​A Warning to the out of town buyer, don’t chase rainbows.

A Warning to the out of town buyer, don’t chase rainbows.

My started off with a phone call from a Connecticut investor friend of mine. My friend was trying to help a New York investor who was in over his head. The NY investor had about a house to flip in North East Pennsylvania. My friend knew that I was in Pittsburgh located in the South West of PA, but he hoped that I knew someone in that part of my state. Sadly I didn’t.

The gist of this story is the NY investor bought a cheap house in a small town in a rural part of the state. There are several problems here already. The rural house is rural because no a lot of people want to live there. Flippers rely on quick sales and places where people generally don’t want to live don’t fit well with this philosophy. To make matters worse the NY investor had no idea of a ARV price. There had been so few sales in the area that he could only find one semi-comp and that one was miles away and not updated. Getting worse still the NY investor could not find a contractor to do the job, so he had to import NY contractors who were unfamiliar with local building code. This story is far from over but I suspect that it will not end well for the investor.

This NY investor is like many around the country who go out of their way to get themselves screwed. They use the internet to do what I call “chasing rainbows”. Rainbows are mythical good deal at some far away location. The premise is that all of the local investors somehow missed this house, and you the guy who isn’t from around there, will swoop in a grab a homerun of deal. This is where I urge caution.

I may be a bit jaded here because I am usually the person getting the phone call from the investor who got screwed. I also happen to live in a great cash flow and flippers market. This is my opinion but it is also backed up by the Wall Street Journal, and Forbes Magazine. Even in my market, out of town investors get screwed. Sometimes this happens because they didn’t do any due diligence, and sometimes it is because they were the victim of a shady wholesaler.

Let’s start with the shady wholesaler. These guys come out of the woodwork when an out of town cash buyer appears. My most recent story was a woman from California called me about a property that she had bought. To describe this property as ghetto property would be kind. They had to close the school district down and the state took it over and merged with it with another district so that someone in that area could be a high school graduate. Any sane person who isn’t armed shouldn’t be there after dark. This CA investor bought a 4 plex that needed some work. The numbers get pretty ugly pretty fast. The purchase price was close to the ARV at $40,000. Did I mention that the neighborhood sucks. The real ARV is close to $60,000. The problem is that the property needed at least $100,000 in rehab. The wholesaler guessed at a repair budget of $20,000. Not only did the investor have trouble finding anyone who would work on the property at any price, she received several bids, and the lowest was a hair above $100,000. So reselling this property is out of the question. The investor didn’t have the cash to pay for the rehab and she quickly found out that banks will not lend on investment property in that area. So then she calls me. I had no solution for her that didn’t involve her losing a ton of money. It is also nearly impossible to get property management in that neighborhood. So even if she can get it renovated, and rented before all of the appliances and wiring is stolen, she will have a hard time getting the place rented long enough to sell it to a cash flow investor.

The way to avoid all of this is to find the local REIA club and ask questions BEFORE you buy. As a club leader, I may not know everyone who wholesales in my town but I know the guys who have good reputations, I also happen to know where you do and do not want to buy property. I love numbers but in real estate the location also matters.

I hope this helps

Josh