My Rotting Home: Weird and Freakish Adventures in Buying Real Estate

Note from Paula: In my last post  — Part 1 – I described how I searched for a rental house. In today’s post, I’ll spill the details of how I put the deal together.
buying some weird real estate no one else wants
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To say that the house is a “fixer upper” is too polite.

The house is –- well, it’s safe for human habitation. I think.

Cable television seems to think that a ‘fixer upper’ simply needs a makeover. Rip out the peeling yellow laminate. Toss in some granite and hardwood. Poof – instant fix.

Haha. If only.

This house has crazy core problems. There are no gutters, rotted doorjams, awful fascia, and the floors feel like mush near the doorways.

Water damage? Check.

Rot? Check.

Mold? Check.

Leaking pipes? Check.

Wonky foundation? Check.

Electrical issues? Check.

Real estate investors are used to dealing with these problems. After all, the house is 101+ years old (and it’s been neglected for at least two dozen years by absentee owners). What do you expect?

But one issue scared every other investor away: the 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.

Some of the “support beams” are nothing more than thin planks of wood propped up on cinder blocks.

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.
my adventures buying real estate
When others are fearful, I see opportunity.

Two experts separately evaluated the basement. A third-party certified inspector spent the better part of an afternoon documenting every flaw. And my partner Will, who paid tuition for his engineering degree by rehabbing houses, spent a day crawling underneath the house.

After lots of scrutinizing, every inspector declared the same opinion: The foundation is “fixable” (although I believe one of them described it as a “sponge on toothpicks.” Yikes!)

Okay, we’ll tackle the foundation. Next question: Would it appeal to tenants?

W.W.T.W. – What Would Tenants Want?

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 to rent your home.

Typically, families with children will rent 3-bed, 2-bath homes, while single young professionals opt for 1-bed or 2-bed units. This neighborhood tends to attract young professionals who want an urban lifestyle (rather than families looking for good schools), and this gave me a bit of pause about taking on a 3-bedroom unit.

Fortunately —

The 3-bedroom unit is the most beautiful space in the building, with huge windows, high ceilings, hardwood floors and Craftsman-style turn-of-the-century character. 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 was money.

Show Me the Money!

The first banker said no.

Will and I had just returned from backpacking around the globe. I think that’s awesome. But 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 … how long, exactly?

Will: Several years. I was overseas.

Banker: Were you working overseas?

Will: No.

Banker: So you were unemployed.

Will: By choice.

Banker: Did you look for a job overseas?

Will: I didn’t want one.

Banker: Tell me about your current job. How long have you been with your employer?

Will: Three months.

Yeah, you can imagine how well THAT interview went.

Rejection!!

But we kept trying. Here’s my little secret: keep trying until someone says yes.

Even if you want to claw your eyeballs out in the process.

Eventually it becomes a numbers game. Ask enough people and eventually someone will say yes.

They’ll demand a higher down payment. They’ll charge a sky-high interest rate. They’ll make you sign over your soul, your kidneys, and your firstborn child. But someone will ultimately say yes.

We got smacked with a higher interest rate: 5.375 percent at a time when everyone else was getting approved at less than 3 percent. That’s the punishment for living unconventionally, I suppose.

The other trade-off was that we were only approved for a $200,000 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 after inspection.

A second investor went under contract at $325,000, but pulled out.

A third investor went under contract at $285,000, but pulled out.

By the time I spotted it, the house had sat on the market for 16 months. The owner was heading into foreclosure. He was desperate to sell.

We offered $225,000. Most of that money came from our loan, with $25,000 plus closing costs out-of-pocket (about 12 percent). The homeowner agreed.

The Rotting Building …

But the homeowner owed $325,000 on it. His bank would lose the $100,000 difference. Were they willing to do that?

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 lose even more money if they sold the house at a foreclosure auction.

And I included pictures. Lots and lots of pictures.

All unflattering.

The bank said yes. I’m now the proud owner of a rotting building.

But I took a risk — and a six-figure debt. Would it pay off? Tune in to Part 3 to learn how it’s doing, one year later.

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Comments

  1. says

    Uhm. My bank wouldn’t even give me a mortgage on a house where the HVAC unit wasn’t working. (Without paying the bank upfront to fix it… etc.)

    The house sounds lovely – I wish I had an experienced rehabbing engineer around….

    • says

      @Kellen — Were you trying to get an FHA loan? FHA is strict about criteria — they might not lend on a house with HVAC issues. Keep trying, and get creative. There’s always a way!

  2. says

    Wow, I can’t believe you got a loan for that house. Generally a bank will only give out a loan on some percentage of the ARV (after repair value), did you use something else as collateral?

    That’s a ballsy purchase, buying a house like that on levered finances. Do you understand why the foundation was sinking? Do you know if it might continue to sink?

    • says

      @Brave New Life — The main reason its sinking is because people who renovated the house in the past seem to know nothing about how to support a house. The original builders — in the year 1911 — did a great job. That much is obvious. But it appears that every time someone did a “quick fix” during the past 40 or more years, they compromised the structure.

      We’re going to reinforce and then re-level the main supporting beams under the house. As I noted, some of these support beams are thin, insufficient and propped up on cinder blocks. In addition, the “unsupported distance” — the distance between the points at which the beams are supported by the foundation — is too long.

      The house will probably never be completely level. I doubt we’ll ever be able to hang wallpaper in this house (you need a pretty level house to hang wallpaper!) But our plan is to reinforce the existing beams enough that the situation won’t continue to deteriorate.

  3. says

    Awesome story! Sounds like a bit of a risk with the condition it’s in, but you seem to know what you’re doing. Hope we get to see some of the pictures of the beautiful part in the next post!

    My girlfriend actually rents in a house with a sinking/already sunk foundation, and a few of the floors are very noticeably slanted. But it wasn’t really a sticking point for her in renting.

    • says

      @Jeffrey — Most of our renters, and people who come to see the house, don’t even notice how slanted the floors are, especially when the walls and the ceiling are painted the same color. When the walls are painted a different shade than the ceiling, it becomes much more noticeable — but it’s still not something that the renters really care about. They’re mostly concerned about things like how much noise comes in from the street, how much the utilities cost (e.g. how well-insulated is it?) and how much natural light it gets.

  4. says

    Great story — I can’t wait to read more! I love fixer-upper stories. My husband and I took on a 1900’s farmhouse that didn’t have lights or electricity on the upper level. Thankfully, everything else was solid, and my husband is an electrical genius. So it all worked out in the end.

  5. says

    Loving this (mini) series, Paula!

    It’s really fascinating to read about your journey into this ownership space, and how you made the decisions on what and where to purchase.

  6. says

    I’ve found that the houses built in the 1930’s can be iffy. No insulation, weird wiring, etc. I had a house inspected that was built in 1910 – like you mentioned about your place, the ORIGINAL work is great, super solid. The floor beams had even had termites in them, but were still perfectly fine to hold up the house since they were so thick to start with. But some renovations were done, not up to building code, putting stairs over the only intake vent… etc.

    It seems like 80% of renovators are complete idiots (well, really, just probably getting away with doing everything super cheap.)

  7. says

    Whatever your feelings are about realtors, this is a great reason to find a good one at the beginning of your home search. Yes, as you say, someone will eventually lend you money to buy a home in your affordability range, but lean on your agent as an experienced person in this process. Great series!

    • says

      @Brian — We did! :-) We collected price estimates from a variety of contractors / engineers, and we selected one of those teams last October. They dug below the foundation to install cement footers, upon which they built a “knee wall” to reinforce the flooring. After they did it, we could visibly see a difference in the “slope” of our floors.

  8. Vicky says

    Great note to keep trying to find the money on a ‘deal’ that you want to be involved with!
    I work with a hard money lender who lends either on the property’s current OR after repair value… yes, the fees are higher, but totally worth it if you can get the property at a great price! Sometimes even the rehab money can be borrowed as well… depending on the lender and what price you lock the property in at, your experience, etc. There’s nothing better than being able to restore an older property back to it’s glory!

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