It is 11:00 a.m. I am lying down in the front seat of my car, and there are guys shooting at each other in the middle of the street. This isn’t the beginning of a movie. This isn’t a catchy start to an article. This is my real life. This is what woke me up.
Back in 2009, I started working with an investor who was buying properties at county auctions. It was a time when there were very few people willing to buy anything, let alone a house. Competition was limited. We were literally buying houses for 10 cents on the dollar. If you wanted, you could buy a house every single day for less than $10,000. Some were gems, some were garbage. It was thrilling. We would go out before the auctions and walk the outsides of these properties, take a guess at what the condition of the property was and buy it.
We ended up buying a lot of property sprinkled all over the South Side of Chicago. The city of Chicago is 234 square miles. The South Side is larger than both the North and West Sides. So the South Side is at least 117 square miles. To put that in perspective, Manhattan is 22 square miles. The South Side is made up of dozens of different neighborhoods, and we were buying in all of them. We didn’t care because we were buying the properties for $10,000, rehabbing them and renting them. It didn’t matter to us because the numbers on paper looked incredible. (What a mistake that was.) We didn’t have the time to learn about the different neighborhoods. All we did was look at the numbers.
Following the Numbers
So about a year and a half into this, we’ve bought and rehabbed a couple of dozen properties in various neighborhoods. There had been a few problems along the way in certain neighborhoods. We had a few break-ins at the properties. We justified it by saying, “But look at the numbers on paper.” So we hired house sitters.
A house sitter is where you pay a person to live in the house while you are doing a rehab to watch the house. Probably this should have been a red flag, but we thought, “Look at these numbers.” We tried to recruit contractors who refused to work because of some of the neighborhoods. But another voice stopped us from taking action: “Do you see this 20% return? We’ll just have to find someone else to work on it.” We had contractors call us and say they heard shooting outside. We said, “You’d better stay inside then. I am going to make some money on that property.” We had contractors robbed coming out of the property to their truck. “It was just part of doing business. Nothing to worry about; have you seen these numbers? I am going to be rich!” I kept thinking.
So now there I was, praying to God to get out of this. I don’t know how long I was hiding there. I don’t even remember going home. The first clear thought that I remember was, “I’m doing all this for a lousy $300 a month.”
After that happened, it was a total shift in my perspective. There were plenty of neighborhoods in Chicago on the South Side that were safe. We already owned properties in some of those neighborhoods. While looking at those properties, I questioned, “Why am I buying in bad neighborhoods? Is risking my life worth it to make a little bit of money?”
Unloading the Properties
We immediately started to try and unload the properties in the bad neighborhoods and guess what? There were no buyers. I even showed them my pro forma and income statement. I said, “Look at these numbers. It is a gold mine.” No takers!
We lowered the price, from a profit to a break even. Still nothing. No takers. We lowered it to a loss. Nothing. We lowered to an even bigger loss, and finally after a few months of this we had a buyer lined up. It was another investor. He was buying properties in the neighborhood because of the returns that he could get. I told him good luck and never looked back.
We lost a lot of money on those properties, and to be honest, I was willing to lose more to get rid of them. I realized there are tremendous opportunities in real estate without having to take those types of risks. We continue to buy property on the South Side. There are a ton of great neighborhoods that are safe with great returns. Not as high as other neighborhoods, but I feel safe when I am there. I always cringe when I overhear a new investor who tells me their primary way of deciding whether a property is a good buy or not depends upon what their Excel spreadsheet spits out.
Read more from Mark Ainley at Bigger Pockets
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