Creative Deal Structure Game #3


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  • You know that driving for dollars is a good way to spot opportunities. Sometimes you’ll see someone loading up a UHaul so you stop to ask if they have sold their house yet. Sometimes you’ll see “tall grass” or lots of mail on the front porch or a tarp in the roof which are all indications of a vacant house.

    Yesterday, you decided to take a different route to get home so you could drive through a neighborhood to see if there were any hidden opportunities. You see a property with tall grass that appears to be empty and really run down. You knock on the front door but notice there is a “RED TAG” meaning the property has been condemned by Code Enforcement. No one can live there until the repairs are done. Some cities even fine the owner until the repairs are done.

    You talk to the neighbors to see if they know how to get in touch with the owner. Luckily, one of them has a name and a number. When you get home, you look up the comps then call the owner.

    You ask the owner if he would be interested in selling the house. He says yes but I can’t afford to fix it up. You say, no problem, I can buy it as it. You ask when was the last time the house was lived in. He says about 3-4 years ago. Then you ask what he would sell it for if you could pay all cash in less than 30 days.

    You’ve looked up the comps for a house in the neighborhood so you know it is worth $160,000 in perfect condition. You have not been in the house yet so you have no idea how much repairs will cost.

    The owner says he would take $69,000 if you pay all the closing costs and he does not have to get the stuff out of the house.

    Keep in mind that this house has been condemned by the city. You know you can get a report from the City about what repairs need to be done before it can get a Certificate of Occupancy again.

    You tell the owner that you really need to see the inside of the house before you can agree to that price. And you need to get the Code Enforcement report too. He tells you that he’s 82 and really cannot drive anymore so he will need to make arrangements for a friend to drive him. You offer to pick him up instead.

    Then… and this is important to always do… you ask the owner if he has any other houses he’d like to sell knowing that if he does, they are probably in poor condition too.

    Yes! He has 12 other houses that he would like to sell. Six are occupied and he is collecting $600 a month rent. He tells you that he has not raised the rent in 8 years because the folks just can’t afford more rent. The other 6 houses are vacant and in need of repair. He can’t remember the last time there was anyone living in the houses.

    When you see the first house, you see that it is full of furniture. There are even old dirty dishes in the sink. The detached garage is also full. It’s very dated but structural sound. It’s a 2200sf ranch style house. There is some roof damage and it appears that raccoons are living in the attic.

    When you go to Code Enforcement to get the report on the house, you find out that 6 of the other houses have code violations too.

    WHAT WOULD YOU DO??

    Continue to discuss with the seller to see what he would ideally like to do. Then submit three offers (for the whole set) that are in line with his goals.

    Keep talking with the owner. Find out what he needs. What is he going to do with the money when he sells? See if he will be open to owner financing. Get an option on the property if he will consider that. Get estimates on the cost to make the repairs to the house. Explain the concept of the highest bidder sale to him. This could possibly produce enough money to pay the gentleman in full for his house. In order to clean out the house, an auction could be set up to clean out the house. Sell the contents room by room in an absolute auction. Everything must go. You could use the proceeds from the auction sale of all of the personal property to pay the gentleman a down payment towards owner financing if he would agree to owner financing.

    SPECIFICS. Give us the $$ you would offer. Get creative. Think outside the box.

    WHAT’S YOUR EXIT STRATEGY?

    Assume that the other houses have an ARV of $160,000 also. Assume that they each need $40,000 in repairs to get to ARV. (ARV – After Repaired Value)

    7 of his 13 houses have Code Violations and are vacant.

    Would you just try to handle one of the houses or would you try to tackle all 13 houses??

    Sum of parts is greater than the whole. Buy as a package, sell as individual properties. If you buy as a package you are receiving an 82 year old of his “headache”, and giving him a peace of mind, and money to live the rest of his life without worrying about maintenance, or money.

    Do an option to buy all of them as a package; seek the furniture on a separate day using HBS, and the houses separately either using HBS, or a combo of wholesaling, and HBS. Use proceeds from one wholesale, and furniture sale towards a down payment to buy the package. Use some money from separate sales to use towards fixing up the livable properties IF they are in an appreciating neighbourhood; increase the rent, and create cash flow. Then refinance after 9-12 months, get the cash out, and pay the Seller.

    First I’d learn why his heirs haven’t stepped in and taken over. Next I’d discuss the tax ramifications of capital gains on the sale of the homes. My first play would be to lease all 12 homes for 60% of his average earnings over the last 5-10 years, I’d have all 12 homes appraised at current fair market value and purchase an option to buy all 12 homes for their current value from his heirs after he and his wife go to Heaven as Clyde puts it. Then I’d fix the dead inventory up and raise rents on the performing 6 units.
    If he had no heirs or was pissed off at them, perhaps a purchase today using “installment treatment” for taxes would reduce his tax hit and I could buy the homes now but use seller carryback financing that would support him well for the remainder of his life with and remaining balance dismissed at his death or the note willed to my grandchildren.

    Andy Teasley
    760-343-2404

    Just a thought, with dirty dishes in the sink, did someone die in the house? In California that might make it only rentable for some years.

    Andy.

    This opportunity is a REAL deal situation that I did.

    The house that had the dirty dishes in the sink — the people who were living there were given a brand new furnished house by their children. They packed their suitcases and just left everything else behind. CRAZY!

    Every house tells a story.

    I would work on property one first and tell the seller I am also interested in his other homes. I would use 70% of ARV minus closing cost minus labor, material and holding cost and permits. I would then pull my profit out and give the seller my cash offer. If he excepts I put it under contract the flip to mty investors.

    Hi Jackie,

    I think the house I did over on Kenwood would be a good one to use for this learning process. I promise to stay on the bench on the side lines till you say for me to tell them how this one went down. I would like to see all the other ways this deal could have been structured. Besides I need to get involved with this community and get back in to the game.
    BTW I heard the FHA extended the foreclosure/eviction moratorium thru February 28, 2021. This means a lot of deals about to be available.

    Sometimes, sellers have a price that is so low that you just need to agree to the price. You need to know when to stop negotiating. Whip out a contract and lock up the deal.

    That’s exactly what I did on the 1st house when the seller said he wanted $69,000.

    After checking out the house, I knew it would cost about $40,000 in repairs. When I went in to check out the garage, a snake slithered out. YUCK!

    Once upgraded, I know it could be sold for $185,000.

    But it would take at least 4-5 months to fix it up, dealing with contractors, getting supplies, dealing with Code Enforcement for permits, and a Certificate of Occupancy.

    So, what did I do on this one?

    I wholesaled it to a rehabber for $99,000 and closed in 5 days, I walked away with a little less than $30,000.

    While he was visiting the house every day and dealing with all the problems, I got an option on the other houses and wholesale them too.

    Who was the winner?

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