Ugly and Awful Houses – The House on the Hill
Many investors run away from what we affectionately refer to as the “Ugly and the Awful.” We define this designation as significant negative house attributes that definitely turn away potential purchasers. The best way to present this idea is with a real life story.
We found a house that had been foreclosed on by a bank and unsuccessfully marketed for four months. This house sat atop a hill with what must have been a 45-degree slope. Whatever the slope, it was a lot of work to walk up it. Further, the backyard was flat but went back only 5 feet to a retaining wall. In short, it had no functional yard in back and a non-functional “leg workout” in front. No wonder this house wasn’t selling.
But we didn’t run away from this house. We went after it aggressively—but at our pricing. We stressed the negative curb appeal of the property when we sought a discount level of close to 25 percent. We secured the house at close to this discount. While this wasn’t the easiest house to market, our attractive lease/purchase terms offset any physical deficiencies of the property.
As anticipated, the marketing task for this house paralleled the slope of the front yard: an upward climb. Generally, certain ratios hold true and are relevant from property to property. For example, if our ad yields 30 replies in a week, ten of those may be lease/purchase candidates. Of the ten, three “no’s” will be either house specific (because they’re looking for a specific attribute in the property which your house doesn’t contain) or time specific (because they’re unable to make it to the showing).
So the 30 calls will yield roughly seven appointments. Of those seven, two to three will be no-shows, resulting in four to five families that will show up. If the ratios vary significantly from this, we suggest you adjust at least one of three things: your phone skills, pricing of the house or lease payment, or the ad. So in response to an ad, you should expect roughly:
· 33 percent of respondents are lease/purchase candidates,
· 70 percent of these candidates will want an appointment to view the house,
· 66 percent of the candidates granted an appointment actually show up, and
· 33 percent of those who show up will fill out an application.
It was almost comical during the marketing phase. Each weekend, we averaged four to six solid appointments. As usual, one of us arrived at the house 30 minutes before the families were due to arrive. We turned on all the lights, ceiling fans, and the air conditioning. Then we sat and waited. In this house, we experienced something unique.
Inside, we watched as our prepped and eager lease/purchase candidates drove up to the house, stopped their cars, waited for 30 to 60 seconds, and then drove off. As special as our terms were, so many families were so incredibly turned off by the degree of the slope that even after driving out, they had no interest in coming in and viewing the property.
But we had anticipated this, and that played into both our purchase price and also the “extra-special” terms we were offering. Eventually, we did find a nice family. This purchase is, to this day, one of our most profitable. The key to buying this and other “ugly and awful houses” is simply securing an additional discount that more than offsets the specific negative attribute or attributes of the property.
If you’re a “buy and flip” investor, then the same lessons apply. Note that you’ll need an even greater margin to reach your targeted profits as you’ll need to sell the house at the lower end of the range of house values in the neighborhood. If you’re a rental investor, you may have it the most difficult, unless that part of town has both a strong rental market as well as a lack of supply of good rentals. If your discounted acquisition price allows you to offer a rental rate that’s $200 or so below the going rate, you’ll probably be okay.
Regular Riches Tip: Don’t buy your investment houses with your emotions and eye of a homeowner. You’re an investor and irrespective of your investment model “the investor margin” is the absolute most important part of your purchase. We’ve done well with “ugly and awful” houses that have scared away potential retail buyers and certainly many other investors.
Copyright© 2002, Andy Heller
All right reserved
For information contact FrogPond
800.704.FROG(3764) or email susie@FrogPond.com
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