[Ayesha B]

Ayesha B

Jackie,

I bought a house from the heirs of a lady who was like a property hoarder; she bought and kept them, but never fixed them, though always tried to fill them with tenants. When she died the sons gradually disposed off her properties. I came across one that was on the list of code enforcement’s roster for a complete demolition. Long story short, local politics prevailed, the town did not entertain my request to stop the demo, yet let an influential local investor stop the demo, thereby incentivizing the heirs to sell the property to him.

I asked the sons if their mother had left any other properties. I knew she had, but only wanted to deal with the ones out of probate. That brings me to the one my next questions will be about.

House was in bad shape, pier & beam foundation with floors on one side of the house not sitting on anything, as the wall had bowed and curved out. The beams were like diving boards under the floor.

1927 built
1020sq.ft
3/1
Bought for $15k
Spent $55k

The house is now a 3/2 custom house with 1360sq.ft, and a pantry, and laundry room, and everything except for the roof and 2 sides of the house being new.

Still needs $1800 in material cost/$3000-$3500 in labour cost
ARV: $125,000
Rental rate: $1250

Location:
3 exits from downtown, in an area that is in transition, with a highly rated, lottery-based KG to High School Charter school, developers moving in to buy Free Mason owned large tracts of land to build apartments& houses, and Walmart’s opening 2+ years ago bringing in more shopping convenience with other chains opening, and general updating of the infrastructure by the city.

SCENARIOS BEING CONSIDERED:

1. Do a Highest Bidder Sale for the highest down payment and I Owner Finance the balance for a steady cash flow. I use my own money-around $4300 to finish out the house M&L, and then get my cash back out, though lesser amount, and time invested with supervision, to be able to cash flow it for 15 years.

2. Do a Highest Bidder Sale for the highest down payment with credit for material going towards the down payment for anyone coming in to finish it out, and I Owner Finance the balance with a probable balloon payment at the end of 5-7 years. This finishes out the house, gets me a down payment with credit given for materials, but no labour cost to me, and a steady cash flow for 5-7 years.

3. Finish it out, spending $4300-$5000, and do a regular Highest Bidder Sale for a cash or a combo of higher cash/and very short term Owner finance deal.

IMHO #2 works the best, but I may be missing something.

[Dee L Graber]

Dee L Graber

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Some background thoughts. Since you mentioned on Tuesday evening’s call that you lived in the 817 area code (although I can’t assume that your F&C house is also in 817, but if not, it’s probably close by), the economics of Ft Worth are probably a useful reference proxy to some extent.

There was a fresh story on WFAA (Ch 8) TV this evening about Tarrant County being the 5th fastest growing county in the entire nation:

http://www.wfaa.com/news/census-tarrant-county-saw-5th-largest-growth-in-nation/425158512

And population inflow generally means increasing housing demand.

I also tried to run a check on actual inflation for the Ft Worth area (since official federal numbers are so bogusly depressed — to keep inflation-indexed payouts (like Social Security, etc) to a pitiful minimum. Chapwoodindex.com has a 100 city chart, but their website was down, so I looked for them on archive.org — which had snapshotted their website most recently this February 24th. The actual goods & services inflation around Ft Worth for the past 12 months was running about 8.9%, with a 5-year average of 9.4%. (unlike the “official” BLS [Bogus Labor Statistics] figures around 2%)

So why does that matter? In two ways.

1. With the ARV at $125k and the monthly rent at $1,250 … 12 months x $1250 is $15k/year (before all other adjustments to that, from income taxes to property tax, depreciation, etc, etc). So on a gross basis, $15k divided by $125k is 12% per year. If the real return was 12% on the growing asset value, that might be impressive. However, once you begin whittling away with the various expenses, taxes and that hidden real inflation figure from Chapwood, the actual return of purchasing power on that asset value is frighteningly less.

So if cash flow is most important to you, the above thoughts are highly relevant.

2. If you are considering carrying the paper in a long term sale, you have to remember that the hidden but real inflation rate of around 9% for your area takes a real bite out of the purchasing power of that payment stream you would be receiving. Can you negotiate a sufficiently higher interest rate to compensate for the real inflation hit, plus taxes, etc., and still receive a real return on your entrepreneurial efforts? That may not be an easy sell.

So those are the two reasons why that hidden but disgustingly real inflation rate needs to figure into your decision making.

On the other hand, if your goal is cash (rather than cash flow), you can probably (at an HBS event) sell the idea of growing demand close to super high growth Ft Worth, and maybe choose to bypass the seller financing complications I mentioned above. Then your challenge becomes how to preserve and grow your cash received in other ways or via other deals.

I’m just trying to provide a little extra background to help with your decision making. Only you can choose whether cash, or cashflow, is most important to you, and then which strategy to pursue.

BTW, thank you so much for your discussion on Tuesday night’s call. I can’t imagine any newcomer who wouldn’t be inspired by your determination, even if they have to listen to the coaching call replay that I understand has now been repaired.

–Dee

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[Jackie Lange]

Jackie Lange

Ayesha

If this is a great area, why sell? Is the house currently occupied or vacant? Your buyer may be an owner occupant.

If you do decide to sell, sell with a Highest Bidder Sale for the highest down payment. You do NOT need to give any credit for repairs needed. The buyer will adjust their highest down payment bid to compensate for any repairs needed.

It would be a good idea to get an inspection report to have available for prospective buyers to see during the open house.

Would you put a balloon on the note to get cashed out in 5 years or so OR keep the cash flow stream coming in as long as possible?

There are other exit strategies you could use.
What if… you sold the property for the highest down payment but kept an option for a 50% interest in the upside over your sales price. It may be worth nothing in 5-10 years or it could be worth twice the value of the house today. You may have to take a little less down to make this one work but it is worth a discussion if you have a buyer who really wants the house ( investor or owner occupant) but does not have the highest bid. If you do this, you’d need to record a deed of trust to secure your option for a 50% interest.

[Ayesha B]

Ayesha B

Thank you, Dee, and Jackie for your advice.

Dee the 9% inflation is like having a softer Hard money loan on top of the regular financing of the house, so one would really have to earn at least 20% to defray the 9% inflation + 5.5% (bank financing) OR + 8%-10% (private money financing). So the carrying cost would be astronomical, unless there is a lot of equity built in for me to start with, with a larger down payment, and higher Interest rate charged from the Owner-financed Buyer.

Jackie, your solution of getting a lower down payment with an Option in a 50% share on the increase in the future value of the house above the present sales price makes a lot of sense.
I sell at present value, collect some down payment, get my positive cash flow going based on the present value at a reasonable interest rate, and then partake in the upside in 5-10 years when this area in transition really takes off. How the paperwork will be done, and explained to a lay person will be something I shall work on.

Jackie, the house was gut-rehabbed, and expanded and can be called almost brand new; all I need is the $4300-$5000 to finish it. I may have found a solution for that too, in renting it for 1 month ONLY to my carpenter as part of a barter agreement: labour/rent. Do you think that would work, or would that open up another can of worms?