On today’s show we’re talking about the discipline of making decisions based on the numbers. In the past couple of weeks I went through a process of underwriting a property that is a rare property. We’re talking about a property at 316 Water Street. As you might have guessed by the name, the property is on a body of water. This was a distressed property that was a bank power of sale. In my home market prices have shot up significantly in the past year. The average price is up 14% in the past year. The largest price increase has been at the bottom of the market. We’re seen prices at the bottom of the market up more than 25% in some cases. A detached home of any description is selling above $650,000.
Imagine my surprise when my wife came across a distressed property, a little bit outside the city that was listed for $219,000. Even rural properties are being priced similarly to properties in the city. There is just no inventory. Not only was this property at a good price, it was actually on 3/4 of an acre on a beautiful body of water with a permanently deeded conservation area across the river. The area on the far side would never be developed. Immediately in front of the house the water is quite shallow and you would never have powerboats nearby. Fishermen would come within a few houses with their trawling motors but again, they’re pretty quiet. The property had a row of mature trees at the water’s edge. The house was about 15 feet above the river and very safe from the risk of flooding. At first the house looked like it could be an opportunity for a flip. Valuations for a single family home on the water we’re accustomed to building in higher volume. So while some of the trades would be competitive with volume pricing, we also knew that trades like plumbing and electrical would be more expensive. The biggest variable was in determining the scope of work. With a bank power of sale, the property is being sold as-is, whereis with no warranties of any kind. So if there was any doubt about a particular part of the property, we had to assume a rebuild. The bank gave us a week to complete our due diligence. A total of 20 trades would be required to complete this project, not much different than constructing a new house. We felt that if we could keep the renovation and repairs below $200,000 we would have a very viable project. A house on the water would sell easily for $600,000. As time went on, we started to put our budget together, it was looking increasingly like the project would exceed the original idea of getting it done for under $200,000. The house had a lot of problems. This would be a full gut of the property down to the bare timbers. It would mean a new roof, new flooring, new plumbing and electrical infrastructure, new HVAC, new exterior siding, new windows, a new attached garage. It would need a new water well and a new septic system. As a rural property, there is no municipal infrastructure. There was a condemned addition on the house. The separate garage structure was also condemned. The chimney was condemned. The house was sagging in places, but overall, the house was pretty robust. The walls were over 12” thick. There was considerable moisture in the basement, and the basement had not been cleaned from the dog breeding operation that had been underway. Entering the house safely required special breathing apparatus with N95 filters. We considered demolishing the house and building a new house with a better orientation facing the water. Both my wife and I were captivated by the allure of buying a waterfront property for considerably less than the going rate in the market.
Our heart said yes, and the numbers said no.
Our Hearts Said Yes
