very popular credit card company has made that very principal the topic of a massive advertising campaign involving one of America’s funniest comics and an adorable infant girl.  But that’s all about rewards points for credit cards users; we are focusing on the affect on rehab investors.

Greed can be seen as a good thing in a world in which time stands still; otherwise, greed should be seen as time’s evil nemesis.  If you are holding out for a price above reasonable, you stand to wait more time to get it.  Basic supply and demand economics are in play here.  However, economics also teaches that there are many costs to time; two of which should be illustrated to show why greed, or certainly too much of one thing, can actually work against for profit endeavors like rehabbing and investing.

Time has carrying costs – ask yourself how much does it cost to prolong the continued activity?  Is your rehab project financed?  Then you are paying interest to your lender, property taxes to the government, and insurance premiums to your agent, all of which costs money.  Completed projects which remain vacant also cost money to maintain including the costs of utilities for basic services.  Hopefully there are not too many other fixed expenses (as salaries!) resulting from carrying an inventory of unsold houses or vacant rentals.

Opportunity cost is the cost of any activity measured in terms of the value of the next best alternative that is not chosen. In other words, it is the sacrifice related to the second best choice available.  Opportunity costs deals with concepts about scarcity and the most productive use of resources.  Are your contractors at this job when they could be at another?  What is the listing agent or property manager doing? And if you answer “That’s me” to any of the above, what else could you be doing with your time?  If your time is not being spent on the highly priced project you have got, it could be finding that next great deal.  You can’t be in two places at once.

# 7 Repairing Fire Damage without Permits

Fire damage is a specialty. Good money can be made in fire damaged homes, but NOT being trained can and will lead to unexpected surprises, delays and losses.

The first thing to be aware of when considering a fire damaged home as an investment is that the local fire, police, code enforcement, and zoning are all aware of the fire.  Fires draw attention. Because the authorities are aware of the condition of the home, past zoning issues will need to be repaired as well as the recent fire damage.  This can and will add thousands, or worse, to a project if old issues are required to be fixed before getting permission for occupancy. Permits will be required and inspections are a must, adding cost and time to the project.

Fire can cause damage not visible to the eye.  Fire can get between walls and damage the framing with minimal evidence from either side of the wall.  Without looking behind the drywall or plaster, there is no way to know.

Fire is hot. Water is cold. When the two meet regularly, the pipes will burst from the pressure of the steam build up and leak, driving up the water bill.  If this occurs outside the foundation, there is no easy way to be sure short of a very large water bill, a very wet spot or a professional plumber.

Remember that there may be more to the repairs than may meet the eye when considering a fire damaged property. Zoning and code attention will apply so know what you are getting into and how to get out of it when entering into a fire damage real estate investment transaction.