Overview:
Closed January 31st, 2020
This property is a 3/2 main house with a detached studio that I purchased For Sale By Owner (FSBO) from a couple who were in pre-foreclosure on a seller financed note. I was able to close just before the lender foreclosed so it saved them from dealing with that mess, got the lender paid off, and it was a great buy for us. At closing it appraised for $40k higher than what we purchased it at – before repairs! The owners had several animals so we had a horrific smell to deal with, but other than it was a light cosmetic rehab after the deepest of deep cleans. My wife and I did all of the work ourselves and furnished it to be a short term rental. We used private money to purchase and refinanced to pull our investor’s cash out to complete the BRRRR.
This deal was found FSBO on Zillow like I mentioned above. As an aside, that is by far and away how I prefer to purchase property – directly from the seller. It puts that ball in your court and you get direct contact, feedback, and information from them. I like working with a good agent too, but when you are working directly with the seller you can really guide the sale by 1) finding the pain point and 2) presenting the solution (hint: it’s buying their house at a discount). Back to the story. The Zillow listing had 2 pictures. Both were of the exterior of the house only. Both were blurry. And both were taken at dusk. The description was awful too. So I know the value was overlooked by anyone who saw it. It was listed as 3 bedrooms and 2 bathrooms with 1600sqft. When I looked it up on the county appraiser I saw the guest house and the pool and thought: Bingo! That was the information I needed to make the deal work. The rest of the information utilized to get a discounted price came after talking with the seller on the phone and just listening. This is where she told me about buying the house with seller financing, and now with the balloon payment being due she was in a bad spot with the lender ready to foreclose on her. The takeaways here are to find the value that others miss when analyzing properties and to also really listen to sellers, they will tell you exactly what they need if you do.
The Numbers:
Purchase: $170,000
Financing: 20% down commercial loan, private money partner put in $30,000 at 10% simple interest (My lender required I bring 5% of the purchase price towards the down payment)
Down Payment: $34,000 ($8,500 was my portion of the down payment)
Closing Costs: $2,273 (taken from the partner’s $30k at closing)
Furnishing: $5,300
Repairs: $1,778 (My wife and I did the work ourselves painted, replaced some trim, and deep cleaned)
Wire Transfer Fees: $55
ATM withdrawl fees: $47
Survey: $595
Total Out of Pocket: $16,275
Refinanced: At $168,000, enough to pay back the investor, with interest, and closing costs.
My Return: I have already paid myself back from the deal from high income due to being a short term rental so my return is infinite.
Update May 2020:
I got the house reappraised and it appraised for $250k! I got it re-appraised because the first appraisal was a “drive-by appraisal” where they just view it from the road and look at comps. The re-appraisal was so that I could take out a line of credit on the equity in the property, $30k in this case. Now I have that cash available to do another deal or use for due diligence money on an apartment deal.
Lessons learned:
- This deal reinforced for me the fact that if you find a great deal, you will be able to find the money to fund it.
- Responsibility to Investors: I learned the importance of holding myself to a high standard, even more so than I usually do, because I had someone who was counting on me with their money. This person wired $30,000 into my account before closing, so I had a newfound level of responsibility to ensure this deal worked out. If I lose my own money, I can deal with that and recover. But if I lose my investor’s money, I spoil a relationship and burn a bridge (at least in my mind). So I was adamant about communicating my progress and being diligent throughout the process.
- The importance of running your numbers. This deal worked so well because I ran my numbers very conservatively. I knew this deal would be worth around, low end, $210k and I budgeted all of my numbers off that. Sure enough, the first appraisal came in right at $210k ($40k lower than the newest one) and I was able to pay off the investor in full and not have to come out of pocket for closing costs.
- Working until midnight every day for 2 weeks sucks! My wife and I stayed up late doing the work to get it done as fast as possible so that we could get it rented, and hopefully have the renter’s (or guests in this case) pay our first mortgage payment. We even had our friends, who came down to Florida on vacation, mind you, help us finish it up. At the end it was WELL worth it and my wife and I learned about each other and real estate.