Re: Your worst deal ever ! - Posted by Milo Brom
Posted by Milo Brom on January 10, 2005 at 22:10:37:
Back in 1990, bought a block of land for cash (no loan) in upmarket suburb for $70k. Spent next year visiting display homes getting ideas. Then designed own house.
1991 went to bank for building loan. Conditions of loan were: use the remainder of my funds (about $45k) and then start drawing down the loan amount. Logic was, they wanted to see construction beginning and wanted me to have a lot of skin in the deal.
During construction, after all my money gone, bank sends letter saying I default interest payments (not true). Waste entire day sorting it out. Turns out to be a computer error and ALL owner-builders got same letter.
Bank would not release final $5k of loan until inspection. Bank’s inspector looked and did NOT approve release. Said building not finished.
I said, if I could finish it without that $5k I wouldn’t have wanted to borrow as much.
He tells me all stuff that needs doing. I stop him. He must be talking about different place. Turns out he was. The “inspector” got two different places mixed up. The other home (just a shell) had all their funds approved and mine (nearly finished bar light fittings and floor) was not approved. They sorted it out and released funds.
Took 3 months to lease so I in the hole for three mortgage payments (it was a P&I loan at 14.5%!!!) Tenant stayed 6 months before family problems (place was in same suburb as wife’s parents and they kept interfering) forced them to move to another state. Another 3 months to lease to next tenant. Had to evict due to breaking lease and getting more people into house. Another 3 months to lease.
This went on for four years. Last tenant in for three months and walks in on wife having sex with his “mate” in the spa. Kicks her out and now can’t afford rent by himself.
All the while, every attempt at laying grass and plants went dead. Nothing would grow in the soil (clay like soil - very hard like rock). So we move in.
Can’t stand neighbors and had a gut full of the place and put on market. Takes 18 months to sell.
After 7 years, with equity, I walk away with the cash I had put in - the $70k I paid for the land and the $45 I spent during construction.
Estimated loss - money spent on trying to get lawn and garden established (about 40 odd palm trees dead, not to mention all the turf), money spent paying mortgage when no tenants in (kept taking about 3 months to lease each time tenant moved out), land taxes, insurance etc. etc. - about $50,000.
Lessons learned:
1: Do not put all your money into deal. You then have nothing left in reserve should things go wrong or you need extra funds.
2: Do not owner-build as bank requires all your money in the deal.
3: Do not buy in upmarket suburbs where there are not many renters. Buy in lower down suburbs where lunch pail Joe and Jane can afford to rent and want to rent.
4: Instead of one deal with a lot of money, do many smaller deals with little money in each.
5: Do ALL your numbers before going ahead. No surprises that way. And makes sure you don’t run out of money.
6: Build the type of houses people want to rent.
7: Do not buy land and then build. Buy ready-to-rent dwelling so income comes right away.
8: Beware tax man. He hit me up for taxes of being a builder!!! Double tax that year (gulp)
There you go, you have just got $50,000 worth of lessons.
Milo