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Editor’s Note: Dennis Fassett is a former corporate finance executive turned real estate investing “Cash Flow Mercenary.” Dennis specializes in single-family and multi-family cash flow properties and thoroughly enjoys assisting his fellow investors with their own strategies, including how to buy your first apartment building.
As an ongoing contributor to Mogul’s “Market News Updates,” Mr. Fassett provides us with his own unique, lively, and thought-provoking commentary on the timely industry news and events of today that are impacting our industry. And be sure to check out his other super-helpful Market News Updates. For now, enjoy...
From Dennis Fassett, Cash Flow Mercenary...
Here are some interesting excerpts from a few emails that I’ve received over the past couple of weeks. (The names are omitted.)
From the West Coast:
“HELP! I've run into a nightmare. I bought a house in Flint off EBAY and have had nothing but problems arise. I live in .”
“The guy I bought the property from, a 2 bedroom, 1 bath house, said all it needed was a hot water heater and some plumbing done but it looks like it needs a lot more work along with 2 doors and a furnace.”
“I still told him I wanted to keep the house. I think thieves broke into the house and looted it. I have pretty limited money what would you do?”
From Japan:
“I would like to take this property back from the management firm. It has been vacant and broken in since Nov. 2013.”
“The property needs to be fixed I am not sure how bad the condition is.”
“I don't know if I should keep fixing and renting or sell it.”
“I am going to Detroit right away if you can give me some advice.”
From Colorado:
“I bought three properties in Detroit in an online auction. They were cheap, only $15,000 each! My wife wanted to get into real estate investing since I’ve been doing it for ten years here.”
“But with the market having bounced back, I wanted to find a lower cost market for her to start out with.”
“So I bought her these three properties. I haven’t seen them and we don’t know anyone in the area. Can you help?”
For Real
No, I did not make any of these up. These are word-for-word from the actual emails I received.
The West Coast Story
The first guy – the one from the West coast - bought a house in Flint, Michigan on eBay for two grand from a guy who claimed he lived in it the entire time he attended the University of Michigan campus in Flint.
You may have heard about Flint. It’s just about the worst place you can imagine. It’s not a joke when I tell you that it makes the city of Detroit look like Beverly Hills, California.
His plan was to wholesale it to an investor here. From the West Coast. To someone local who actually knows the area. And - GASP! - after he bought it, he realized that it needed $10-15K in work just to be livable. And that even fixed up it would only be worth a little more than 10K.
The Japan Story
The second person is a very nice lady who lives in Japan. She and a couple dozen of her family and close friends attended a seminar in LA a couple of years ago being given by a group that was pitching Detroit properties.
So she and all of her family and a lot of their friends cashed out their retirement accounts and bought houses in Detroit at an average price of 20K. Sight unseen.
Then the group pitching the properties hooked them up with a dirt-bag rehab company that charged them another 20K for a shoddy rehab.
And if that wasn’t bad enough, the group pitching the properties then hooked them up with a dirt-bag property management company. Shortly after they signed up, all of their houses were looted of appliances, furnaces, AC units and copper.
So they had the dirt-bag rehab company rehab them again for ANOTHER 20K. It was the shoddiest work I have ever seen. Then the group pitching the houses and the dirt-bag rehab company declared bankruptcy and disappeared.
And these nice Japanese folks are all sitting on homes in some of the worst neighborhoods in Detroit, and they’re into them for $60-70K each.
And not one of them is worth more than 20K. The ones that have been burned down are worth zero.
The Colorado Story
The last guy is frankly the most surprising. When I talked to him on the phone he said he’s been doing rehabs and flips in Colorado as his sole source of income for 10 years.
His wife had been bugging him for a couple of years to get into REI with him. But as he mentioned in his email, the price points in his area were too high, so he wanted to start her off in a lower cost area.
So he picked Detroit of all places.
He went online and thought that he was in heaven because all the houses were priced so low. He thought he had his “pick of the litter” and he had a hard time choosing which ones to buy. But he picked three and bought them. His plan was to flip them and double his money.
And he emailed me when he realized that he needed boots on the ground.
He told me that all three were brick 3/2s with basements in “decent” areas, and that all of them were in “decent” shape.
That was far from the truth. None of them were brick. One didn’t have a basement. Only two of them had three bedrooms.
And not a single one of them had windows, a front door, a furnace or plumbing. Two of them had holes in their roofs - which I could see even on Google street view.
He paid 15K each for three houses that needed a minimum of $15-20K in work - EACH - to be livable. None of them would be worth more than 20K or so fixed up.
Lesson Learned?
I’m not writing this to trash these people. They’re real estate investors just like us. And it kills me that they did what they did.
But they all serve to demonstrate an important lesson. Besides not buying in Detroit.
The lesson is that you need to know a lot about the areas you’re buying in if you’re buying outside your area.
You don’t want to be the one writing emails to someone six states away asking for help. Because by that time, it’s generally too late.
Dennis Fassett
earned a BS in Economics and followed that up with an MBA in finance. After working and corporate finance and banking for several years, he started buying single family houses, and quickly built a very nice portfolio of cash flowing rentals. When the credit markets started to dry up and he couldn’t get any additional single family mortgages he shifted his focus to apartment buildings. He now has over $3 million in rental real estate. He manages most of it his self and still has a day job. Dennis has even created his own Private Equity fund to buy apartment buildings.