$40,000 Pay Day–No Work Involved

For those of you that think making this kind of profit isn’t possible in your market or that you are too inexperienced–think again!

I finally dove into the investment real estate market last year after sitting on the sidelines for three years reading stories like this one and getting “analysis paralysis” on potential deals. I hope my mistakes and successes will give some of you the courage to “get in the game.”

I was referred by one of my excellent contractors to a vacant lakefront 2+ bedroom, 2 bathroom, fixer-upper property in Council Bluffs, Iowa. (Council Bluffs is a city close to Omaha of about 70,000 people and currently in a fairly stagnant real estate market.)

I had to do some research on the county assessor’s website to find out who owned the property because my contractor could not remember his name. It turns out that it was owned by an 86-year-old gentleman who owned the house free and clear. I made an appointment to meet the seller at the property to do a walk through.

The house needed some major cosmetic work

He had built the home in 1976 and had let his grandchildren live in the property for the last few years until they had outgrown the house and needed a larger place. The house was nicely situated on a canal with about 70 other homes, with average prices from around $200,000 to $225,000. The house had become cosmetically distressed, to say the least.

After walking through the property, I determined that it needed a major facelift, but the foundation, roof, plumbing, electrical, and other mechanicals appeared to be in good shape.

The house needed paint throughout the interior and exterior, new carpet (the existing carpet had been marinating in cat urine), four new sliding glass doors, some new windows, and both bathrooms and the kitchen were in need of major updating.

I estimated about $30,000, or so, worth of repairs. After spending about forty minutes walking through the property, I cut to the chase and asked the seller how much he was asking for it. My contractor had informed me that the gentleman had previously told him he wanted $120,000 for it, representing a very good deal for a lakefront home in this area.

Much to my surprise, the seller told me that he would sell it for $95,000 in as-is condition! I made a valiant effort to maintain my best poker face and told the seller, “Let me crunch some numbers, and I will call you first thing in the morning”.

Now here’s the problem…

I had just begun a major remodeling project on another property and would not be able to swing both deals at the same time because of the money and resources needed. I called the seller and explained my situation. I told him that I would be willing to give him full asking price for his property, as long as he would give me six months to close on it.

He said, “That won’t be a problem.” Wow! I was dealing with a very understanding and flexible man here. I met him at the title company, finished the offer paperwork, and opened escrow with a $1,000 deposit (an advance from my line of credit).

So for the next six months, I plodded along with my other project, the whole time worrying about how I was going to afford this property, that someone would try to go around me by making a higher offer, that the seller would experience health problems, etc. Lots of things could go wrong in six months?

Time was running out, but I didn’t give up

As my six-month window was rapidly approaching, it became clear that I was not going to be able to finish my rehab property in time to get it sold in order to close on the lakefront house.

After unsuccessfully trying to refinance my remodel house to pull out equity for down payment, closing costs, etc., I scrambled and was able to get 100% financing through a mortgage broker I met at a local real estate investment club. The great news–the property appraised at $165,000!

Once we had a closing date set, I decided to try to sell the property in “as-is” condition instead of rehabbing it (due largely to the appraisal). So, the next day, I put a free ad on www.craigslist.com that said:

I got several responses and ended up showing the place to two different couples, one of which made me an offer of $135,000 with closing in three weeks. I accepted on the spot and drove over to the couple’s home to complete the purchase agreement and collect the earnest deposit. I was so excited, I could barely contain myself!

I feel like I got very lucky on this deal. But I have always made a point to take good care of my contractors and others in my network, making sure that they are rewarded for doing a good job. My contractor does not know it yet, but he is going to get a nice envelope of cash for the great referral.

Now for some lessons learned:

DO:

• Spend some time doing due diligence in the market you are looking to invest in. If you haven’t evaluated comps in the area, how will you know when you have a good deal?

• Act quickly when you know you have a great deal. I made a full asking price offer immediately after viewing the property.

• Always add “and/or assigns” on your purchase agreement. This allows you to assign the contract without actually having to buy the property and then turn around and sell it right away. I could have done the deal more quickly if I would have assigned the contract.

• Attend or start a local real estate investment club in your area. Can you say networking opportunity? If you are wholesaling, you can build your buyer’s list at these meetings. They are great to meet potential lenders and other professionals.
• Use free Online tools. Most counties have tax assessor websites where you can see a property’s assessed value, its current owner (and the mailing address), the price and date of the last sale of the property.

  My particular county has overhead and front views of each property and allows you to scroll over neighboring properties for information. And www.craigslist.org is one of many places that offer free Online ads, including pictures for your properties.

DON’T:

• Be afraid to ask for the moon when you identify an excellent bargain. (The seller agreed to give me six months to close!)

• Rely on only one type of financing when purchasing a property. I was able to get a lender offering 100% financing on an investment property with a one-year balloon, which is great. But, I could have used a hard money lender to purchase the property and gotten the deal done much more quickly–especially with such a low LTV (loan to value ratio).

• Forget to ask “is that the best you can do?” when either buying or selling a property. That single question can save you thousands of dollars over the course of time. It is a simple negotiating tactic that puts the pressure on the other person to decrease their asking price or increase their offer.
• Forget to take care of those who take care of you. Call it Karma, serendipity, or whatever you want to, but what goes around comes around. Pay your people well for doing a good job; give them bonuses for completing jobs early and for good referrals. They will be a great bird dogs for you for future projects!

Keep making contacts and offers and success will find you!