It seems there are fewer and fewer viable deals in the marketplace these days. While the prices of retail housing are probably sustainable given the lack of inventory, that same lack of inventory is driving the cost of the houses we buy and renovate higher and higher—to the point where we have trouble finding houses we can profitably renovate.
I’m good with that.
Just last week I looked at a house that suffered from a lot of deferred maintenance. Based on the after repair value (ARV), I figured I could offer about $15,000 less than the asking price, which was itself under market. That afternoon, my Realtor® friend let me know she already had an offer only $3,000 less than the asking price. “Congratulations,” I said. “I am really happy for your seller.”
How Is That Possible?
So how was that $12,000 gap possible? Was the buyer a retail buyer? Were they looking for a low-end homestead?
No. It turns out the buyer was another investor who wanted a rent house and was willing to discount the rent because of the deferred maintenance. They were going to leave the nonfunctional central heat and air in place and add a couple of window units. I assume he was going to do as little as possible to maximize his cash flow.
I’m not criticizing. That is a viable business model. It’s just not my model.
I prefer to maximize equity so long as the property still cash flows.
Deferred maintenance only gets more expensive to repair over time. That drives down the value of the property and with it your equity. In the extreme, the building falls down and you’re left with the value of the lot less the cost to clean up the debris.
So that buyer had an advantage over me as a landlord. But all landlords have an advantage over renovators. Landlords can make their money over a longer period of time, so they can afford to pay more today. Renovators have to make their money now through forced appreciation. Renovators simply can’t pay as much for the same building in the same condition as can landlords.
Our market is changing to favor landlords over renovators right now. Over the next year or so, many economists are predicting a recession, which will eliminate appreciation and may even lead to a “correction.”
Since I put my own money into every deal, I’m more interested in finding the right deals than in the quantity of deals. My mantra is, “The only thing worse than no deal is a bad deal.” Business is slower, but that’s okay, too.Hermann says please like and share!