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Buying Foreclosure Properties – Creating Wealth with Foreclosure Investing (Part 3)
This is the third part of an article on buying foreclosure properties. You can read the first part and the second part.
Now it was time to close the deal, do the repairs and get this house rented!
My purchase contract included a 7 day due diligence period with the right to cancel the contract contingent on a house inspection – I highly recommend you have something like this in your contracts when buying foreclosure properties, it will allow you to back out for almost any reason in case you find any “surprises”.
I used a very experienced general contractor to do the inspection instead of a home inspector. This way I still got an inspection done and at the same time got an estimate of what the repairs would cost. The contractor basically concluded that the house was in great shape and repairs needed were mostly cosmetic. He estimated my repair costs at $10,500 – 11,000 compared to my $9,500 – 10,000. Good news.
Two days later the house was mine . Time for the rehab.
Buying Foreclosure Properties and My First “Rehab”
When buying foreclosure properties you can be sure that repairs will be needed. There was also the fact that I needed to make this house attractive enough since I planned on setting the rent at the top of the rental range for the area. Now I needed to get work quotes, negotiate, hire and schedule the work.
This is a summary of the work done:
- Trade: General contractor/handyman
Repairs: Drywall repairs, dining room conversion back to dining room, install new kitchen countertops, install appliances, plumbing repairs, re-grout bathtubs.
Comments: This is a powerful person to have in your network. A versatile handyman like this can save you money and time because he can do so many different things.
- Trade: Painters
Repairs: Paint entire inside of the house including doors, ceilings and trims.
Comments:Not only did they work fast but their price was reasonable and their work was high quality. If you look at the living room before (3rd picture down) and after you will notice the incredible difference that just fresh, neutral paint makes.
- Trade: Garage Door Repair.
Repairs: Installed new garage door.
Comments: I got three garage door estimates - $1200, 950 and $675 – guess who I picked? They did an awesome job and I got them through a reccomendation from another investor (are you getting the point abot the importance of networking?).
- Trade: Pressure Washing.
Repairs: Clean gutters and pressure wash entire exterior of house.
Comments: This is a very cost effective means of creating curb appeal. When these guys were done the siding sparkled. Saved me thousands by not having to paint exterior.
- Trade: Carpet
Repairs: Installed about 1,800 sq. ft of new carpet.
Comments: I saved myself about a $1,000 by choosing a carpet that had factory ”defects” – meaning there were some uneven lines in the carpet pattern – big deal. For a rental house this was perfect and the carpet looked awesome.
- Trade: Me
Repairs: painted garage, landscaping, cut down trees, miscellaneous electrical repairs, installed window blinds, repaired broken windows, re-finished kitchen/bathroom cabinets.
Comments: Ever heard the expression “sweat equity”? Well this is what it means. You cannot expect to hire someone for absolutely everything. Although my handyman skills are limited, I can do some things. Plus, I wanted to stay within my project budget.
- Trade: Cleaning
Repairs: Final clean-up after all work was done.
Comments: For $200 two ladies showed up and left this house sparkling. It would have taken me and my wife about two days to do this. Ask yourself what is your time worth?
So what did it look like when all the work was done?: Foreclosure Property – Post-Rehab Pictures.
Getting it Rented
Ok, are you ready for this?...How long did it take me to get it rented?
Four days... Let me explain.
I started advertising Monday, the very next day after the cleaning was done. On Thursday I received a call from somebody interested in looking at the house. On Saturday I held an open house and the person attended and loved the house. On Monday I had their rental application (I received 3 more applications in the next week or so). It took me about 3 days to do the credit/background checks and I decided to rent it to this first applicant. So technically it only took me four days to find the person that eventually ended up renting the house for $1275 per month.
In reality I should not be surprised. Ask yourself, why shouldn’t it rent quickly? This house sparkled, had new appliances, carpets, paint, it had four bedrooms and it was in a good area. All this made it very attractive - all my research and preparation proved to be right.
The Final Numbers
Here are some numbers so you can see how my repair estimates compared to the actual costs:
These are the total holding and other costs:
Not bad at all, I think. My repair costs were just $73 more than I projected and $1200 under what my inspector projected. Better yet, my holding and miscellaneous costs were much less than I projected mostly due to the short holding time, low cost of advertising and the fact that I was very conservative in my cost projections.
Finally, there was one more thing left to do: Refinance
Cash Out Refinance
My plan for buying foreclosure properties was to purchase using a line of credit and then refinance to get my money back. I now had to find someone to refinance me at a time when the credit crisis was getting started and the lending opportunities for investors were starting to dry up.
After several unsuccesful tries and by asking around through my network, I found a lender that would refinance me. This lender would do a 30 year fixed loan at 7.25% for 80% of the appraised value. The key here would be what that appraised value would come out to be which is a gamble when buying foreclosure properties .
During my initial calculations
I estimated the market value of this property to be between $150,000 – 160,000. Well, I must have done something right because the appraisal the lender did came in at $159,000 .That meant my total loan amount would be for $127,200.
From above you can see I had $127,600 in expenses so that meant that this loan would cover almost entirely my expenses minus the financing costs of the loan. This meant I would have to come out of pocket to cover those and I was fine with that. This was basically my down payment.
So the bottom line question is: Was this a good investment?
Lets see…this is what the numbers say:
Monthly Rent: $1275
Monthly Mortgage, taxes and insurance payment: $1066
Cash required: $6,002
Annual cash flow after expenses: $2196
Cash return on investment: 36.6%
Total annual return: $3,420
Total return on investment: 56.98%
I’ll say it was…
A Newbie No More
Although I was far from calling myself experienced in buying foreclosure properties, the lessons from this first experience in buying foreclosure properties were invaluable. When you look at all the areas I had to deal with I had accumulated some great experiences that would serve me well in my next investment. I was now fired up and ready to do it again.
Read back through the first
part of this article because there are a lot of lessons here for buying a foreclosure. The main point is for you to
see in detail all that was involved in making this happen, not so that you feel it’s too much or too hard but so you can see how very possible it is for you to also do the same. You don’t have to do it the way I did - there is more than one way to skin a cat - but you have to do something to make it happen.
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