The Crack House

October 25, 2008 · 6 comments

I mentioned in a previous post about an offer I made on a house with a major foundation issue that may even need to be knocked down. The offer I put on this property was extremely low, but considering the seller (a bank) has had two previous buyers back out when they evaluated the problem, I thought they may be willing to settle for a low offer just to get the property off their books.

Today, my agent called and said that the bank wanted to know what my best terms were for my offer. In other words, they wanted to know if I’d waive the due diligence period (i.e., purchase the house as-is without inspection), and what the largest earnest money deposit I’d be willing to make is. Basically, they wanted me to contractually commit to buying the property without having any recourse to back out later. By putting down a large deposit, and not having a due diligence period, I’m essentially buying the property with my deposit (since if I back out, I lose that deposit). This is reasonable for the bank to ask, as they want to be sure I’ll actually go through with this deal should they accept me offer.

So, I played along. I said I would waive my due diligence period, and that I would put down a deposit equal to the full price of my offer. This basically commits me to buying the property at my full asking price as soon as they accept my offer. Because I would purchase the property at this price regardless of any due diligence, this is a win-win for both sides — I get a property at an extremely low price, and they get a guarantee that I won’t back out.

I’m now waiting to see if they’ll accept me offer given those terms…

Now, to be honest, I’m not even sure what I’d do if I got the house. I have several options (though I don’t know if all of them are financially feasible/sound):

  • Flip the house to another investor immediately for a small profit (I’m fairly certain I’d be able to do this)
  • Get some structural engineers out to the property and determine if it can be repaired…if so, rehab and sell.
  • If the property can’t be salvaged, demo it now and build a new home to sell.
  • Determine if there is some short-term reinforcement that can be done to ensure the safety of the structure and then rent the house for the next couple years.
  • Board the house up for a couple years until the market turns, and then sell the house as-is to another investor willing to pay a premium over what I paid.
  • Board the house up for a couple years until the market turns, and then knock it down and sell the land.
  • Board the house up for a couple years until the market turns, and then knock it down and build a new house.

If I get the house, I’ll likely have to run some scenarios to determine the cost/reward of each scenario, and make my decision using that data.

By the way, the huge crack in the foundation in the garage provides inspiration for the name of this house — The Crack House.

6 responses to “The Crack House”

  1. tracy says:

    Phew! I thought you might be buying one of Atlanta’s infamous crack houses.

  2. Ryan says:

    I think I came up with something you didn’t have listed: If the house can’t be salvaged, demo it, build a new home, rent it out until the market turns, and then sell it!

    …but there’s probably a good reason you didn’t have that one listed.

  3. J Scott says:

    Hey Ryan,

    It’s not a bad idea, but the problem is that I really don’t want to build a brand new home (new fixtures, floors, cabinets, etc) and then turn it over to tenants who might tear it apart. Then when I go to sell it, I have to fix the damage done to the brand new home, and it will no longer fetch the same premium price because I can no longer call it “brand new” (a lot of buyers like the idea of a brand new home).

  4. Ryan says:

    Ah, gotcha. Makes sense now.

    Thanks for the continuing updates! I’ll be checking back frequently as usual.

  5. Rowen says:

    Just wondering what happened to this place…did you offer get rejected…

  6. J Scott says:

    Hey Rowen –

    Didn’t realize I never updated this one…

    The short story is that my original offer of $25K got rejected. After that, it went under contract with other buyers at least 2 more times, and each time the contracts fell through.

    When the price dropped to about $35K, I offered $20K, and the bank countered at $30K.

    I had my structural engineer go out and give me an idea of the repair costs, and his assessment was that the house was built on a “construction landfill” and probably needed to be knocked down and rebuilt.

    Given that, I wasn’t willing to budge on my $20K price (which was still a good deal for the land alone), and cut off negotiations with the bank.

    I know the property has been under contract at least once since, but is once again back on the market.

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