House #4: Finally Mine

Good News: I finally closed on The Yellow Stain House today!

While closing on this house is a good thing, it’s a reminder that things don’t always work out the way you plan, especially in this business. I’ve been learning that lesson repeatedly over the past couple weeks. Here are some of the roadblocks and challenges I’ve had with The Yellow Stain House just in the past month leading up today’s closing:

• Foundation Issues: Didn’t find the foundation issues until I was within minutes of being under contract without a due diligence period
• Plumbing Issues: Didn’t find the major plumbing issues until after the water was turned on, which also was within minutes of being under contract
• Renegotiation: I walked away from this deal, only to have the seller come back to me with major concessions
• Flood Plain: Just 24 hours before closing, my lender finds that this property is in a Flood Plain
• Loan 1 Falls Through: Because of the Flood Plain issue, loan #1 turns out to be more difficult than expected
• Decide to Rent: Because of my loan situation, I decide to go the traditional loan route, and find a partner who can co-sign
• Loan 2 Falls Through: While processing the loan #2, the seller decides they want to impose a per-diem penalty for missing the closing date. To avoid the mounting penalty costs, I need to close quickly with cash.
• Back to Flipping: Because I now have a lot of cash tied up in this one, I don’t want to hold and rent. So, my exit strategy is back to flipping.

Here we are. Three rounds of negotiation, foundation, plumbing, and flood plain issues, two failed loans, Plan A down the drain, Plan B down the drain, Plan C down the drain, and back to Plan A again. Between inspections, appraisals for loans, engineering consultations, and contract penalties, I’ve officially spent more on this property pre-purchase than any other property I’ve yet acquired.

Now, that said, here’s why I’ve happily enduring all this frustration…

I picked up The Yellow Stain House for $60,000. Based on my last appraisal, the as-is value is currently $124,800. This leaves me nearly $65,000 in equity on this purchase! Subtract out the inspection and appraisal costs, the closing costs, the foundation and plumbing repair costs, the cost of removing the property from a flood plain, and my equity is still over $55K.

Additionally, I did some research today on rent comps in the area. I had been assuming they were around $1000/month, but in actuality, they are closer to $1200/month. This means the property could provide tremendous cash-flow as a rental as well. So, regardless of whether I decide to resell or rent this one, the numbers are fantastic.

In fact, with the new information about the rental comps, I actually have another exit strategy (are we on Plan D yet?). Yes, I know…in yesterday’s post, I said that I had finally figured out what my exit strategy was going to be on this one. Well, I changed my mind again. I’m going to actually try flipping the property to another investor for a quick profit without doing any additional work (besides the foundation, plumbing, and flood plain work). While flipping to another investor wouldn’t be the most lucrative route, I could still make a very decent profit this way. The reason I’d be willing to forgo some of my profits by selling to another investor is two-fold:

1. Quick and Easy: While I’d see less profit, the total time and effort I’d be putting into this property post-purchase would be minimal. A couple days babysitting the foundation and plumbing guys, and a few minor cosmetic enhancements, and I could be done with this project and onto the next.
2. 90 Day Rule: If I sell to an FHA buyer (a likely scenario if I finish the rehab), I’d have to hold the property for 90 days before I’m allowed to sell. This means a couple extra months of holding costs, and more importantly, a couple extra months that my cash is tied up.
3. Win/Win: Because there is so much upside to this property, I could make a decent profit plus allow the investor on the other end to make a nice profit as well, either by renting or flipping. I love situations where I can succeed and help someone else succeed.

So, I’m going to spend the next week or so — while the plumbing and foundation work get completed — marketing this property to other investors. If I get a taker, great. If not, I’m planning to do a minor rehab ($6,000 or so) and put it on the market for retail sale, hopefully for a nice profit.