I Said No Before I Said Yes.

I am on a few local mailing lists. That means I often see many proposals come across my computer screen.  There may be weeks when there is little that interests me followed by a day when three or four intriguing situations present.  It was on one of those busy days when I received an e-mail from an investor who was seeking funding on a rehab/flip deal. The proposal was pretty good.  It provided a thorough description of the property.  The investor clearly detailed his plans with credible cost estimates.  He included comps of recent sales to support his after repair sales price estimate.  There were multiple photos of the property.  I had known this investor for years, even did several deals with him when he was at a different company.  I always open his e-mails.

I thought the proposal might be viable.  He was planning a modest rehab of a 1,000 sq. ft. home and a resale at a higher price.  The end buyer might be a homeowner.  The home was located ½ mile from a very active downtown in a vibrant city with good schools.  There was a possibility that the end buyer could be a landlord.  This home was already a rental and it would have been easy to find tenants in this area if the home were updated.  (The rehab would have put the price outside my parameters for a rental but, as you will learn if you read on, there were other reasons to buy this house.)  I considered the proposal for a few minutes and rejected it.

Why?  Several reasons.  1. I invest, primarily, through my self-directed IRA and though I expected some funds to be returned shortly, they were currently deployed and the investor had a short window to close the deal.  2. I knew the area fairly well.  There were many new construction homes being built.  (Almost all of these homes require an existing home be demolished first as there are no vacant parcels.)  The new homes in the area are larger than 2,000 sq. ft. with, at least, two stories and full basements.  This home was one story and only 1,000 sq. ft.  I thought it was possible that this home could be a candidate for demolition even if it was remodeled.  3. I received other proposals that day which looked more interesting and more profitable.  4. The investor was active but hadn’t done many rehab projects.  The margins were tight enough on this proposal that a major surprise or a misstep could have consumed much of the potential profit.

Approximately 5 minutes after I had deleted the proposal I received a phone call from another investor.  This is an investor with whom I had only done business with once (he listed one of my rental homes for sale).  I consider him a friend though we rarely interact outside of real estate events.  (We met at a REIA and would often go out after meetings to discuss the topic of the night or watch a game.)  We did not and do not always agree but we usually find ways to disagree amicably.  He often views situations from a different direction than I and I had thought for quite a while that we would compliment each other in business.

He was on the same e-mail list as I.  He asked if I had seen the proposal.  I said I had and asked if he wanted to add a second story to the house?  He informed me that it didn’t have a basement.  (I hadn’t even noticed that since I didn’t look at the proposal very long).  My response was that it had to come down if it didn’t have a basement.  That was exactly what he was proposing.  We spoke for about 10 minutes, decided on a price we would be willing to pay for the assignment of the contract and within half an hour we had a verbal commitment to purchase the contract.  Though we were not positive what we were going to do with this house at that point this became our first spec home.

The investor who sent me the e-mail with the rehab proposal sent a previous e-mail marketing this house to investors who rehab homes and then offer them as turnkey rental properties to other investors.  I am not on that list.  The builder we partnered with on this project (and several other investors I see regularly at REIA meetings) received that e-mail and rejected that offer.  He also said no before he said yes.  This project could inspire other posts on different aspects.  If anyone has read this far and would like to see those posts, please let me know.