Tuesday, February 27, 2007

Summary of Real Estate Purchases

So far we have bought 3 single family houses, with a fourth scheduled for next month. Here's a summary of how we did it and our strategy to sell the houses. We have basically been able to get really good deals that allowed us to use OPM (other peoples money) without putting much cash of our own in.

  1. Property A - A brick home we bought for $80,000 through a Realtor. We used a HELOC from our current home to finance the down payment and repairs. We got a conventional mortgage for 80% of the purchase price. We spent $16k on repairs (the biggest problem was water in the basement and our big expense was installation of drain tile). We advertised this as a "Rent-to-own" property and got nearly 1000 calls on it and so were able to pick some excellent tenants. We have the property leased for a year. The tenants signed a lease-option agreement and gave us $2500 towards the option. We give them a $150 rent credit each month that their rent is paid on time (every month so far). We get a slight premium for the rent. The option price is $134,500. The tenants have actually improved the property quite a bit (they replaced the floor and fixtures in one of the bathrooms). The place looks great - so far, so good.
  2. Property B - A 1000 sq ft home in a poor section of the city we got for $5k using short sale methods we discussed previously. This property came through our direct mail campaign to someone in foreclosure. We used a HELOC from Property A to buy it. We just cleaned up the interior and plan to wholesale it (it needs lots of work to be habitable). I'm going to try a "flat fee" MLS listing service to sell this property.
  3. Property C - Another home from our foreclosure mailing. A nice house in a town just outside of city limits. A half mile to the north in Amherst similar homes are selling for $300k, to the west is a poor district of Buffalo with homes selling for 25% of what we paid. We bought the house for about $163k after reinstating the first mortgage and a short sale payoff of the second. The house was sold 18 months ago for $182k. We thought we could just paint the interior but after closer inspection, it looks like it needs some new windows as well as a new boiler. The house is in a nice neighborhood but I worry that it is too close to the poor area of Buffalo. There were very few comparables (it's a large house - 2700 sq ft) and well designed. I think once we finish it will look great, but will people pay to live here? Since we underestimated repair costs, we intend to do a lot of the work ourselves on this home. The underlying monthly payment on the mortgage that we bought "subject to" is over $1600 per month. Rents for houses in this area are not nearly that high, so a "rent-to-own" scenario might not work well like it did for Property A. On the other hand, if we try to sell it outright, if we guess wrong on price, it will drain cash from us quickly. Our exit strategy is yet to be determined.
  4. Property D - This is due to close March 20th. This home came to our attention from a woman we mailed a foreclosure letter to. This is another house she owned and wanted to sell - not in foreclosure. We will use our hard money line of credit to buy and pay for the rehab costs. This will be a complete rehab that we will use contractors for to do all the work. This is due to the use of a hard money lender to finance it. Since the lender will allow us to finance all the rehab costs, cash flow should not be much of a problem. We plan to sell it outright, probably using a flat fee listing service.

Are we going to fast? Time will tell. My first venture with real estate followed a fast acquisition path as well. However, we are better financed this time. In addition, I plan to unload all 4 of these properties this year, rather than my buy and hold strategy the first time.

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