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

October 19, 2011 By Paula Pant 29 Comments

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.

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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.

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.

Supersize My City Apartment: Buying a Triplex

April 12, 2011 By Paula Pant 14 Comments

Every major city I’ve visited — New York, San Francisco — has blown me away with one amazing aspect: its main park.

Whether I’m in Central Park in Manhattan, Golden Gate Park in San Francisco or Lumpini Park in Bangkok, I can’t help but notice a few common threads: these spaces are gorgeous, centrally located, and bursting with life and energy and impromptu music. Where else can you find a combination of exquisite landscaping, an impeccable view of the city, and spend an afternoon with dog-walkers and drummers — totally for free?

So when I moved to Atlanta, I was sure about one thing: I’d live within walking distance to Piedmont Park, this city’s most thriving central park.

My boyfriend and I found rental two blocks from the park. Even by urban standards, it’s cramped: our kitchen is so small that only one person can fit inside at a time. If I want to wash the dishes while he tries to cook an egg over the stove, there will be a collision. One of us will just have to wait.

Actually, three of us will have to wait while I’m doing the dishes, because my boyfriend and I don’t live alone: we rent one room in a 3-bedroom unit that we share with two roommates. This unit is one of three within a triplex building, which means there’s one unit above us and one unit next to us.

The Urge to Upgrade

As the months passed by, the cramped quarters started to grate on us. We wanted to live somewhere where we couldn’t hear a stranger’s footsteps above us in the middle of the night. We wanted a kitchen large enough that two people could stand in it at the same time.

At the same time, we didn’t want to give up our coveted location. We can walk anywhere we want to go: restaurants, bars, the grocery store, the yoga studio, the movie theater: everything we could possibly want is within a five minute walk. Given the awful Atlanta traffic, this is a Godsend.

So when we noticed the much-bigger triplex across the street was for sale, we were immediately interested. Perhaps this was our shot at owning a larger home without sacrificing our location.

We called the selling agent, who explained that the building for sale was divided into three units. One unit is enormous and occupies two-thirds of the building, featuring bedrooms upstairs and a gigantic kitchen, living room and sun room downstairs. The other two units are single-bedrooms stacked on top of each other on the north end of the house.

She gave us the rental figures, the property tax history, and the past 24 months of water bills. We crunched the numbers. If we rented the two single-bedroom units at their current rate, and brought our two roommates to live with us in the large unit, then the rental income we’d collect could cover everything: mortgage, insurance, taxes and water. In theory, my boyfriend and I could live there for free — in theory.

It would be a no-brainer, if the house weren’t in such horrid condition.

Bob Vila’s Worst Nightmare

The triplex has horrifying problems. It’s foundation is collapsing. The building is 99 years old, and a century of shoddy retrofits has not been kind to it. Joists are missing, load-bearing beams are propped precariously on cinder blocks, and the floors are so slanted you can place marbles on the ground and take bets on which direction they’ll roll.

The home’s structural instability is the reason no one else snapped up this deal: the triplex had been sitting on the market for 16 months by the time we inquired about it. The owner could no longer keep up with the exhausting costs of maintaining the house. He was heading for foreclosure, and willing to sell it for less than what he owed.

Its sinking foundation is just one example of a bevy of problems. The house has no gutters, so rainwater rotted out the floorboards around the entrance doors. When you step inside you feel as through you’re sinking into the ground. The pipes under a second-floor bathroom recently burst, leaking sewage all over the downstairs walls and staining the ceilings. The fixtures are ugly: nothing had been updated since the 1970’s. The bathroom tiles are cracked. The kitchen cabinets are lopsided (thanks to the sinking foundation). The laminate over the countertops is peeling away. The worn-out carpet reeks of cat urine.

Being the Right Buyer

If my boyfriend was anyone else, we would have passed on the house just as every reasonable person in Atlanta has done. It was obvious why this structure was sitting on the market for 16 months. Foreclosure seemed to be the owner’s only chance at getting rid of it.

Fortunately my boyfriend is a perfect buyer. He’s a civil engineer who put himself through college by rehabilitating houses. He understands joists, roofing and pipes from a hands-on, check-out-my-scars perspective.

He can judge a house with an unstable foundation and decide just how severe the problem really is.

He spent several hours in the houses’ crawl space, studying and photographing every support beam. He emerged that evening, dirty and sore, declaring the foundation “fixable.”

“It’s a rotting house on a bad foundation,” he said, “but it’s not a wet sponge on toothpick. It’s fixable.”

As for me? I simply love a great deal. We knew the seller was super-motivated to get this house off his hands.

His asking price was $400,000. We offered $225,000. He immediately accepted.

We crunched the numbers again. If we paid “rent” to ourselves, in the same amount that our roommates would be paying, and if we managed the fix-it work ourselves, we can maintain this house.

Realistically, it will take at least two years to stabilize the foundation, hang gutters, replace the roof, fix the pipes, rip out the floorboards, replace the rotting siding, and bring the house to a modicum of stability. It’ll take another five years, at least, to update the cosmetics so that the house is attractive.

But if the enormous cost of repairs and maintenance is our only out-of-pocket expense — our roommates and renters will take care of the mortgage, taxes and insurance — then we can make this work.

We can own a kitchen big enough to fit 10 people inside — and still walk to Atlanta’s most vibrant central park.

UPDATE 2012: This house is embarrassingly profitable! It’s brought FAR more money than we expected. Here’s a breakdown of the income and expenses.

Why a Fixed-Rate Mortgage is the Best Choice

February 24, 2011 By Paula Pant 11 Comments

Why is a fixed-rate mortgage so much better than the alternatives? Because it provides stability and peace of mind. Adjustable-rate mortgages are a gamble.

Are you willing to risk your home?

When you buy a home, you will learn that there are two kinds of mortgages: fixed-rate and adjustable-rate.

What’s the difference?

A fixed-rate mortgage gives you an interest rate that never changes. An adjustable-rate mortgage gives you a volatile interest rate: in times of slow economic growth and low inflation, the interest rate will be low; in times of high economic growth and inflation, the interest rate will rise.

Why do some people like adjustable-rate mortgages?

Advocates of adjustable-rate mortgages argue that these give you a shot at getting lower rates than you can ever get with a fixed-rate. In late 2010, when the average fixed-rate mortgage was 4.5 percent, I overheard a guy sitting at the table next to me at a sushi restaurant bragging to his dinner companions about his brand-new, adjustable-rate 3.25 percent mortgage.
It’s true that he’s getting a lower rate than those with fixed-rate mortgages … for now.

You can’t predict the future.

But what’s going to happen in 3 years, 5 years, even 10 years, when interest rates rise and this guy’s 3.25 percent rises to a whopping 6 percent or 7 percent?
Advocates for adjustable-rate mortgages argue two points:
#1: You never know which type of mortgage will end up being cheaper in the end – why not keep open the possibility of a cheaper mortgage?
Of course, that swings both ways. An adjustable-rate mortgage might be cheaper OR more expensive down the road. There’s no way to know. Why take on the added risk and uncertainty?
#2: Paying 7 percent in 10 years — when you owes less on your mortgage — is better than paying 4.5 percent now, when you carry the heaviest loan on your mortgage. In other words, it’s better to owe a low interest rate on a big debt, and a high interest rate on a small debt.
Riiiight. Sounds great in theory. Except for one pesky little point:
Don’t assume that 5 years, 10 years, or 15 years down the road, when mortgage rates rise, you’ll be able to handle the extra payments.

Let’s say you’re paying $700 a month on your mortgage right now.

Four years later, you and your spouse accidentally get pregnant. With twins! Congratulations! Looks like one of you will become a stay-at-home parent.

The following year, your brother gets sick. You take two months’ unpaid leave to care of him.

Then your furnace breaks down. Your engine explodes. A storm blows a heavy tree limb onto your roof.

Gas prices have climbed to $6.50 a gallon. You need eyeglasses. And – guess what? – your mortgage has skyrocketed to $1,200 per month.

Can you afford it? More importantly — can you say, with absolute certainty, that you are SO SURE you’ll be able to afford any mortgage bill, no matter how high it climbs, at any time over the next 30 years?

“If it gets too high, I’ll refinance,” you retort.

In other words, you’ll put your family’s fate in the hands of a mortgage underwriter. Nice plan, dude.

What makes you so sure that you can refinance? What if you accidentally miss a bill, and your credit gets dinged? What if banks institute even-tougher lending policies? What then?

Are you willing to take this incredible gamble … knowing that if you lose this gamble, you’ll lose your home?

The American Dream … or the American Nightmare?

February 22, 2011 By Paula Pant 3 Comments

The typical American dream is to own a house. But throughout the housing bubble, home ownership actually became more of a nightmare for some people.

What are you willing to sacrifice for this?

The traditional American Dream is home ownership, but everyone who lived through 2008 – 2010 knows that home ownership, for many, became the American Nightmare.

What went wrong? (Aside from subprime mortgages and other things outside of our control):

1. Many people bought a home because it’s the “adult” thing to do … not because it makes financial sense. In fact, for many people, renting makes more financial sense than owning. Unfortunately, too few people actually sit down to crunch the numbers and figure out Rent vs. Buy. They see home ownership as a status of success, and they pay — dearly — for that status.

2. Many people think a home is a good investment. Guess what? Even if you’re one of the lucky few who escaped the Great Recession untouched, and your home is worth more now than it was in 2007, it’s still probably a lousy investment compared to the gains you would have earned elsewhere. Housing historically appreciates at 3 to 5 percent per year — drastically less than what you’d experience through an index fund tracking the overall stock market.

3. Many people forget the costs of homeowners insurance, maintenance, repairs, mortgage interest, and mortgage insurance. When you add these into the picture, your home becomes an even lousier investment.

4. Many people assume they’re supposed to purchase a home because it’s a status symbol of success and adulthood. Again, you’re paying — dearly — for that status.

The most important thing to consider when determining your housing choices?: Ask yourself: What am I willing to sacrifice in order to afford this?

Your House is a Lousy Investment

February 22, 2011 By Paula Pant 21 Comments

Here’s the truth about houses: Unless you’re a landlord, your house will probably be the lousiest investment you ever make.

The myth about home ownership is that it’s a great investment — a way to “build equity” rather than “throwing your money away on rent.”

Hogwash.

Here’s the truth: When you rent, you pay one bill: the rent. That’s it.

When you buy, your property tax ALONE might cost as much as a single person’s rent. Property tax for one apartment I rented after college (which was valued at $250,000) cost $500 a month … the same amount I paid as rent.

And this tax, by the way, is money that contributes $0 to your equity … money that you’re “throwing away.”

Live in an area with low property taxes? Okay, then calculate your property tax + homeowners insurance + repairs and maintenance.

“But I’m not single!” I hear you saying. “We’re a couple with kids, and we need more than one bedroom!” Okay, fair enough.

Let’s say you’re a couple, looking for 2-3 bedrooms, you live in an area with low taxes, AND you’ve found cheap insurance. On the surface, you seem like a great candidate for a home owner. So let’s crunch some more numbers, shall we?

How Much Will that Home Really Cost You?

Calculate the amount of money you’re throwing away on the interest on your mortgage. Remember, your mortgage principal repayment becomes home equity; your mortgage interest payment becomes thrown-away money.

“Oh, but mortgage interest is tax-deductible!” you reply. (This is the equivalent of saying, “Oh, but for every $1 dollar I pay, I save 28 cents!”)

Let’s say your mortgage interest is $400 per month. Subtract the 30 percent you saved in taxes. Your out-of-pocket mortgage interest — your Net Loss — is $280. Now, let’s assume low figures for the property tax and insurance: Your property tax is a mere $300 a month, and your insurance is $120 a month. Congratulations: every month, you’re “throwing away” $700 per month on your house: money you’ll never see again, money that doesn’t add to your home equity, and money that won’t add one cent of resale value to your home.

Wait, that’s not all. That $700 per month ($8,400 per year) that you “throw away” is JUST taxes, insurance, and Net Loss interest. We still haven’t accounted for repairs and maintenance.

Regular ‘ol Maintenance … Nothing Fancy

You want a roof over your head? You can expect to replace it every 10-15 years. An asphalt-shingle roof (the cheapest) on a ranch house will cost $1,700 – $8,400, according to CostHelper.com. Let’s taking the average of those prices — $5,050 — and the average of that timeframe, assuming a new roof that will last 12.5 years. That means your roof costs you $400 per year.

Don’t forget to replace your carpet. According to Home Depot’s website, this will cost $2-$6 per square foot and needs to be done every 5-10 years.

On an 1,800 total sq. ft. home (moderate size) that needs 1,000 sq. ft. of carpeting (hallways, bedrooms, living area) assuming a modest $3.50 per sq. ft including padding and installation, every 7.5 years, your carpet will cost you an average of $465 per year.

Now we’re up to $865 per year on JUST maintaining the carpet and roof.

Oh yes, does your house come with a yard? A lawnmower costs $250. It’ll last for, say, 5 years without breaking, so that’s an average of $50 per year plus gas. I hope you’re not planning on landscaping, because that will really cost you. You’ll need a sprinkler system, too. And your furnace needs to be fixed. Don’t forget to fix the gutters, repaint the siding, and spray for termites.

Honey, can you please call the plumber? And fix the garage door? And … is your refrigerator running?