High End Product in Low End Houses

I had a great visit with my friend Ricardo to go meet a Tacoma real estate investor named Walter Johnson yesterday. Walter has been investing in Tacoma real estate since 1997. Lots of investors I know are having success in this market, and I wanted to learn more about what they are doing.

Walter is finding properties in good middle-class neighborhoods in Tacoma that he buys for $40-50K. Many of them are in foreclosure. He then "re-faces" or "re-surfaces" them.

I'd never heard of that. That's because no one I know does what Walter does. Walter has an artist on his team, along with architects, engineers, in-house real estate agents. This artist used to work in high end "Street of Dreams" types of homes and won many awards for his work, before the market tanked. His work includes a very high end product which is inexpensive to produce, but looks like a million bucks.

It is ground-up granite mixed with (secret ingredients) that can be applied to any surface. It can be poured into a mold and used as window and door trim or base moulding. It can be thinned and applied as wall texture. It can be applied as faux brick or stone blocks, or used to build fireplace mantels.

Walt spends maybe $15,000 per house "re-surfacing" interiors and exteriors, and then resells it or keeps it as a rental. His costs have gone way down since discovering this product. Being this much below other commercial and residential listings has kept his business profitable and thriving.

And Walter explained to me the reasons to be optimistic about Tacoma: 3rd largest port in the country, a big military presence, and lots of money being pumped into casinos and related development by the Puyallup Tribe. It doesn't hurt that housing prices are so much lower than those in its big neighbor of Seattle.

Interesting model, interesting work. Good job, Walter!

Investor Tip on Estimating Repair Costs

The next tip in our investor series is to avoid the common error of underestimating the need for and cost of repairs. One can never be pretty enough and one can never have enough money set aside for rental repairs. A good rule to follow is always considering the worst case scenario. When you see a soft spot in the floor, even before you consider the cost of replacing the floor board, consider that the joists underneath may be rotten as well. Rarely will you see a fix-over come in under budget. When you are discussing costs of repair with a potential seller, a good strategy is to double it. When you underestimate repair budget and overestimate what a great deal you believe your first big purchase to be, you have a recipe for disaster, and one many enthusiastic newbie investors fall into.When going into a sale, underestimate what you believe the value of the house is, and overestimate what you believe it will cost to rehab it. With this set of expectations, you will more often be pleasantly surprised rather than bankrupt when all is said and done.This mindset is also critical when dealing with contractors discussing the cost of their services. Never settle for an hourly rate; you will almost always spend far more than the original estimate. Get specifics, and be sure to get the contractor's worst case scenario numbers. Set a timeframe, and get it in writing. In fact, if they tell you the job will take 2 weeks, include in your contract the deadline date, as well as a daily charge to them for each day over deadline. This helps keep everyone on a realistic schedule.So remember, prepare for the worst, get everything in writing, and you will be purchasing many sequels to that first sale.