Josiah Smelser is the current podcast 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 runs his own investment property business along with a partner. Josiah is currently a licensed certified general appraiser (can appraise commercial and residential properties) and spent time working for companies such as CB Richard Ellis CBRE as a commercial appraiser in his past. Josiah was formerly a finance professor at the university level for several years, where he taught a number of finance courses including real estate. Josiah 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. 

“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’re 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.”

- Josiah Smelser

Worst investment ever

Josiah tells an extraordinary, harrowing tale of flipping a house in which the extent of what went wrong went way beyond Murphy’s Law. The sheer amount, kind and combination of renovation obstacles Josiah and his partner had to overcome to get their property ready for sale were staggering. Their business model is to buy a property, do value-added renovations to it, get it rented out, and then refinance it. Their business model on flipping, is buy a property, renovate it, sell it as fast as they can and try to make a minimum of US$25,000-$30,000 per house profit, and invest the capital back in 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 not in the center of the city, lacked proximity to many amenities, but had good schools
Bank rejects their multiple price offers to buy the foreclosure property
Second visit reveals water pouring through the ceiling of downstairs bathroomDiscovery 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 shrinks as repair costs and holding costs go up massively
After listing, Josiah does some research and realizes 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 he gets a buyer, Josiah visits the house to find “a sea of hornets swarming the front yard” that had been nesting in the ground revealed right before the visit of prospective buyer. The hornets had been kept in check by the armadillos
A water pipe breaks off a wall behind their the new air conditioner they had installing, pouring water
Mysterious event of a window being left open day after day, as though a thief has been breaking in. This issue remained unsolved
Another buyer comes along who demands multiple inspections and long lists of almost never-ending post-inspection tasks and repairs added up to more than 50 items
A foundation specialist inspector is brought in, and he finds water and water damage under the property
Discovery of a previously unknown septic tank in the back yard, and prospective buyer wants inspection No. 5 to be carried out to make sure the tank works. The septic tank needs to be dug up, repaired and reburied
One item is to fix the fireplace. Once complete, the repairman while cleaning blows instead of vacuums soot from fireplace all over the floor and walls of the house, just hours before handover, and the walls need to be painted
Pressured desperate countdown and clean-up prior to handing the keys over, and

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 to send each other text messages of a meme of two old men laughing in remembrance of the sheer happy relief to lose money and walk away from the deal when they finally sold the house.

Some lessons

Get inspections. Josiah would highly recommend getting an inspection or multiple inspections of different types.

Be wary of expensive properties. This one property was on the high end. Now Josiah will not get involved in flips that are this expensive. As you go up in price on properties, there are fewer buyers. The higher up 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.” Josiah Smelser

Overestimate your expenses. Do an initial estimate and when you’re finished it, add 20%. Look at the days on the market of your comparable sales, nail that down. Then try to try to ask yourself realistically: “Can we turn this around and be out of this, 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 benefit.

Andrew’s takeaways

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, but 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 wrong time. 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 taking the loss in the end, he did complete a hellish project and learned many lessons. Big respect for that.

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, you know, because they don’t all work out.”

- Josiah Smelser

No. 1 goal for next the 12 months

Business goal: To add to our portfolio 10 or more cash-flowing properties in good areas/high-appreciation markets.

Parting words

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.”

- Josiah Smelser

You can also check out Andrew’s books

Connect with Josiah Smelser

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Website
Email
Instagram – @dailyrealestateinvestor

Connect with Andrew Stotz

Further reading coming soon

Josiah Smelser (2019) The Daily Real Estate Investor

SMEs Are Hiring Aggressively: Is That A Good Thing?