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:
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
Connect with Andrew Stotz
Further reading coming soon
Josiah Smelser (2019) The Daily Real Estate Investor