Real Estate Investor Case Study: The Plumbing Problem that Kept on Giving…
We all enjoy gifts and/or people that “keep-on-giving”; however, in some instances, we want it to be done with as soon as possible. Unfortunately for me, I recently experienced an unfavorable “gift” that just refused to stop giving!
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My goal with this article is that you as a newer real estate investor can use this real life example and apply it to your business. Hopefully you are already applying the principles I will talk about, but if you aren’t, the following is what can happen in the nitty-gritty-non-guru world of real estate property investing.
The Real Estate Deal
One of my top wholesalers brought me a smokin’ hot deal. The deal was attractive in two ways. First, it was simply a quality wholesale deal. It was priced right in a great neighborhood. It allowed for the wholesaler to make money while also left plenty of meat on the bone for me. Second, he already had it sold to an interested party via land contract. We call them land contracts here in Michigan, but they’re also referred to as contract-for-deed, installment sales or owner financing.
There was a catch though, the end buyer needed to move in asap, and there just wasn’t enough time on their schedule to get the house dewinterized and everything up and running. The wholesaler told me they wanted the house, but for their protection, they wanted the plumbing, electrical, hot water heater and furnace guaranteed for two weeks after utilities were turned on. This probably sounds crazy on my end (I plan on writing a blog article about this point alone next week), but I accepted those terms.
The Phone Rings
A week and a half later, * Ring Ring * I answer and it is the buyers of the property. They go on to tell me that they finally got everything turned on, but there are a couple leaks in the basement.
They didn’t sound too severe, so I called my plumber and had him go over there and assess the situation and give me a price.
The $150 Plumber Phone Call
Later on that day, * Ring Ring * I answer and as is always the case, I have butterflies in my stomach and adrenaline flowing through my veins. Did the plumbing explode? Did all the pipes disappear? (insert any sort of wacky scenario).
It was great news though, there were a few leaks in the galvanized pipes, and he’d get it all up and running for $150. Awesome! I approved and figured that was the end of it…
The $1,800 Phone Call
A couple days later, * Ring Ring * I answer with a not so good feeling in my stomach. The plumber tells me that for some reason, as soon as he fixes one section of the galvanized, an area further down “splits” and begins leaking. He informs me that he can just replace it all right now for $1,800, or he can keep working section by section and continue to work at the hourly rate. A quality plumber ain’t cheap, so I had to weigh the Risk vs. Reward.
There was no way I was going to keep the plumber on the clock at his hourly rate. Besides, getting all new galvanized plumbing isn’t such a bad thing anyways. No need to skimp out on the new buyers for the sake of trying to save a few nickels.
The Drain Phone Call
A week later, * Ring Ring * I answer and it is the buyers. They tell me how professional the plumbers have been and thank me for being so prompt with things…. HOWEVER, now there are drains that aren’t doing their job.
I get a hold of my plumber again and have him get the drain guy they use over there to clear things out.
The $2,450 Phone Call
A few days later, * Ring Ring * I answer and its the plumber. He tells me the drains are all cleared up; however, there were a couple sections where the drain clearing machine could not get past. Those sections need to be replaced and a couple toilets are leaking and need to be rebuilt.
The final total after all this (including drain cleaning) was $2,450.
Key Points for Your Real Estate Investment Business
I can’t say I’ve ever had an original quote of $150 turn into $2,450, but the element of “surprise” didn’t catch me off guard. If you are getting into real estate investing with the mindset that everything will always be filled with rainbows and puppies, reality is going to hurt quite a bit.
Let’s look at some aspects for you to remember…
- Worst case. Worst case. Worst case. – While the above may sound terrible, it didn’t ruin anything at all. In fact, I was happy about it because I came out better than I had planned for in my spreadsheet. Given the price I got it at and the wiggle-room I had, the $2,450 rehab bill still came in far below what I had entered into my spreadsheet of $7,000.
Point being – always enter in large numbers and assume the worst. Be sure you “stress test” your spreadsheet.
- Customer Service with a Smile. – Remember your companies reputation is always on the line. Getting those phone calls from the buyer was not my ideal situation; however, they happened so they need to be take care of, and taken care of promptly. After they called about the original plumbing issue, my plumber was in contact with them setting up a meeting within an hour.
Point being – being prompt and courteous does not only maintain your reputation, it can lead to future revenue when your customer begins to tell their friends. Word-of-mouth marketing is by far the cheapest!
- Contractor Relationships. – The plumber I used in all this was someone I’ve used in at least seven or eight of my projects. In other words, I trust him and he trusts me. I trusted him so much that I handed the customer service reigns over to him and allowed him to work directly with the buyers. And as I mentioned earlier, the buyers specifically made sure to tell me how pleased they were with the plumber and his professionalism.
Point being – building quality relationships with quality contractors is a great way to save yourself time and headache. You may have to pay slightly more, but in my mind, this trade-off is worth it.
All in all, this was a great deal for me despite the plumbing issues. While it was no doubt an "issue", it wasn't a "problem" because I planned according with my numbers and used a quality contractor. On top of this, maybe it will lead to some more revenue since the buyer's made it clear they were happy with my company's customer service.
How about you? Any stories where an originally small renovation quote balloons, and balloons and balloons some more? Leave a comment below, I’d love to hear your stories!
Photo: Vitor Sá – Virgu