“Free” Kittens?

Last week, I was offered some very cute “Free Kittens.” They were small, playful balls of fur tumbling over each other and looking up at me pleadingly. I’ve had cats before, so I was tempted. But even considering the benefits, I refrained because I know that there is no such thing as “free.”

As I walked away from the kittens, I considered the idea that if something looks too good to be true, it probably is. This holds true with real estate deals also: they may look great in the heat and excitement of the potential purchase, the promise of a great deal, the money that we know we will make.

The truth is, however, that kittens need continuous care: food, shots, and attention. Similarly, a real estate investment needs supervision: maintenance, unforeseen challenges, and renovations.

Every day, “deals” that are not deals are presented to me. You will also encounter these “deals,” but be careful. Your ability to discern a good deal from a bad deal comes only with experience, research, knowledge of the market, and a business plan. When you have each of these components in place, you will be able to distinguish a truly great deal from a “Free Kitten DEAL.”

Remember that a “Free Kitten DEAL ” looks good. You want to take it immediately. But do not fall in love before you consider all angles. Just like a kitten is a long term commitment, so is your real estate. You make your money on the day that you purchase the property, but that money will not be realized until later. You must make good decisions.

A good deal is comprised of three things:

1. Possibility of equity, a high return on investment, and cash flow.
2. Low maintenance costs and low repair costs.
3. Excellent chance for successful exit strategy.

No matter how much you like a property, if you are not confident about the above elements, then this is a “free kitten DEAL”—which is far from free. These elements must be backed up with facts—do your “due diligence” research before you get carried away with dreams of a rich future. Even with planning, weathering the storm is sometimes all we can do with an investment; you must be certain that you can do this before you enter into a deal.

When I am presented with properties that look like great deals, I always consider the above stipulations. If I need to spend thousands of dollars to upgrade the property, will it be sale-able and earn enough money?

What I want you to see is that not all “deals” are good deals. Consider the following example:

I found a potential deal in a desirable area, 30319, but it was on a busy street, so there was a lot of road noise. The house had three bedrooms and one bath, was 1200 square feet, and sat on 1/2 of an acre. The repairs to put in a new bath and kitchen would have been no less than $40 thousand dollars. The schools in the area were average to poor.

The offering price of $105,000 sounded like a good deal for a home owner/occupant who would not need to consider the available education. The area was in high demand, so must buyers would have been able to find only a rehab. This was a positive because many people do not want to do all of the work that I could do.

I mulled this over considered what two other investors had done with similar houses in the same neighborhood.

Property A: Buy, rehab, and sell. This deal required the cost of acquisition and of rehab, the holding cost, and the realtor fees for a total of $150,000. This left a profit of $20,000: the return low and the risk high. Consider also the “what ifs” of the market. Also, when you buy at a discount because of an undesirable feature such as the busy street, you have to give that same discount to the next buyer. The after repair value is $170,000. Here is their gamble: Was this enough profit?

Plan 2: Buy it, demolish it, and build a mini-mansion on the property. The cost to build in this neighborhood is $110/ sq ft. plus the cost of the land. The minimum size of other houses in the area is 2,200 sq ft. with the total cost to the buyer of $425,000. With this scenario, you know that the profit potential is there, but do you have the capital, education, experience, and desire? You MUST be confident in order to consider this plan. Here is the gamble: Will someone want to live in their castle on a busy street? 

These were the two plans available to me on the property in question. I know I have the experience and capital to demolish and rebuild, but would an individual who makes $200,000 want to live in the house?

Since I couldn’t confidently answer the above three stipulations, I passed on what looked like a “free kitten.” The two investors who bought the other properties may have thought they had good deals, but they did not. Investor A’s house was on the market for 6 months and had an over-run of $50,000. Investor B did not sell for over 4 months.

As you can see, both plans involved a risk that I had to consider carefully. I knew my strengths and weaknesses and made an informed decision. You must also know your strengths and weaknesses so that you will show a good profit. Don’t get fooled by “Free Kittens.” There is no such thing as “free”; there is only a good deal.

For more personal attention, please attend my Creative Deal Structuring Subgroup. We discuss real estate deals and investments:

White Hall Grill, the first Wednesday of every month at 6:30 pm.

I also do affordable online coaching sessions twice monthly.

I will not, however, be tempting you with any of those elusive “free kittens.”