Of course, hindsight is genius.
Let me take a minute to gloat.
It was July 20 2006, when I first took a weekend and worked up plans, bids and did a comprehensive analysis of “This Old Mold House” and a possible offer.
After extensive work I met with the owner’s son-in-law to present my findings and conclusions.
I worked very hard to make the numbers work. That is, I really wanted to buy the house for remodeling and resale. However, because I didn’t have a ready buyer for this house. I had to consider all of the costs in carrying the project until a closed sale.
I deemed this problematic.
Let me explain.
Sixteen months ago the beginnings of a slowdown in house sales was just becoming evident in the Minneapolis and Saint Paul market. I wasn’t surprised by this. In fact, I had stood back from participating in the market.
I was totally exhausted after finishing “This Old Crack House” . Houses had doubled in price in five years. I was a benefactor of this. Having sold our old home for twice the amount we had bought it for five years earlier, and bought “This Old Crack House”, I was a benefactor of this. Of course I was grateful and happy with the return on my investment.
Who wouldn’t be with a doubling of the original investment?
However, the troubling fact was that I knew that this simply couldn’t continue.
Over the last five years, I had bought and sold eight houses within a few blocks of “This Old Crack House” and worked hard to build a new stable neighborhood. I was able to buy houses, gut them out and totally remodel them, selling them for a fair profit. That all changed when easy money became available at record low interest rates with no down payments, and other incentives such as variable interest rates.
It was not uncommon for a house to go on the market selling in less than a day after receiving several offers over the original listing price.
As a small contractor who bought these old homes for refurbishing and resale, I could no longer compete. I had to cover the rather substantial costs of obtaining a short term mortgage as well as carrying the costs of materials, labor, and other expenses incurred with these projects. I found myself working harder and my already narrow margins or net profits were shrinking.
Rather than lose money or take those risks, I simply stepped out of the way and didn’t do a single remodeling job for resale for over two years.
Of course, in all fairness, I also was busy with my own project, “This Old Crack House”.
I also was very busy with my shop doing special commissions and expanding my furniture business and just beginning my classes in stained glass.
I am neither Einstein nor a visionary. However, I knew at some gut level that this runaway double digit appreciation we had been seeing, simply couldn’t continue.
My dad used to say “What goes up must come down”. I have never forgotten that simple wisdom.
After finishing “This Old Crack House”, I felt burned-out and was moving in a different direction and was consumed with learning about a new craft; stained glass. I was still driving a bus and had a small custom furniture shop going on the side.
I had been working seven days a week for several years. I was tired.
I stood on the sidelines watching the housing market with amusement, wondering when the “shoe would drop”.
The only real remodeling project I had done was to build a replacement garage and ramp for Mz D.
While building this replacement garage, a funny thing happened.
We had had experienced a major storm in late autumn which included straight-line winds and tornadoes. One person had been killed and several injured. There were thousands of trees down, homes damaged, roofs destroyed from the golf ball size hail. In short a mess to say the least. The local building official and his small team of inspectors were overwhelmed.
I was getting a routine footing inspection from the official local building inspector whom, with all my building projects, I had got to know quite well over the last few years.
He approached me about a temporary internship as a limited building inspector, doing mostly roofs and small residential project inspections. He would train me and supervise my inspections. He also would provide the classes necessary to become eligible after completion, to sit for the tests required for becoming a State Licensed Building Inspector.
The pay of only nine dollars an hour was very low, but he assured me, the experience would be invaluable. He also was very willing to work around my schedule and the job would only be 20 to 24 hours a week.
I was intrigued by this and told him I would consider it. I told him I never had been an inspector and felt very inadequate. He insured me with that in addition to his training my extensive hands-on experience as a contractor and having my own shop, I would be more than qualified to do the job.
In fact, one of his requirements for his inspectors was to have worked in the fields they were to inspect. He felt very strongly that the best inspectors were those with hands-on practical experience verses book-learned head knowledge.
I thought about it over the weekend. Why not? It would be a great experience.
I showed up Monday morning for my first day.
To say it was a valuable learning experience would be like saying there is a lot of water in the ocean. What an obvious understatement and tremendous learning experience it turned out to be.
What was to be a temporary 20 hour per week intern position has become a full State Licensed Building Inspector’s position. It grew to involve several other duties working in a community development city position that specializes in rehabs, mortgage foreclosures and other specialty projects.
That is a whole series blog by it self. I will save it just for that to do it justice.
But I have digressed.
Fast forward eighteen months to October 2007.
It’s well known and documented that the house market is in trouble. Foreclosures are in the news every day. Housing prices have plummeted, inventory increased ten fold and market times greatly extended.
In short, the housing industry is a mess.
Even though I wanted so badly to buy “This Old Mold House” and rehab and sell it again in 18 months, my hard upfront work told me to pass on this project.
The house had been valued at $190,000.00 and was taxed at close to the same value.
Initial discussions with the son-in-law about the price they wanted for the house were vague. Of course they wanted as much as they could for the house. That goes without saying.
And of course I wanted it for as cheap as I could.
Feeling them out seemed to indicate that they would accept somewhere in the 170 thousand dollar range. They were well aware of all the work that needed to be done.
My initial gut-feeling was this was far too much, but I would undertake due diligence and see where I ended up.
Long ago I found out that numbers don’t lie. They are “what they are”; period.
I no longer allow myself to become emotional about a purchasing decision like I did for my personal home and current home “This Old Crack House”. Been there did that. This house was an investment and needed to be profitable. I was not prepared to take on this kind of remodeling project just for the experience. Although I am always looking for good new neighbors for our neighborhood the projects have to make good business sense. I don’t have to be greedy or hit a home run or have huge profit margins but I need a return on my investment in both time and money. Even though it is a passion it has to pay its way.
After spending the weekend doing “the numbers”, drawing plans, getting material bids, figuring my labor costs I came to an inescapable conclusion; this house was in need of some serious remodeling. Twenty years of neglect had come home to roost.
Added to this fact was the reality of the quickly deteriorating market conditions. All the warning signs were present and the conclusion of my numbers supported this.
In the beginning I would have purchased this house and justified doing so by anticipating that I would make it up in my labor, or in time, would recover my costs as the project appreciates. Those days are behind me.
I’m not only older and more realistic, but I have gained significant experience and from that derived a modicum of wisdom. In spite of myself, my ego is in check, as is my comprehension of reality. Although I still dream, I am long past being dreamy.
The only way this project could possibly work is if the sale price was no more than one hundred and fifty thousand dollars.
This was a far cry from the $190,000,000 at which it was appraised, and still a long way from the general area of one hundred and seventy the owners were expecting.
I had come to the conclusion, after my extensive work ups, that to remodel the house would need a minimum of $32,000 and might need up to $50,000. When this cost is added to the purchase price of, say even at $175,000, plus allowing for the costs of obtaining a mortgage, carrying costs, likely commission costs, and some reasonable profits upon sale it became very obvious this wouldn’t work. This was even truer considering the difficult market conditions with no end in sight.
The numbers simply didn’t add up. I knew this and would deliver this message at our agreed Tuesday meeting.
I put together a compressive summary to present my findings to the son in law. I opened up my numbers and showed him how I arrived at this conclusion that the house wouldn’t work for me and offered suggestions as to what he might do to sell the house.
I was very honest and open with him. I pointed out all the things that would be required in order to sell the house and what I felt the costs would be to bring the house to a marketable condition. I had nothing to hide or any agenda because I had concluded that the project wouldn’t work for me. I had informed him up front before I even discussed the details that I wouldn’t be making an offer because the numbers didn’t work.
I then gave him the option of either stopping at that point in the meeting, shaking hands and departing, or for his consideration, I would be willing to share my findings as to what I had found and how I arrived at my conclusion.
I had nothing to loose I had already invested the time and money to get to this point. Why not share this? After all, I had a vested interest as to the future owner of this house because I lived in the neighborhood. I didn’t want some slum-lord to buy it and turn it into rental.
He chooses to hear the presentation. As I presented it to him, he seemed impressed and to understand how and why I came to the conclusion I did. I even pointed out such things as to how they had been paying over $1000 a year more in taxes than they should. There was a mistake on the tax assessment concerning the upper level that had never been completed that the city had calculated as finished square footage. This was a eye opener to him.
When all was said and done he asked “just out of curiosity how much would you offer if you were going to make an offer”.
I said, “Well, I feel like I have been put on the spot, but it would be in the range of about one hundred and $150,000 or so. However, there would be a lot of variables to this price also”.
I asked him why he had asked.
He said, “I wanted to be able to give my mother-in-law a price range and also I have been given a verbal offer of about $175,000 from a neighbor two doors down”.
I looked him right in the eye and told him, “Take it and run, now”.
He then confessed he had doubts that the guy could raise the money.
I then said, “It is very easy to spend money you don’t have; be careful”.
I wished him luck. We shook hands, I wished him luck offering help with getting the tax assessment problem taken care of and I left.
I walked back to my home “This Old Crack House”, wondering what would he would do?
I had no clue but was convinced he would do nothing.
Was I wrong, I wondered?
“This Old Mold House” Copyright 11/22/2007 all rights reserved D. Jerzak