Josiah Smelser is the current host of The Daily Real Estate Investor podcast, a show on achieving financial freedom through real estate investing. Josiah runs his own appraisal business, is a licensed real estate agent, and operates his own investment property business along with a partner. Josiah is a licensed certified general appraiser (can appraise commercial and residential properties) and has spent considerable time working for companies such as CBRE as a commercial appraiser. Josiah was formerly a finance professor at university level where he taught for several years a number of finance courses including real estate. He has an MBA from the University of North Carolina and is writing a book titled The Daily Real Estate Investor, so stay on the lookout for that. Josiah is happily married, has three children, and lives in Huntsville, Alabama, in the United States.
“Since we have this property that’s just sucking money out of our business, we can’t go and do other deals and that was the greatest loss of this whole thing – the opportunity cost. This property was a nuisance. We were having problems constantly that were eating up our time …. eating up our investment capital. We thought at one point we’re going to have this thing for a year to who knows how long … we can’t get rid of it and we have to keep making these payments.”
Worst investment ever
Josiah tells an extraordinary, harrowing tale of flipping a house in which the extent of what went wrong was way beyond Murphy’s Law. The sheer amount, kind and combination of renovation obstacles Josiah and his partner had to overcome to prepare their property ready for sale were staggering. Their business model is to buy a property, do value-added renovations to it, get the property rented out, and then refinance it. Their business model on flipping, is to buy a property, renovate it, sell it as fast as possible and try to make a minimum of US$25,000-$30,000 per house profit, and invest the capital back into the investment side. But because of delays with this one early venture they were unable to do any more flips, and were unable to do any more buy-and-hold properties. The long list of obstacles included:
- Location was away from the city center, lacked proximity to many amenities, but had good schools
- Banks rejected their multiple price offers to buy the foreclosure property
- Second visit revealed water pouring through the ceiling of a bathroom
- Discovery of extensive termite damage
- Armadillo infestation and massive holes in the yard
- Rotten wood discovered around windows, half of which need to be replaced
- Margin quickly shrank as repair costs and holding costs went up massively
- After listing, Josiah did some research and realize properties in the area are quite slow to be sold – They “just don’t move as fast” as homes in other areas – because there were not enough buyers looking for houses in the area
- Finally finding a buyer, Josiah visited the house to find “a sea of hornets swarming the front yard” that had been nesting in the ground. This was revealed just before the prospective buyer arrived. The hornets had been kept in check by the armadillos but were then attacking the buyer as she got out of her car
- A water pipe broke off a wall behind the new air conditioner they had installed, spurting water everywhere
- Mysterious event of a window being left open day after day, as though a thief had been breaking in, an issue that remains unsolved to this day
- Another buyer came along demanding multiple inspections and long lists of seemingly endless post-inspection tasks added up to more than 50 items
- A foundation specialist inspector was brought in. He found water and water damage under the property
- Discovery of a previously unknown septic tank in the backyard, and prospective buyer wanted inspection No. 5 to be carried out to make sure the tank worked. The tank needed to be dug up, repaired and reburied
- One item required was to fix the fireplace. Once complete, the repairman, instead of vacuuming soot from the fireplace, turned a switch the wrong way and blew dust, tar and soot all over the floor and walls, just hours before handover. The walls need to be rewashed, painted and workers’ boot prints cleaned from the halls and bathroom
- Pressured desperate countdown and clean-up prior to handing the keys over
Deal represents excellent case study in ‘opportunity cost’
While they lost only $20,000 on the deal, it took six months to complete it. They had stopped their investment business, and for five months were far from achieving the goals they had set for that business because they could not sell the property. Therefore, the main cost Josiah says was the opportunity cost of not being able to buy properties, refinance, get their money back, and continue to buy property with that capital. The actual loss he estimates was more like hundreds of thousands of dollars on top of the stress of the entire project.
Josiah and his business partner still send each other text messages of a meme of two old men laughing, in remembrance of the sheer relief to lose money and finally walk away from the completed deal when they had finally sold the house.
Get inspections. Josiah highly recommends getting an inspection or multiple inspections of different types on any property before you buy.
Be wary of expensive properties. This one property was on the high end. Now Josiah avoids getting involved in flips of properties that are this expensive. As you go up in price on properties, there are fewer buyers and the higher in price you go, the harder it is to sell a property.
“If you’re going to flip a house try to find properties that are in the sweet spot where you have the largest number of buyers out there.”
Overestimate your expenses. Do an initial estimate and when you’re finished, add 20%. Look at the days on the market of comparable sales and nail that down. Then try to try to ask yourself realistically: “Can we turn this around and be out of this as quickly as we want to be?”
Don’t underestimate the impact of buying outside a city. Because Josiah and his partner were not in the middle of a city or town, the days (months) they spent with the property on the market killed their return on investment.
Always try to reduce the amount of inventory you are holding. This concept applies to all types of business, whether in manufacturing or real estate. It is easy to forget the fact that it consumes time, energy and capital. Also, inventory can deteriorate, then you can have even more problems.
Beware of lemons. Some failures can really be down to just bad luck, or the poor timing. Despite all the quantifiable measures possible, there’s a randomness factor in business. Sometimes we are going to get exposed to a client or a project with which everything goes wrong. It’s at that point we just have to face it and push through.
Persistence is honorable. Josiah stayed and worked through every problem and kept going until it was finished. Despite having to shun his commission and take the loss in the end, he did complete a hellish project and learned many lessons. Big respect!
Opportunity cost is brutal and very real. This is because it is not only financial, but it is also related to the damage that the resulting emotional state can do to the investor, to their partnerships, to business deals, and to one’s confidence.
“Your time is the greatest opportunity cost loss wise that you can bear in a deal, because we have a limited amount of time. And Warren Buffett talks about that all the time, your time is your greatest resource … So you want to spend your time well … when it comes to opportunity cost, be very diligent about cutting your losses, and moving on and continuing and persevering … because not all deals work out well.”
No. 1 goal for next the 12 months
Business goal: To add to his portfolio 10 or more cash-flowing properties in good areas/high-appreciation markets.
Josiah hopes one person can avoid some of the pitfalls that he and his partner had on the deal described.
“It was great having the opportunity to do this. I really appreciate it.”
- How to Start Building Your Wealth Investing in the Stock Market
- My Worst Investment Ever
- 9 Valuation Mistakes and How to Avoid Them
- Transform Your Business with Dr. Deming’s 14 Points
Andrew’s online programs
- Valuation Master Class
- Women Building Wealth
- The Build Your Wealth Membership Group
- Become a Great Presenter and Increase Your Influence
- Transform Your Business with Dr. Deming’s 14 Points
Connect with Josiah Smelser
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￼Further reading coming soon
Josiah Smelser (2019) The Daily Real Estate Investor