You’ve probably seen this car on the road before – a late model import with a colorful, fancy paint job and an abundance of accessories. Its spinning chrome wheels, exhaust pipes and bumpers glisten in the afternoon sun. The after-market spoiler, positioned strategically on the trunk, rises high above the roofline making the vehicle look less like a car and more like an oversized shopping cart.
They say beauty is in the eye of the beholder. No doubt Disco Dan, the owner of this pimped-out driving machine, believes his automobile is the envy of the neighborhood. After all, he spent more money accessorizing the car than he did to buy it. Unfortunately, Disco Dan will be in for a rude awakening after he gets married, has children, and is forced to sell his rad ride for a minivan with a built-in DVD player and luggage rack.
The general buying public will not be impressed with his car’s bountiful bling. There is no premium placed on chrome wheels or rear spoilers. As a matter of fact, Disco Dan’s over-the-top upgrades actually devalue his asset.
A normal buyer will have to calculate the expense of returning the car to normal in their offer price. These expenses will include a new paint job, wheels that don’t spin and the removal of the obnoxious rear spoiler. In the end, Disco Dan will be fortunate to get .10 cents on the dollar in return for the so-called “improvements” he made to his rainbow on wheels.
How to Analyze a Real Estate Deal
Deal analysis is one of the best ways to learn real estate investing and it comes down to fundamental comfort in estimating expenses, rents, and cash flow. This guide will give you the knowledge you need to begin analyzing properties with confidence.
It’s Possible to Over Improve a Home Too!
I call them “Disco Houses”. Their owners go over the top with accessories – everything from wall to wall travertine bathrooms and tongue-and-groove ceilings to cultured stone interior walls and exterior elevations. While these finishes may look stunning in a million dollar mansion, they are way too over-the-top for a $100,000 suburban tract home.
Last week, a Realtor I work with sent me an REO listing in Peoria, Arizona. It had been on the market about 30 days and was priced competitively. For the life of me I couldn’t figure out why this property hadn’t been snatched up by a retail buyer. Then I saw the pictures and the song ‘Stayin’ Alive’ started playing in my head. This was a white-leisure-suit-black-collar-gold chain-wearing-John-Travolta disco house. It had oversized crown molding and baseboards throughout, lavish light fixtures and antique bathroom vanities. Every surface in the kitchen was covered with cultured stone, travertine or granite. Based on the price, size and neighborhood the previous owner had gone completely overboard with the upgrades – so much so that a regular homebuyer couldn’t afford to unimprove all of the improvements.
While certainly more rare than under improving a home, I have seen fix and flip investors (and normal homeowners) go the other direction and over improve a property. It’s not necessary to install granite countertops, oil-rubbed bronze fixtures and travertine showers in an $80,000 property. Few homebuyers will see the value in these kinds of upgrades and an appraiser probably won’t either.
Here are two tips for making sure you don’t over improve a property:
- View other comparable properties in the neighborhood (preferably other flips or normal sales) and take note of their improvements and finishes. Use similar ones for your deal.
- View new home models and take note of their designs, paint schemes and finishes. Homebuilders pay professional designers big bucks to decorate their houses so copy what they do for your properties.
This approach has been profitable and cost effective for me. I encourage you to employ a similar strategy. Perhaps together we can put the Disco House to death. Forever.