Value Add, Wholesaling and Speculating

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The seller doesn’t get it!  I’m reading from the end of an email chain in which the seller is blasting me for not taking his counter offer on a single family house.  A few email messages ago he discussed ad-nauseum why I  ” . . . really need to reset my expectations in this market.”   The truth is that I’m not buying the deal for one simple reason:  the deal has been stripped of it’s equity.  I have no issues with a person wanting to make a profit.  That’s par for the course.  But if a property is not in Turn Key condition (requiring no work or upgrades) paying market price leaves me no upside potential in the property.  NEXT!  I’ve been around single family deals long enough to know when a seller has priced a property for a fast sale and when they are speculating.  What’s a speculator.  Here’s an example:  A brand new remodeled home recently sells in your neighborhood for $500,000.  The house was move in condition, no upgrades or repairs needed with all the latest shiny features, materials, etc.  The seller has priced his outdated house with none of the latest features for $485,000.  Yet when I look around the neighborhood the price for comparable quality and features is more like $450,000.  As a contractor I determine that is would take a $25,000 investment to bring the outdated home to date with the $500,000 remodeled home.  If I pay $485,000 I’m speculating that an extra investment of $25,000 will fetch an even greater price than the $500,000 newly remodeled home.  However, if I pay $415,000 the $25,000 investment should bring me a $500,000 home for the cost of $440,000.  This is a value-add strategy because I have “built in” $60,000 of equity by doing the upgrades.  If I decided not to do the upgrades but still purchased the house for $415,000 another strategy is to sell the house for $450,000 (the value for similar outdated homes).  This is the wholesaling strategy which would net a profit of $35,000 minus my costs to quickly sell the property.  And as you can see from this example, if you can get an offer accepted at a discount you will have more options available should your plans ever change.  Food for thought.

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MIXED MESSAGES!

Who will forget the week of messages we just experienced!  First the (phony) message that set off innocent Hawaiians about ballistic missiles causing panic when instructed to  to seek immediate shelter!  Then football watchers at this Sunday’s Minnesota Viking game wearing Apple Watches being sent messages by their Apple Watch that they might have a heart issue which was actually caused by the excitement (and resulting increase of blood pressure) from the miracle play that resulted in the Vikings victory over the opposing Saints.  Messages people!!!  These events were one more reminder to me that STICKING TO THE PLAN is the only thing we can ever depend on.  This summer I was managing a single family remodeling project that was in its early stages.  An agent and a painter came over to look over the house and told me that I would be lucky to get around $525,000 when the house was finished.  I disagreed.  I told them that the house would be undergoing several floor plan changes that would re-create how the house could be used, thus giving it greater value.   Eyes would roll as you can imagine.  This didn’t deter me.  I was the one with plans in hand and after s

eeing how several similar remodeling projects had performed in the marketplace my plan was grounded reasonable expectations.  The target future value I held onto was $575k.  At times the project didn’t go well.  Work was slow because of the crushing summer heat and the workers just weren’t as productive as when temperatures were cooler.  Labor costs began to exceed budget.  It severely tried my patience.  But by the time the ‘heavy lifting’  was finished, opinions changed.  Agents and vendors alike remarked that $575k would be a good asking price.  Then, a nice break from the heat helped further advance progress so that hardwood flooring and kitchen cabinets could be installed.  The tide had turned.  In the end we finished over budget, with the house taking three months to sell and earning a $595k sales price at closing.  Sometimes you’ll work a project and you’ll field options that will differ from your plan.  If you’ve done your homework, those options are unqualified and should be disregarded as nothing more than a mixed message.  Mixed messages can cause chaos and confusion because they often lack clarity and grounding in facts!  My job was to maximize the value of the house so that when I finished the house it would have a value of at least $575k, potentially more.  When we sold the house above my target value it was one more reminder that STICKING TO THE PLAN is the only thing you can ever depend on.

PS.  I thought you would appreciate the before and after pictures this house project!