Investor Case Study: Why You Should See Properties in Person
When I was a new investor…
I was quick to purchase properties when they were priced right and in the right area. So I was about to purchase a property sight unseen due to it’s incredibly low price and great location, but decided to make the trip to see it in person at the last minute.
When I arrived, everything looked great at first. It was an unbelievably cheap price for its size and location at only $30,000. While it had been a foreclosure, another investor had purchased it and started some renovations less than a year ago. The other investor had already gutted the interior and started framing the first and second floor with an appealing floor plan.
Location, Location, Location…
The property was located in an area of Indianapolis called Fountain Square that was really starting to get the attention of international investors for ultra cheap historic properties with a lot of character. The neighborhood was also a historic district, and had loads of character and many restaurants, bars, and shops. Buyers were lined up to purchase any renovated homes as fast as they went on the market, and were willing to pay prices ranging from $200,000 to $300,000 at the time.
There were still a lot of abandoned homes and rougher pockets, so precautions needed to be taken to secure the homes after purchase so no new plumbing would be ripped out, or contractors tools stolen. But it was a fantastic and rare situation for investors, and there was starting to be a lot of intense competition to snatch any available property that hadn’t yet been renovated.
There were several corporate investors from China and some individual investors from Canada also buying up homes in the area, so word must have spread quickly about the opportunity. For this reason, it was hard to keep a cool head and not rush into any property that seemed like a good fit on paper.
Great Housing Stock
The house was a fairly large for the area as well, with most of the nearby homes in the surrounding few blocks being under 1000 square feet. This one was closer to 2000 square feet. The exterior was a Dutch colonial with a double pitch-roof, which was an attractive style, but I noted that it might require a lot more of the budget for a new roof compared to some of the other homes I was evaluating. The neighborhood was filled with historic style homes that were each unique and had a lot of character.
The exterior siding had already been completed by the current investor, so it already had great curb appeal. There wasn’t a garage, but that was fairly typical in the area as well, with many homes just having a parking pad accessed from the alley behind the home, and some homes only having street parking. For the homes being renovated for the lower end of the price range, a garage wasn’t necessary.
Inside, it had been completely demoed and framed for the new layout. Everything looked great on the first floor with a spacious kitchen and living room. The second floor was framed out for a master suite with a walk-in closet. This was expected by buyers in that area, even if it meant giving up a bedroom from an older home’s original floorpan.
Now for the bad news, because as with many things in life, it was too good to be true.
The basement told a completely different story than the exterior and the first and second floors. When you walked into the basement, you stepped down onto a dirt floor. The walls were also literally just dirt, and the entire structure was supported by what could best be described as toothpicks. It was really alarming! This made me immediately question if upstairs construction was up to code at all, or if any permits had even been obtained.
It was clear that the foundation needed an extreme amount of work, and the current investor must not have had the budget to complete it, or felt it was not worth putting the money into it, so he just dressed up the outside, continued the upstairs framing, and hoped someone might be distracted by all that and take it off his hands.
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The lesson I learned from this experience:
Always look at any property you want to buy in person. If you cannot, then have someone you trust look at it for you.
Check out the surrounding area as well, since there are often surprises that aren’t apparent (probably on purpose) in the listing photos or Google maps. Also, if you don’t yet know how to recognize costly issues on your own, then it’s really useful to hire an inspector before you make any purchase.
All that being said, home prices continued to soar in that area for a long time, and renovated homes soon reached prices in the $600,000 range. If another investor had plenty of funds available to fix the foundation and any other surprises, and timed the market just right by waiting a little longer to sell it, then they might still have had an excellent profit margin.
However, I had an absolute upper budget of only $75,000 for renovations at the time, and this house would have required much more than that if it was going to sell for the higher price points.
Since I wanted to maximize my profits and didn’t have access to any more funds, I was aiming for a more modest sale price with less fancy trimmings. So it just wasn’t the right property for me at that stage in my investing career, and I had to walk away.
Case Study Submitted by Victoria R.
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