The Unwise Investor

Here is the promised post about how NOT to invest.

There are many reasons investors bellyflop on their investments. Greed, indecision, improper financing, or over-zealousness can all cause a good investment to turn bad.

The example I share with you now is probably one of the most egregious I have seen of an otherwise good investment turning into a nightmare.

2920 Childs seems like a great property. Its condition is impeccable. It is better than brand new. Top end appliances are included. The home has exquisite trim work, canned lights, and more. This is a beautiful home ready for sale at $144K. The sellers even have done an appraisal in advance to make it easier for the new buyers to get a loan. From the appearance of the home the seller should have no problems selling it...in theory.

This investment seems like an even bigger money maker when you take a look at what the owner bought it for. They purchased it from the bank for $39500! What a steal!




With such a cheap property turning into such a beautiful home, how can this investor go wrong? He should be rolling in the money, right?

Lets consider for a moment the factors that play into what gives a home its value. When people buy a home they are purchasing three things: The House, The Land, and The Neighborhood. These three things combine to determine what it will sell for in the open market. The House is in impeccable condition. For homes like it, it should rank among the best and command the best possible price for what it is. For The Land, the lot is standard for the area and home type. Nothing out of line there. But what about the The Neighborhood? This is where our tragedy begins. Here are the comps for the street.


This does not look good. I don't know if the owners of the home had seen these before they purchase it. If they did, they clearly miscalculated what their investment could sell for. If not, then they should have worked with a professional Realtor that would show them this fundamentally important market data. Here is the $/SQFT breakdown so we can compare apples to apples.

WOW! The post fixup price is way off the charts. The sad thing is that I talked to the owners about this home and they said they were into the property just under what they were selling it for. They spent way too much fixing it up. If they had done an average job and made the property tenable, they would have had a good investment that even could have cash flowed. Now all they have is a property that is over improved in a depressed neighborhood. It will take them 10 years to recoup their costs at least. My bet is on 15 to 20 years.

The moral of this story is to be wise and play by the numbers with your investments. If you start out and you buy right you are safe. If you then over improve, you are not. The quality of the fix up job you do should be directly correlated to the neighborhood in which the property resides and more importantly where the area is trending. Is the neighborhood bad but getting better? Then do a better job than you would otherwise but still stick within a reasonable budget. Is the home in a slowly declining neighborhood? Then make it clean and tenable and rent it out. Don't put granite counter tops in it. You're wasting your money.

Feel free to comment or ask questions.