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Where Investing and Speculation Collide

By Bruce W. Ford
9/17/05

Some uninformed folks would describe someone who rehabs distressed property as a "speculator" or even a "property speculator." Don't be fooled! There is a VAST CHASM of difference between rehabbing and property speculation.

Let me explain. According to Dictionary.com, the definition of speculation where business is concerned is:

• Engagement in risky business transactions on the chance of quick or considerable profit.
• A commercial or financial transaction involving speculation.

While all investing...in anything... has some element of speculation to it, I want to highlight a key difference between speculation and investment. When you speculate, risk is higher and by the nature of the word speculation, more risk than usual is implied.

So, in that context speculation doesn't fit what I advocate at all. I'll explain further, but first let me illustrate the difference between investment and speculation in rehabber terms from what happened to me just this week.

I got a call, a "hot" lead from my wholesaler. The property is located on the fringes of a hot area of my town called Riverside. Riverside is an area where historic homes are being bought at inflated prices and fixed up very nicely! Well, that's in the heart of Riverside, but this house is on the distant edge of that part of town.

The house is 934 square feet. Great area, yadda yadda. My wholesaler needs $81,900 and he's sure the house's "repaired value" will come in at around $120,000. He continually repeats something he heard from an appraiser about values "around" Riverside.

I agree to go and take a look. Before I do, I do some of my own checking. From the tax records (available online), I learn that the house was built in 1942, just changed hands last year for $72,000 and is of wood construction with asbestos shingling on the outside.

It doesn't look good when I look at the numbers. IF...and in my mind a big if...the appraisal comes back at $120,000, then the 70% I can get a hard-money mortgage for is $84,000. So, my mortgage will cover a portion of my closing costs, but none of my rehab.

When I look at the property, it's got some things going for it. It looks to be in pretty good shape and is on a corner lot. In truth it needs $10-12K rehab. One negative is that it's square and there is no porch under the roof line to easily add square footage for increased value. The neighborhood is fair but two things jumped out at me:

- There is a couple of very old apartment buildings on the street. Normally this would not bother me in the least, but these will prevent the yuppie crowd from rushing into the area in a buying frenzy.

- Every other house within sight is also very small and of similar construction. This means we aren't talking about architectural gems in the historic and sought-after areas of Riverside.

If the money situation was better, that is to say, if this was a better investment, I would buy, buy BUY! If the spread allowed me to buy and rehab it with little or none of my own money, I would.

But, if I bought this house and rehabbed it with considerable out-of-pocket investment, I would be speculating on the area, and I had my doubts.

I didn't buy it, but if I had, that would be speculating!

So, how would I define speculating?

• Speculating involves taking on more than usual risk.
• Speculating involve banking on values that aren't there today, and aren't projected to be there based on NORMAL conservative appreciation rates.
• Speculating is banking on external or environmental factors to make you money.

What is investing, but not speculating?

• Buying property that you are "safe" in, meaning you could rehab it and sell it in the short term and make money.
• Buying property that will make you money based on what you bought it for, current environmental factors, and conservative appreciation rates.
• Buying property such that hope is not part of the strategy!