Jan. 6, 2006: Timid real estate investor lost chance for large Phoenix area rental home gain
In July 2004 I was working with a potential investor. She was prosperous and well qualified, and she was buying at a time when a nice rental home in the Phoenix area could still throw off a positive cash flow.
We had settled on a newer three-bedroom home in Tolleson, a good rental area with great appreciation potential. We put the house under contract (for $135,000, if you can believe that) and began the inspections.
The sellers were in pre-foreclosure. They hadn't done a perfect job of maintaining the home, nor had they understood their rights under the builder's warranty. In all, the repair issues came to around $1,500.
That's a lot for a house that new, but it's not an outrageous sum - a little over 1 percent of the purchase price. The sellers couldn't cover it, of course. They were already losing the house.
My buyer canceled the contract. I thought this was a huge mistake, so much so that I offered to pay for the repairs myself. But she was scared enough by the specter of costly repairs that she not only walked away from this house, she fled real-estate investment altogether.
That house is now worth $225,000. She has lost $90,000 - so far - over $1,500 that I would have paid.
If you say that the house has appreciated by 67 percent in the 18 months since all this happened, that sounds like a lot. But that's not even the worst of it.
She was putting 5 percent down, and she would have paid around 3 percent in closing costs. Ignoring rental profits and tax benefits, her total outlay would have been $10,800. Her rate of return over those 18 months would have amounted to 833 percent. She would have more than octupled her investment stake in a year and a half.
Yes, this was a period of anomalous appreciation. But even at a staid 6 percent a year, that house would have turned $10,800 into $90,000 in less than nine years.
The moral of the story? Fortune - and fortunes - favor the brave.
Greg Swann is the designated broker for BloodhoundRealty.com, a full-service Metropolitan Phoenix real estate brokerage. This article originally appeared in the West Valley regional sections of the Arizona Republic.
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