I have a client who is looking for a property to renovate.

He might flip it - or he might hold it as a rental. It all depends on the property. Sometimes, I recommend doing both - put it on the market for sale or rent and take the first decent option that presents itself.

I found him a renovation project that looked really good on paper - but to me, it looked just as suspicious as any I’ve seen.

The property is located in the West End of Atlanta. Some properties in the West End have sold for more than $300K, but location is everything.

In my article “So You Want To Flip Some Houses?”, I show where even the experienced flippers on “Flip That House” haven’t always been successful… including their acquisition of a property on the West End. Their West End listing, by the way, just expired yesterday. No takers.

Anyway, the house I found is a small house, and it just hit the market for $45,000. The recent comps show an average sale price of $180,000 for other nearby similar two bedroom - one bath homes.

Although the property needs work, the pictures show that some renovation work had been done… but it is fairly obvious that much more work still remained.

The tax records show the last sale of this property was less than two years ago - at $225,000. The previous sale was in December of 2005 at $85,000. A few months earlier, it sold for $49,900 as a foreclosure. To me, this was obviously a case of mortgage fraud.

So I called my client up and told him about this property… and I emailed him the information including the comps. IF this is workable (that’s a big word - if) then we must move quickly to snatch this property up - so he agrees to drive by after work.

I tell him to pay close attention to the comps.

I am less concerned with the subject property than I am with the comparable sales. There’s a lot of unscrupulous real estate deals that happen in certain parts of town… and of course - this is one of those parts of town.

If the comps look like they support a $180K price tag… then the subject property might support it, too… after renovation. If the comps don’t look like they support a $180K price tag… then we know something is not right.

Here’s a good piece of advice - if you aren’t totally comfortable with a property… you should walk away.

Or run, as the case might be. This is one of those “run” cases.

So my client drives by the comps, and calls me up saying he can’t believe anyone would pay that much to live in those houses.

“It’s not that the comps are THAT bad,” he said, “but there’s no way I can believe they are worth that much… not around here.”

“How do the surrounding houses look?” I asked.

“They’re pretty bad. That’s why I can’t believe the comps are worth anywhere near what they sold for. When I stopped to look at the house, a drug dealer came walking up to me and said ‘hey man… ya need anything?’ “

“On top of that - some of the houses on this street are real shacks. You know what a lean-to is? Some of these are leaning so hard - if they serve peas at dinner… they’ll roll off the plate!” he said.

Obviously, the comps are probably cases of mortgage fraud that will become tomorrow’s rehab projects after those properties fall into foreclosure.

According to the MLS, this house in now under contract. The listing agent is the selling agent… so the buyer was probably not represented.

The buyer was probably shown the same comps I showed to my client. After all - on paper this looked like a good deal. The difference, of course, is the interpretation.

While the listing agent is talking this deal up like it’s the find of a lifetime - any decent buyer’s agent would be warning their client, instead.

P.T. Barnum knew what he was talking about.

Posted by Doug Quance on Saturday, January 6th, 2007 at 10:19 am.