The Finally House
The Basics of the Deal:
“The Finally House” was purchased for 41K and it offer 3 Bedrooms, 1 3/4 Baths, is about 1,200 feet and sat on a standard city lot of 6,500 square feet.
We called this “The Finally House” because it was the first time we heard a bank cry uncle during negotiations. We had made 50+ offers before this house was finally put into escrow. This property sat in a semi rough area and was being badly damaged as time went by. The bank had enough and wanted out and thus took our offer even though it was only 60% of the current asking price. We offered 40K hoping to get it for 45k or less and their first counter came back to us at 45K. We could have taken it as it matched our target but we sensed they were ready and only came up 1K on our counter. Thinking back we may have gotten it at 40K if we held out. But as mentioned above we were happy to finally get an REO house in escrow and we looked forward to a lot more.
Expected and Initial Plan:
We initially expected the house to cost 10K in repairs and to rent rather quickly for $950 a month or more. We needed to replace most windows, paint inside and out, new carpet, new rear fence and other miscellaneous items.
Actuals:
We ended up spending about 15K in repairs. The extra 5K came from a new Central Heater and a pluming issue with cracked pipes. Turns out the property was vacant so long that tree roots got into the pipes and then they expanded once the house was put back in service. Big lesson learned on the pluming issues as I am sure it won’t be the last time this blows our initial budget.
On a positive side we rented the property for $950 even before the repairs were complete and the family moved in the day we finished
Current Status of Property:
We still own the house and consider it a long term keeper as you can’t build houses for what we paid for this one. So whenever the market turns and this unit is back to replacement cost we might look at exchanging the property but until then we are happy to keep it.
The initial tenants moved out about 90 days ago or so and at the moment the rental market is soft so we have had to lower the asking rent to $850. This hurts but given the low price we have plenty of margin/cash flow. We expect rents to increase over time as more people are becoming happy renters and look at home ownership as a large risk. Good for us.
Lessons Learned:
Given units have been vacant for years and damaged by break in’s expect the unexpected. Add 2K-3K to any new purchase and expect potentially large issues for the first 90 of having a tenant in the property. Units that go back into service after a year or two of being vacant will have surprises so don’t sweat the little stuff just keep buying right.
Buying right means extra expenses or rental rates dropping are no big deal.
If you sense the upper hand don’t just accept a counter because they hit your number. Take a shot at shaving just a little more off the price. But be careful if you sense competition as losing a nice deal over measly $500 or $1,000 would be foolish.
Grade the Deal and Why:
If we did this deal today I would grade it a “D” but given it was the first one and we took action and executed a plan that lead to nice cash flow I will give us a "B”. Note we won’t be easy graders going forward.
Future Plans for Property:
We look forward to holding this property long term. We will look to extract 20-30k of equity as time goes by via an equity line with a bank or via private money from our network. We only owe about 20K on the current mortgage.
When the property gets back to replacement cost of 120K-150K we will look to exchange our equity into a small multi-family, but until then we are happy to hold the property given the cash flow it spins off every month.
