Note from Paula: In my last post — Part 1 – I described how Will and I searched for a rental houe. In today’s post, I’ll spill the details of how we put the deal together.
To say that the house is a “fixer upper” is being too polite. The house is – well, it’s safe for human habitation. That’s a good starting point.
When I tune into HGTV to watch shows about “fixer uppers,” I have to laugh. Cable television seems to think that a ‘fixer upper’ simply needs a makeover. Rip out the yellowed, peeling laminate. Toss in some granite and hardwood. Poof – instant fix.
Haha. If only.
This house has some crazy core problems. There are no gutters – yeah, that’s right, NO gutters. The floors feel like mush near the doorways.
The deck unbolted itself from the building. The pipes leak. There’s mold in the bathroom walls. But real estate investors are used to dealing with these problems. After all, the house is 100 years old. What do you expect?
But one issue scared every other investor away: the building has a sinking foundation.
Imagine a concave object, like a cereal bowl – high on the sides but low in the center. That’s what the house looks like; it droops several inches in the middle. You feel a little like you’re in an amusement park fun house.
Real estate investors are fond of fixer-uppers, but many get scared by a bad foundation.
When others are scared, I see opportunity. Will spent a day underneath the house, taking a closer look at the foundation. Some of the “support beams” are nothing more than planks of wood propped up on cinder blocks.
I never would have bought the house without Will. He put himself through engineering school by rehabbing old houses, which means he has both an academic and a hands-on understanding of structural issues.
Obviously, we also had a “real inspection” performed. You know, by one of those certified people who belong to Official Associations.
After lots of scrutinizing, both Will and the inspector the foundation “fixable.” Will asked me if I thought it would “sell” well to tenants.
W.W.T.W. – What Would Tenants Want?
I said yes. The house has nice “bones” – high ceilings, huge windows, lots of light. Those traits impress tenants.
More importantly, the house is divided into two single-bedroom units and one three-bedroom unit.
Single bedrooms are ideal. It’s easy to find one person – just one person – who wants to live there.
Three-bedrooms are tougher to rent. Heck, it’s hard enough getting three people to pick a restaurant for dinner. “Let’s get Italian! No, let’s get sushi!” Imagine how hard it is to find three roommates who agree that they want to rent your place.
But the three-bedroom is the most beautiful space in the building, with 19th century fireplace mantles and hardwood floors. If three people are going to agree on any space, this would be a great one. I gave it a thumbs-up for marketability.
Now all we needed to do was find some money.
Show Me the Money!
We agreed Will should take out the loan. He owns an investment property in Colorado that he bought when he was 21, which means he has a 10-year history as a “homeowner” without a single late payment. His credit score is a whopping 810.
Yet the first banker turned him down. Will and I had just returned from 2 years of traveling around the world. As it turns out, bankers don’t look kindly on unconventional lives. Their conversation went something like this:
Banker: So you’ve been unemployed for the past 2-and-a-half years?
Will: I was overseas.
Banker: Were you working overseas?
Banker: So you were unemployed.
Will: By choice.
Banker: Did you look for a job overseas?
Will: I didn’t want one.
Banker: How many years have you been at your current job?
Will: About 3 months.
Yeah, you can imagine how well THAT interview went. Rejection!
But we kept trying. Here’s my little secret: just keep trying until someone says yes. Eventually it becomes a numbers game. Ask enough people and eventually someone will say yes.
The trade-off was a higher interest rate: 5.3 percent at a time when everyone else was getting approved at 4 percent. That’s our punishment for living unconventionally, I suppose.
The other trade-off was that we were only approved for a $212,000 loan. Would that be enough?
The house was priced at $420,000 in 2008. An investor went under contract at $380,000, but pulled out (presumably after an inspection).
A second investor went under contract at $325,000, but pulled out.
TA third investor went under contract at $285,000, but pulled out.
By the time we spotted it, the house had sat on the market for 16 months. The owner was heading into foreclosure. He was desperate to sell.
So we offered $225,000. Most of that money came from our loan, with $13,000 from our pocket. The homeowner agreed.
But the homeowner owed $325,000 on it. His bank would lose the $100,000 difference. Were they willing to do that?
Will and I wrote – I’m not joking – a 24-page letter detailing all the structural deficiencies of the house, pleading a case for why a home in such bad condition should sell for a $100,000 discount. We argued that no one else would buy a house with foundational problems, and noted that the bank would collect even less for the house at a foreclosure auction.
And we included pictures. Lots and lots of pictures. All of them unflattering.
The bank said yes. We are now the proud owners of a rotting building.
But we took a risk — and a six-figure debt. Would it pay off? What will people rent it for? Tune in to Part 3 to learn how it’s doing, one year later – and what our plans are for our next investment property.