Creative Deal Structure Game – Fire Damage

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  • You get the list of Code Violations properties which is always a good source for wholesale/rehab opportunities. After doing research for each property to determine which ones have an older deed date so there is a higher chance of equity, you send a postcard to 45 owners. In less than a week, the calls start rolling in.

    One is a sad situation. After making mortgage payments for 30 long years, they finally paid off their house in December. Then December 20th, their Christmas tree caught fire and destroyed most of the house. It has extensive damage. (note, all fire-damaged houses will be on the Code Violation list). The owner does not even want to meet at the house because it is so heartbreaking.

    After looking at the property, you determine that it will take at least $100,000 to do the repairs. You’ll also need to replace all plumbing and all wiring in the house. The whole house smells like smoke. Permits and inspections will be needed. Or, you could tear down the house and build a new house on the lot.

    The ranch-style house is worth $190,000 – $225,000 all fixed up. It’s a great location. The owner is asking $25,000 which is the lot value

    What would you do?

    • This topic was modified 3 weeks, 6 days ago by Jackie Lange.

    Wholesale it and give him his 25K

    Assuming someone has somehow compensated the Seller from insurance for the loss.
    I would offer the seller a purchase-money mortgage note for the 25K, with $2k down, 0% loan and a 5 yr term.
    If location and rent support, the numbers and refinancing out of the rehab loan are doable.

    (Taking into consideration the criteria for the seller responding to our marketing and the ARV supports the risk of doing the 100% rehab)

    This a good investment property to own.

    Assuming he has been fully compensated by insurance I would offer him the 25K on terms. I would then do one of 2 options from there…

    1. I would potentially do the rehab by borrowing hard money or better using my own cash reserves. Once it was fully repaired I would refinance to pull my cash back out and have a property worth approximately $190K that I have $100K in and seller financing for the $25K, all in $125K with $65K of equity and probably be able to rent it out and keep it as a higher end long term buy and hold.

    2. If I didn’t want to tackle a full rehab I would consider wholesaling it for $50K leaving someone with $40K in equity for buying this deal from me. I would take terms on this so I could preserve my original $25K seller financing. I might agree to $10K down and accept payments for the remainder.

    My first choice would probably be number 1.

    Some good ideas so far. What are some other ways you could do this deal?

    If you don’t want your life to be tied up for 4-6 months with a major rehab project, permits, and building inspections, you could sell to a rehabber at a reduced price (maybe $50,000), but keep an option for 10-20% of the upside. Let someone else do the work but you get a piece of the pie. Learn as much as you can about OPTIONS!!!

    Would anyone scrap the lot and build a new house?

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