After the flooding in our area sixteen months ago, we’ve been cautious about buying any properties that incurred major flood damage. Not so much before we were concerned about the rehab/damage, but more because of our concern that the stigma associated with the flood areas would impact our ability to sell the houses.

But, we took a chance on this property, and we were pleasantly surprised. First, we made certain to find a nice neighborhood, where many of the existing owners chose to repair and remain in their homes after the flood…this ensured that there was a decent community around which to rebuild the neighborhood. Secondly, we made certain to find a neighborhood that didn’t look devastated from the exterior, despite the interior of the houses needed complete gut rehabs.

Both of these decisions were ultimately good, as we found numerous potential buyers interested in the property, and we were able to get it under contract within a couple weeks of listing it — even during the winter holidays.

The biggest issue we faced was the appraisals. With so few resales in this area in the past year and a half, there weren’t many comps for this property, but ultimately we got that to work out as well. Ultimately, it would have been difficult to get this property to appraise for any higher than our sale price, but that price was enough to generate a decent profit on this deal.

It’s safe to say that — if the conditions are right — we’ll buy future properties in this neighborhood and other flood neighborhoods in the area.

Now, on to our final analysis numbers:

Timelines

The rehab on this one was one of the largest we’ve ever done, but the total hold time on the property was actually pretty short — just 100 days. While the rehab took about 6 weeks, we were able to get it on the market, under contract and sold within another 6 weeks.

Here are the key timeline milestones:

• Purchase Offer Date: 9/14/2010
• Purchase Closing Date: 10/19/2010
• Rehab Completion Date: 11/24/2010
• Sale Listing Date: 11/26/2010
• First Sale Contract Date: 12/20/2010
• Final Sale Contract Date: 12/20/2010
• Sale Closing Date: 1/27/2011

Financials

Here is the breakdown of financials for this project:

We will clear just over $21K on this project (after including unpaid utility bills we’re waiting to receive). Our ROI on this project was about 31% (we paid all cash and used no leverage on this project) and our annualized ROI was just over 110%.

Final Statistics

Here are just some of the final statistics that I’ve been tracking for all my projects, and that summarize the success/failure of each project pretty well:

• From Offer to Purchase Time: 35 Days
• Rehab Time: 36 Days
• Selling Days on Market: 24 Days
• Selling Close Time: 38 Days
• Total Hold Time (Close to Close): 100 Days
• Total Profit: $21,287.89
• Return on Investment (ROI): 31.08%
• Annualized ROI: 113.44%

For those not familiar with the concept, there’s a form of real estate investing often referred to as “Lonnie Deals.” A Lonnie Deal involves purchasing a mobile home (MH) in a mobile home park, doing some minor rehab to get it into move-in condition, and then reselling it to an owner occupant looking to buy a MH to move into. The key to Lonnie Deals is that the reseller also finances the purchase of the MH. When I say “finance the property,” I mean that the reseller will actually play the role of the bank/lender, and allow the buyer to make monthly payments until the home is paid off (generally less than 5 years).

Because it can be very difficult to get bank financing on a MH, and because a lot of people who live in MHs have sub-prime credit, there is a huge demand for MH sellers who will finance the properties for their buyers. For example, while it may be difficult to sell a particular MH for $6000 in cash, it may be relatively easy to sell that exact same MH for $10,000 if it is financed. This is because very few sellers are willing to finance the sale of their MH (they want/need the cash as soon as they sell), so buyers who can’t pay cash for the MHs don’t have very many options.

A typical Lonnie Deal involves buying a MH for anywhere from $1,000-6,000, doing minor rehab (or no rehab, if it’s not needed) and then reselling for at least double the total cost, with owner financing and interest rates around 10-13%. If you run the numbers, you’ll find that Lonnie Deals provide a tremendous return on investment, with yields often over 100%!

Here’s a good example:

Let’s say you find a MH listed for sale by owner for $5000. Because the seller is unlikely to find a buyer who can get bank financing, and is even more unlikely to find a buyer who has $5K to put down on a home, you are able to negotiate him down to $2000; this is actually a very common scenario. Now, you go in and make sure the plumbing, electrical and HVAC works, you make sure there are no roof leaks or floor damage, etc. All of this minor repair may cost $500 on a typical MH. You now have an investment of $2500 into this home.

Then you list it for sale for $5500, and offer to owner finance it for $500 down, and $250 per month. At 10% interest, this works out to exactly 22 payments before the MH is paid-off. If it’s a decent home in a decent mobile home park, you will likely get a lot of interest at these prices.

So, what’s our return if we can sell this MH for $500 down, $250 per month for 22 months? According to my calculator, the yield is over 135%! I don’t know about you, but compared to the 2% I’m making off my savings account, that’s pretty darn good…

Digging a little further and you’ll notice that the original $2500 investment is paid back in 8 months ($500 down-payment and the first 8 payments of $250), and then the next 14 payments of $250 are all pure profit (minus taxes, of course).

So, what happens if the buyers stop paying on their loan or decide to just move out? Well, that’s actually a great scenario for the seller. Let’s say the buyers default on the loan or move out after one year — the seller will have collected the $500 down-payment, plus $3000 in loan payments. He’s already made a $1000 profit, and can then turn around and resell the same home to another buyer! Best case scenario is that the buyers keep defaulting on their loans, the seller can keep reselling the property…over and over and over again…

And nicest thing about Lonnie Deals is that you don’t have the headaches you have with a lot of types of real estate investing. Because you are turning around and selling the home (sometimes just hours or days after you buy it), you don’t have to deal with all the hassles of doing expensive renovations, being a landlord, etc. You are essentially playing the role of the bank, and as you can imagine, that’s a pretty easy job.

As you might have guessed, given the theory behind Lonnie Deals, I’m very interested in seeing how well it works in practice. Starting this week, my wife and I have teamed up with my brother and another investor-friend of ours, and are looking for mobile homes. I have no idea if it will be a profitable venture or not, but as I’ve always done, I’ll keep you updated on my progress, whether successful or not…

Here are some pictures…

The house is a 3/2 split-level with a large eat-in kitchen, separate dining room and large open living room. The bedrooms are large, and the master bath currently has a jacuzzi tub, room for a double vanity and a stand-up shower. The lower level has a partially-finished large room that can easily be converted to a finished space with a drop ceiling, some carpet and some paint. And there is a very large two-car attached garage off the basement. The lot is relatively large (based on our guess of the property line) and relatively flat, though it is mostly populated with trees, so unless we do some landscaping, it’s not very usable. And while there is a large second-story deck off the living room, it needs some serious work.

In terms of numbers, we’re picking this one up for $48K, and I expect the rehab to be somewhere in the area of $25-35K, depending on what we decide to do with it (I’ll post a Scope of Work and final budget when we get closer to closing). It’s likely we’ll spend as much — if not more — on the exterior than the interior of this one. We likely need a new roof, plenty of soffit/fascia work, some siding repair, new exterior paint and a decent amount of landscaping. Though once completed, I think we’ll have some decent curb-appeal for the neighborhood.

Unfortunately, there isn’t much in the subdivision in terms of comps, as most of what is selling in that area is foreclosures. I hate to buy a potential flip without any concrete resale values, but based on some of the non-comp data, I’m not too concerned with this one. The house is appraised at $152K, the two houses directly across the street are listed for $155K and $165K, and we’ll likely be able to make our desired profit if we can sell at a minimum of $110-115K. While I don’t imagine we’ll be nearly as nice as the two listed across the street (we’re likely not going to do a full remodel on this one), our target market will be different, and I think that price for this house will be a great deal for a first-time home-buyer with a family.

Our exit strategy on this one will likely be rehab and resale, though the numbers would could support holding this as a rental or lease-purchase. It’s a large house, and once the market turns (or at least once there are more qualified buyers), I imagine it could easily rise 20-30% in value very quickly. So, we’re not ruling out holding this one if the rent comps support that strategy. We’re planning to do some more research in the next couple weeks, and will figure out our strategy by the time we close.

In the meantime, my closing date is next week, and I have a feeling I’ll be unsuccessful at getting the date pushed out without incurring a substantial monetary penalty. That leaves me with essentially two choices: close next week with the issue of the flood plain unresolved or back out of the deal. And given that I have a pretty big earnest money deposit on the property, backing out would be expensive. Oh, and I still think that even with the flood plain issue, this is a very good deal.

The immediate question though is whether I think this is still a great deal as a flip? Or do I think there is a better exit strategy for this property?

I try to ensure that all my acquisitions have multiple exit strategies, just in case “Plan A” backfires or hits a snag. In the case of The Yellow Stain House, there are actually multiple backup strategies, each potential profitable.

Here are a couple of them:

• Hold the property as a rental. Even with the work that must be done to make this house rent-ready (foundation fix, plumbing fix, roof fix), this property should cash-flow very well. I’ll write another post later in the week with more detail about the rental analysis, but suffice-it-to-say, this is a very viable short-term — and even long-term — option.
• Sell to another investor. Given the nice discount that I am getting on this property, there is enough equity that I could likely do a couple of the major fixes (foundation and plumbing), and then sell to another investor for a profit. While I think this would likely result in a relatively small return, the effort involved would be small, so it would be a quick profit.
• Get a renter in-place, then sell to an investor. Another option is to make the rent-ready repairs, get a renter in place, and then sell the property to an investor as a turn-key investment. Assuming we could get a decent monthly rental rate, I think we could likely attract a number of investors who would love this turn-key opportunity.
• Make minimal repairs, and sell to an owner occupant at a steep discount. While there are some issues that would likely turn off many buyers (flood plain, foundation, etc), if we were to do some minimal rehab to FHA standards (as opposed to the full rehab and basement finishing that we originally planned), stage the property nicely, and then list it well below fair-market-value, we could very likely attract some owner-occupant buyers who would be thrilled to get a very nice property at a great price.

Of course, I’m not sure yet which of these options would be most optimal in terms of ROI; but given the flood plain situation, it seems clear that doing a full flip with only a resale as an exit strategy is not the way to go. So, I’m running various financial scenarios on each of the exit strategies above, and will try to figure out which way seems most profitable. It’s fun to think that I may have my first rental property…we’ll see…

With my due diligence period almost over, I ran the numbers one last time the other day, and this is what I came up with…

My budget for this one (as a rental) is $14,000 ($11,500 plus the closing credit), so with the $61K purchase price, my all-in cost will be $75,000 plus closing/financing costs.

I plan to do the following work:

• Replace the roof
• Repair/replace cracked rafter in attic
• Repair soffit/fascia/trim damage from leaking roof
• Replace A/C
• Replace Furnace
• Replace Water Heater
• Replace fridge/dishwasher
• Get an exterminator in to seal up openings
• Minor plumbing repairs
• Steam clean rugs
• Deep clean house
• Paint interior

I have a bid on the roof, rafter and soffit repair for $5K. I have a bid on the A/C, Furnace, and Water Heater replacement for $5K. I have a bid on the painting for $1500. The appliances will cost less than $1000. The exterminator will be less than $500, the plumbing repairs will be less than $500 (hoping to get that thrown in with the HVAC work). That leaves me about $500-1000 worth of wiggle room for anything unexpected, though this place is in really good shape once the mechanical stuff is replaced.

As for rental comps, it should be pretty easy to get $800/month, and I’m hoping for closer to $850. While I like to use the 50% rule for expenses, with all new mechanical systems, new appliances, and new roof, my expenses for the first several years should be well below 50%, and if I can keep them at 44% or below, I can cash flow with 100% of my money pulled out (and self-managing it). With a 10% down-payment left in there, and not refinancing out my rehab costs, it actually cash-flows pretty well, and my return is close to 9-10% on the investment.

When I go to sell, I’ll want to add about $10K more work:

• Exterior Painting
• New Microwave/Washer/Dryer/Stove
• New Windows
• New Doors
• Repair the “bulge”
• Fix up the garage conversion room (sheetrock, flooring, etc)

This will take my basis to about $85K, and comps in the area would indicate that the place is worth $120K-$130K (though I don’t think it will sell quickly in this market, so I’ll have to wait at least a year or two, and may wait much longer). So, I should make $25K-35K after all commissions, and maybe more since my wife will be the agent for the sale.

Not a home-run, but certainly a decent deal…and the work on this one is *easy* compared to some of the others…

First, here are some pictures…

From a numbers perspective, I’m picking this house up at around $61,000. It’s a bank-owned foreclosure that dropped from $125K down to $70K before I put in my lower offer. Rehab costs to rent are about $12,000 (see below), and rehab costs to resell are about $25,000. If I were to resell, I’m guessing that I could currently get about $115,000, though in this market, it may take a couple months. If I were to rent, I’d likely get between $800-850 per month.

Therefore, as a rehab and sell, after closing costs, financing costs, rehab costs, holding costs and selling commissions, we could expect to earn a profit of about $10-20K. While that’s not a horrible return on what is likely to be just a couple week project, I’m not confident that this house will be easy to sell, so there is certainly a risk of over-improving and then having to rent at some point anyway.

And as a rehab and rent, assuming a 10% down payment on a 30-year fixed interest loan, after closing costs, financing costs, and rehab costs, I could expect to spend about $21,000 out-of-pocket, and earn about $100-150 per month in profit (after paying all bills and maintenance costs). This a return of about 7% on that out-of-pocket investment, which isn’t great, but considering that the property will likely sell much more quickly and for a higher price in a couple years, it may be worth a lower return for the time being. Additionally, if I refinance the property at some point, I should be able to pull all my investment out, and still earn a couple dollars per month in profit. This is a more optimal situation, as it would allow me to pull out all my cash, but still hold onto the property until the market turns around.

Based on that analysis, I’m currently leaning towards renting this house for at least a year or two.

That said, the rehab costs (even to just rent) are higher than anticipated, based on the inspection I had yesterday. While the “bulge” in the wall that I was concerned about is almost certainly not a structural defect, the inspector uncovered a number of other issues that must be addressed, even if the house were only to be rented:

• The roof has three layers of shingle, and the weight of the shingles has caused a roof rafter to crack. The entire roof needs to be redone, and the rafter must be replaced. The roof is about 8 squares (a unit of measurement for many contracting jobs), putting the total roof replacement cost at about $3000, plus some extra for the rafter repair/replacement;
• Both the air conditioning compressor and the furnace need to be replaced. For an 1100 sq ft house such as this, that will likely cost about $4000;
• The water heater needs to be replaced. This will be another $1000 or so;
• There is some evidence of prior vermin infestation, so getting an exterminator will cost about $500 (assuming some follow-up work);
• The kitchen needs a new refrigerator (and dishwasher, if I decide to replace the broken one). I expect another $500 for these;
• There are some minor plumbing issues (clogs, leaking water filtration system, etc). I’m budgeting about $500 for plumbing issues.

Based on those estimates, these big-ticket items will likely run about $10K.

If I choose to rent, I’ll likely add an additional $2K or so to the rehab for things like carpet cleaning, house cleaning, new mini-blinds, and interior paint. If I choose to sell, I’ll probably add another $10-15K on top of that for things like all new appliances, landscaping, exterior paint, building a patio, leveling some floors, fixing the “bulge”, etc.

The next step is to get a good roofer, HVAC guy, and plumber out to give me quotes on the big-ticket items above; these quotes need to be completed this week. Once I have those, I’ll know for sure whether I want to move forward to close on the Bulge House.

Luckily I factored a 10-day due diligence and inspection period into the contract, so I have 10 days to deal with any issues I need to deal with and decide whether I want to move forward with this one. The first issue is that the house used to have a garage, which was at some point was closed up and converted to an extra room. While this isn’t a bad thing in-and-of itself, if the owner who did the garage conversion didn’t pull all the permits and get all the proper inspections, then this is a considered an “illegal garage conversion.” The reason illegal garage conversions are bad is two-fold:

• If the county finds out about the conversion at some point (for example, if I were to pull permits or get inspections for other work being done), it’s possible that I’ll get fined for the illegal conversion, and may even have to go through a costly inspection (tear down sheetrock, etc) to validate and potentially fix anything that wasn’t done properly;
• If the illegal conversion is discovered and not corrected, when I go to sell the property, I may have problems selling to buyers who want to use government subsidized loans (FHA, VA, etc). Since these are my primary buying targets (first-time home buyers), it could make it much more difficult to resell the property.

All that said, even if the garage conversion is illegal (which I suspect it is), the cost of remediation (or the risk of ignoring it) may not be very high, and I very likely may move forward on this one anyway.

The second issue that needs to be checked-out before I were to buy this house is that one of the main structural walls that runs down the middle of the house is bulging out on both sides right in the center of the wall. While it could be a structural issue, there is no other evidence of structural instability in the house (at least not that I noticed, but I’m certainly no expert). So, my hope is that that the builders just had to sheet-rock around some structural component (a plumbing pipe or fixture, for example), and that’s the reason for the bulge. Certainly, if the bulge is the result of a structural defect, it likely won’t be worth buying the house without an additional and considerable price discount.

I have 10 days to do my due diligence on these and other issues that come up, of which four of those days I’ll be out of commission for my wedding. So, it’s going to be a busy week, but I’m starting to get used to that. I’ll post more updates and details about the bulge house over the next week, if/when this due diligence issues get resolved.

* First, some pictures of the new property. The basement pictures aren’t in here yet, but since I’ll likely be finishing the basement, I’ll upload those when I get a chance. If you take a look at some of the pictures of the back/side yard, you’ll notice these very tall (~15 ft) stalks that look like corn. They’re all over the back yard, and I have no idea what it is (it’s not corn, and it’s not bamboo). Whatever it is, because of it, I will now officially refer to this house as the Corn House forever more.

* I’ve been going back and forth about whether to rent or try to sell this house. While I think either exit strategy would work, I’m leaning towards reselling for a couple reasons. First, this is the first property I’ve purchased, and there would be a get feeling of satisfaction if I could take the whole thing from beginning to end quickly, and actually make my first profit from this business. Additionally, I really want to get to know some of my contractors (as I’ll need them for bigger things later), so having them do a full rehab would allow me to better judge their skills, their ability to hit schedules, etc. Lastly, the comps indicate that — despite the tremendous slow-down in the real estate market in Atlanta — this neighborhood has been fairly strong at keeping values and getting houses sold. While trying to resell is certainly a risk (I don’t deny that!), it may be my chosen exit strategy on this house. Of course, if I can’t sell, I can always rent; it would cost me $$$ out of my pocket for a while (since the rehab costs are higher), but that’s a risk I’m willing to take.

* I’m starting to put some processes in place to make future acquisitions and rehabs easier and more efficient. I’ve created a “Scope of Work” template that I am using to define all the work I want done on the house, and will be using that to convey my rehab plan to my contractors. And I’ve started putting together a master materials list with products, SKU numbers and prices, so I’ll be able to quickly estimate materials costs on future projects and will be able to quickly put together a materials purchase order (or give the purchase order to my contractors for them to do the purchasing).

More updates tomorrow…

First, the bad news: Offer #2 was a day too late, and buyer who submitted an offer a day before mine got the house. I was hoping that he’d back out during the 7-day inspection period, but that period expired on Friday, and he apparently decided to go through with the purchase. It’s too bad; I liked that house, and was confident it would make a great rental. But, that’s the downside to this business, and I’m going to have to get used to not getting every house I make an offer on.

Then there’s the good news: I (have almost) bought my first house!

The wholesaler/agent I’ve been working with (Gordon) sent me over two properties to look at last week. Unfortunately, it was a crazy week with traveling and wedding planning so I didn’t have a chance to get over to take a look the day he sent them. But, since I knew he had offers in on both, I figured I could put it off a day. The next day, the fiancee and I stopped by both properties, and both look great from the outside (”great” meaning, “not so great,” meaning great, if you know what I mean). Unfortunately, we were unable to get inside either property, so I called Gordon and asked if he knew a way to get in. He offered to drive down to let us in, but was about an hour away at the time, so I told him it could wait until the weekend. Well, apparently he had already gotten the house under contract, so there was no waiting.

Gordon drove down, we walked through the house, and he gave me a lot of great pointers on how he’d approach the rehab (he a seasoned flipper). Assuming the rehab estimates come back in the range I expect, I think this would be a great candidate to either rent or re-sell; so I need to start analyzing both sales and rental comps, and figure out a preferred strategy. My inspector will be coming out today to do a full inspection, and I have contractors coming out all weekend to give me bids, so hopefully by early next week, I’ll know exactly what needs to be done with the house (and hopefully it’s not much more than what I expect) and will be able to put together a formal plan for this house.

Assuming things go smoothly with the inspection and with the contractor bids, I’ll give a lot more detail about the house/deal (along with some pictures) in the coming few days. Oh, and I’ll also tell you why we’re referring to this one as The Corn House…

The house is an REO (bank-owned foreclosure) listed at $61,900. I had a GC come by on Sunday, and estimate the rental rehab costs at about $10K-11K, and about 2-3 weeks of work. Rehab to sell would likely be $5K-15K more, depending on how nice we would make it, and would probably add another week to the effort.

The comps (what other similar properties in this neighborhood are selling for) are in the $120K-130K range, but a lot of similar houses that are currently on the market are rehabs, just like this one would be. Rent comps are $900-1000, and my agent thinks I could probably get Section 8 tenants in there for $950.

I put in an offer at $56,000, and my potential exit strategies are as follows:

1. Rent It. If I can get the property for $60K and put $13K of work into it, my basis is $73K. With a 30-year fixed loan at 7.5%, I can take refi all my investment back out and cash flow with 50% expenses and $900/month in rent, assuming I do all management. This is very conservative, and with lower expenses, higher rent, and leaving any part of my investment in, I should be able to generate very decent cash flow. I could later do some additional rehab, and when the market rebounds, could likely sell for at least $130K.

2. Sell It. If I can get the property for $60K and put $25K-30K of work into it, my basis is $90K on the high side. I could probably sell quickly at $115K, and make a quick $25K-30K.

3. Try to Sell It, Rent as Backup. Another option is to keep my options open. If I can get the property for $60K and put $22K of work into, my basis is $82K. If I could sell it for $110K, I could make $28K profit, but if it turns out I can’t sell it, I could still cash flow it as a rental with about $7K of my own money left in the property. This way I wouldn’t be spending so much money on the rehab to kill my chances of renting if I can’t sell, but I can make the property nicer than a rental and hopefully attract a buyer looking for a cheaper house.

Not sure what I think of Option #3. This is a “hedge my bet” option that would force me to create something that’s better than a rental but not a “best in show” house that I’d want to sell? Will have to think about this option some more.

Will hopefully have an update on this one soon…