House #14: Final Analysis

We sold The Pine House yesterday…and the analysis of this project is probably more interesting than any we’ve done yet…

Here’s the quick overview of this project: We made mistakes every step of of the way!

Here’s the longer version:

First, we overpaid for the property. We originally set our maximum purchase price for this house to be around $32-33K. But, given that we didn’t have any other projects going on and didn’t have any other prospects for new projects, we acted a little bit desperate and ultimately paid $40K. My rationale at the time was that if the rest of our assumptions and analysis were correct, we’d still easily make our profit target.

Unfortunately, we missed on our other assumptions as well…

Next, we went over our rehab budget. We knew there was likely to be some structural issues with this property, just based on the amount of water that was getting into the house. We didn’t expect that there would be as much dry-rot and termite damage as there was, but given the visible condition of the house, we probably should have. Ultimately, we went over budget by about 10% (about $6000). This is the first time in 20 houses that we significantly went over budget, and it was a good reminder that no matter how long we’ve been doing this, there will be surprises on occasion.

Next, we over-estimated the resale value of the house. Sure, we looked at the comps. And they supported our initial ARV of about $135K. But, in retrospect, we knew these comps were suspicious. There is an investor in our area who isn’t completely ethical, and he does a lot of weird stuff with his properties, including selling them being his own companies to raise market value and to serve as comps for his own resales. While we knew these comps weren’t on the up-and-up, we ignored the fact that likely meant we wouldn’t be able to resell for amount. And we were correct. Actual ARV was about $10K below our estimate.

Lastly, we under-estimated how long it would take to sell the property. We always assume six months in our financial analysis as a worst-case assumption. In this case, we didn’t factor in the fact that if we didn’t sell before the tax-credit expired in May, we likely weren’t going to be able to sell until the Fall. And that turned out to be correct. While we had two contracts before the tax-credit expired, both fell through and we ultimately weren’t able to sell until now — over nine months after purchasing.

So, in the end, we spent $8K more than we should have on the purchase, went over budget by $6, underestimated resale by $10K and went over our holding costs by about $1K. In other words, our analysis of this project from the beginning was off by $25,000!!!

Now, the good news is that we are always VERY conservative in all of our assumptions, analysis and decisions. And because we were so conservative on this project as well, despite the $25K missteps, we still were able to generate a profit of about $6,300. Not great, and certainly not worth the time and effort we all put into this project, but given that our calculations were off by 20% of the sale price, most investors likely would have lost money on this project.

Just a testament to how important it is to always be conservative in your analysis and to never think that things can’t go wrong — they can!

Okay, so on to our final analysis numbers:

Timelines

As I mentioned above, the total hold time on this house was 274 days…the longest we’ve ever held a house that we weren’t renting or lease/optioning…

Here are the key timeline milestones:

• Purchase Offer Date: 12/8/2009
• Purchase Closing Date: 1/20/2010
• Rehab Completion Date: 3/28/2010
• Sale Listing Date: 3/29/2010
• First Sale Contract Date: 4/3/2010
• Final Sale Contract Date: 9/10/2010
• Sale Closing Date: 10/21/2010

Financials

Here is the breakdown of financials for this project:

Our ROI on this project was about 6% and our annualized ROI was just over 7%.

Final Statistics

Here are just some of the final statistics that I’ve been tracking for all my projects, and that summarize the success/failure of each project pretty well:

• From Offer to Purchase Time: 43 Days
• Rehab Time: 65 Days
• Selling Days on Market: 165 Days
• Selling Close Time: 41 Days
• Total Hold Time (Close to Close): 274 Days
• Total Profit: $6,382.87
• Return on Investment (ROI): 5.85%
• Annualized ROI: 7.79%