Don’t Play Leapfrog with a UnicornPosted on May 6, 2012 by
It’s really frustrating when a real estate investor calls to ask for advice, then argues when he doesn’t like the advice I give – especially when the advice is square dead-on.
Last July, an investor – we’ll call him David – called asking about a “once-in-a-lifetime” opportunity that he had been told about. It was a three-bedroom, one-bath home in downtown Atlanta that he could buy for just over $14,000, rehab quickly for $7,000, then sell for $75,000 to pocket a cool $54,000 profit. Needless to say the investor was hot to trot.
A wholesaler brought David the deal. A wholesaler is someone who finds a deal, gets it under contract, and then assigns (sells) the contract to an investor. There are good and bad wholesalers out there… but this was one of the bad ones.
A good wholesaler will insist the investor do his due diligence before buying the property. Bad wholesalers often provide the investor with an appraisal, a cost estimate of repairs, and an appraisal of the property’s FMV (fair market value). Problem is, all the numbers come from the wholesaler’s people – not the investor’s people.
As an investor, it is your responsibility to verify all the numbers – and to make sure the property in the pictures is actually the property being offered. Not doing so is crazy… and David, sadly, was ready to close the deal sight unseen; he was relying strictly on the wholesaler’s information.
Because David didn’t know enough about the deal, I strongly advised him to delay signing until he knew more about what he was getting into. Unfortunately, David’s impatience got the better of him and he bought the property.
Last week, David came up to the ranch seeking some much-needed advice. The Atlanta house was eating him alive. He explained that the rehab cost turned out to be $31,000 – not the advertised $7,000, and after making the repairs, the property’s FMV wasn’t $75,000… it was only $25,000. To compound the problems, David borrowed the purchase and fix-up money from his brother, and his brother wanted to be repaid. Because the home was so upside-down, there was no money with which to repay his brother.
David came to me looking for a way out of his pit of quicksand. In the end, I explained that when you play leapfrog with a unicorn, at first it can be thrilling, but eventually it will become a pain in your rear end.
Folks, as investors, it’s critical that we verify everything about a deal before moving forward with it. Too many times, we’ve seen someone present a “moneymaking deal” that was anything but moneymaking.
Bottom line: Don’t play leapfrog with a unicorn!