Sunday, January 27, 2013
A little background...(Part 2)
It's the Summer of 2003. I've been looking for a test subject to begin my foray into real estate investing. The whole concept of buying a house in need of some light renovations on the cheap and transforming the "ugly duckling" into a "beautiful swan" for a profit was intriguing. As a result of my intense self-education and reading real estate investing books and Internet sites, I learned what now seems an obvious lesson: A good neighborhood is an important factor. Therefore, I searched relatively desirable locations coupled with a relatively desirable houses that theoretically wouldn't sit long on the market thus increasing my carrying costs. My turn around time was 3 months: One month to purchase and close. One month to renovate. One month to sell and close on the property.
I intended to use the HELOC on my personal residence to self-finance in order to avoid all the hassles and expenses of a real estate loan. I had $55,100 HELOC and credit cards that I could use. Using this method would save on appraisal, inspection, loan fees and closing costs thus reducing the amount of my initial investment by thousands.
I found a 1900 sq ft. 4 bed 2 bath 1 1/2 story VA repo in a decent neighborhood. Since it was a VA house, I would have to bid against other RE investors. Sure enough, while I was looking through the windows another investor showed up and looked it over. I decided to bid 59k. I won! I purchased the house with cash using my HELOC and cash withdrawals from my credit card. I invested another 7k into renovations. Fortunately, the house was in very decent shape and needed mostly cosmetics. It needed bathroom and kitchen counters, sinks, fixtures, ceramic bathroom floors, ceramic tiled back splashes throughout, new wood laminate kitchen & dining area, lighting fixtures, new paint in/out and new appliances, etc... The roof was in "fair" condition and I was able to clean and restore the carpets to almost new condition (remember I have a commercial cleaning company).
I didn't have time to do all the work, and that wasn't my plan anyway. So, I interviewed 2 handymen: Handyman #1 came to the house smelling like a brewery at 10:00 a.m. Not going there. Handyman #2 was knowledgeable, respectful (always "yes, Sir...etc...) and sober. I liked him and he was hungry. His work turned out to be affordable, of excellent quality and he was expedient. I was fortunate to find him even though I knew it wouldn't last. "Vick" was TOO good and would be sought after by a construction industry with a powerful vacuum for knowledgeable and talented people.
The realtor who helped me transact the purchase estimated the house would sell in the high 70s to low 80s. Another realtor I interviewed put the price between $87,500 and $89,500. I started doing my homework on the comparables and used a fairly simple method to arrive at the future asking price: I took the last 3 years of comparables and divided by the total square footage. As a result I came up with an avg. price of between $48.00 - $52.00 per sq ft. When I applied this standard to my house (which was bigger than most of the surrounding houses due to a garage converted to a 2nd living area), I arrived at a value of high 80s to low 90s. The numbers worked and I proceeded to transform this homely duckling into a beautiful and desirable swan.
Everything went well and I had a lot of fun with this real estate investing "experiment". I still had much to learn. I was worried about the appraisal process which would ultimately make or break my deal. Would it appraise for my asking price?
In the meantime, I had a realtor ask if I was offering a "Seller's fee" to Realtors bringing buyers in. "Yes". That would be worth 3% to me. The really cool and amazing thing was that I learned that the "woman buys the house". In other words, if she loved it, her husband will often acquiesce to the purchase. Therefore, all other considerations aside, kitchens and bathrooms must be immaculate. Mine were.
The first couple that surveyed the house just had to have it. Sold! $89,500. The catch: It was a military couple and they asked me to pay ALL closing costs. I ran the numbers and decided that my "I-just-want-to-not-lose-money" project would net me around $14k in profit. The whole experiment took 2 1/2 months from closing on the property to arrive at an acceptable contract. The property showed so well I never even had to list it. The experiment was a success and a real estate investor was born.
However, I decided that Fix and Flips were not to make up the bulk of my future real estate ventures. I would become a Landlord.
To be continued...