by Barry Lenson
Lets’ face facts. Only a small percentage of real estate ventures generate as much profit as the investors were hoping for. And many investments actually lose money.
When ventures lose money, the problem is usually that the investors failed to work the numbers carefully. And working the numbers is not all that difficult. Let’s take a closer look.
First, consider this investment that lost money:
- An investor named Joan bought a pre-foreclosure property for $180,000 from a seller who said, “Houses like this in this neighborhood should sell for $300,000.” So Joan spent another $50,000 on renovations, then discovered she could sell the house for only $225,000 in the current market. Her mistake? She believed an unsubstantiated statement from the seller (“Houses like this in this neighborhood should sell for $300,000”) instead of studying comparable sales in the current market. As a result, she spent too much on renovations – and lost money.
Second, consider this investment that made money:
- Before starting serious negotiations to buy a condominium that was for sale, Jim did a thorough investigation of comparable sales in the complex and the wider area. He learned that the unit he was considering would sell for about $250,000 in the current market. He then toured the unit and estimated that he would have to spend $85,000 to fix the place up before he could sell it. Then he added in a buffer of another $15,000 for taxes and other unexpected costs. Next, he offered the seller $150,000 (the projected selling $250,000 cost minus his $100,000 estimated expenses and buffer). When the seller protested and asked for $225,000, Jim replied, “I am offering you $150,000 because that is what the property is worth to me.” In a month, the seller called and accepted Jim’s offer of $150,000. The deal was done and when the renovations were completed, Jim sold the property for $275,000. After all was said and done, he had netted more than $40,000 on his investment. Success!
Those examples prove that a successful investor only needs to add and subtract! But here is more advice to keep in mind:
- Always start out with a realistic dollar figure of a property’s value on the current market. How much will it really sell for, or command as a rental? This your baseline figure. All your other figures must be weighed against it, so keep it firmly in mind. Don’t daydream here, and don’t believe what a seller or real estate agent tells you. Look at comparable properties in the area – and remember to consider only recent data, not sales figures from two years ago.
- Set a firm budget for your improvements, and stick to it. Even if you want to put in ceramic tile floors, put in linoleum tile instead if the numbers don’t work. Or put sealant on the driveway instead of repaving it. You don’t have to do everything on the cheap, but you do have to refuse to spend more money than you can recoup from your final sale or rental. Don’t get carried away. Your budget must be your final yardstick in every decision you make.
- Do a realistic estimate of taxes and other recurring expenses, like utilities, association fees for condos, etc. Estimate how much they will run while you fix up the property – and how much they will cost if it takes you six months or a year to sell the property after you have fixed it up. Don’t fudge these expenses, work them into your budget. They are not going to go away.
Sticking to this advice requires discipline and self-control. Yet consider our Chairman, Donald J. Trump. He didn’t get where he is today by overspending on his development projects. He bargained hard to pay the right price, then bargained hard to keep renovation expenses within budget. If you follow his example, one day you too can follow in his success.