How We Bought A $50K Duplex – Part 1

Who, What, Where, When, and How?

2009 Recap

Seriously – Wasn’t Kitten PoP freakin’ adorable?

2009 was a big year for the PoPs. We got a kitten, got married, and bought a foreclosed house that we fixed up as we lived in it. We learned a lot about what we could do in terms of “home repair”, and found that the list of “repairs we were willing to tackle” was a lot longer than the list of “repairs we’d have to pay someone else to do”.

Early 2010

We watched home prices in a few rental-heavy neighborhoods not too far from our home continue to drop.  And by drop I mean that prices were reaching low levels that had not been seen in these neighborhoods in about 15 years.  It was not uncommon for a property to be listed at $60K, and when you looked at the sales history on the county property appraisers website, you could see that it sold in 2005 or 2006 for $250K.  We were watching the real estate bubble burst in epic fashion not too far from our home. But how could we capitalize on this?

Even though prices were dropping we still couldn’t jump right in.  The thing is, the US government locked us out of a lot of these deals because they were trying to get HomePath buyers to buy many of them.  And the remaining sales in this price range were happening as all cash deals.  Without a financing contingency, banks could get the homes off the books faster, which is precisely what they wanted.  But… we didn’t have all the cash. What to do?

 

Mr. PoP began preliminary talks with his parents about the possibility of borrowing money from them, and after a few months of talking about it pretty casually, we drew up some real figures – a $50K loan with 5% interest only payments for 5 years, with payment due in full at the end of 5 years.  (As part of our debt prioritization, we’re looking to pay this off in 4 years.)  This was July 2010.

With our non-traditional financing set, we could now compete with cash buyers, who were dominating the foreclosure/rehab home marketplace in 2010. We were scouring for deals, hoping for a duplex, but open to single family homes in the right rental price range.

And before long we found ourselves singing along with Kenny Rogers:  “You got to know when to hold ‘em, know when to fold ‘em. Know when to walk away, know when to run…”

 

Know What You Are Aiming For

Cracks like these on the inside and outside of the house indicate that the foundation is probably settling. It could cause significant problems down the road.

Our criteria was pretty straightforward.  We wanted:

  • a property that was relatively close to where we lived since we’d be acting as property managers
  • a neighborhood with solid rental history and easily determined rental rates
  • a dirty, ugly interior/exterior bad enough to scare off most
We also knew what we didn’t want:
  • structural problems (like termites, settling foundations, etc)
  • squatters or existing tenants – from what we understand they are incredibly difficult to evict
  • too many unknowns

 

It Became Our Routine

One of the more ridiculous things we saw – a pop-corn ceiling rotting inside of a shower from water damage. Why am I not surprised that a pop-corn ceiling inside a shower might not dry properly?

Since we knew what we wanted, we felt like we were pretty easy clients for a realtor to have.  We did most of the research looking for the houses ourselves – scouring the latest listings on realtor and a variety of other local email listing services in our area to find the most recent listings.  All we needed from the realtor was the codes to get in and to draw up offer contracts when we found one worthwhile.

For months and months, date night (and many other evenings) consisted of driving around neighborhoods looking for crappy houses that looked abandoned.  We would then look them up in the county Property Appraiser’s website to see if they were REO (real estate owned – aka a foreclosure) yet.  We got very good at identifying houses that were near foreclosure.

We would usually stop and scout out a couple of houses a night, parking and walking around the houses, and if we had the entry codes, going through the inside looking for damage.  There was pretty much always something wrong – it was just a matter of how bad it was.

Ironically, the worse the house was, the less likely we are now to have pictures of it, but here are a couple of choice ones that we managed to snag before running back to the car and speeding away.

 

This is a knife that was stabbed into a house’s wooden siding and left there at eye level.  Really makes you want to get to know the previous occupants, huh?

Imagine turning the corner and almost hitting yourself in the face with this knife sticking out of the wall!

 

An aspiring painter must have lived in this house as they painted words on the interior and exterior walls that rhymed with “witch” and “runt”!  Rumor has it there was a particularly nasty divorce precipitating the foreclosure.

Don’t know if you can make out the fun word spray-painted on the back of this house.

 

But if the inside and outside of the place looked like they had possibilities, we would go for a walk around the neighborhood, stopping to talk to anyone who was out and about.  If they were friendly and walking their dogs, eager for a nice young couple to move in and fix up the neighborhood, this was a good sign.  If they were on their phone screaming, “Where’s my money!?!  He stole my f*-in’ money!”, we took this as a bad sign and headed for the car right away.

 

Although there was an obvious lack of maintenance in many of these places (with roofs in need of repair being one of the easiest deferred maintenance tasks to spot), it was just as common to see poorly executed and un-permitted construction…

So,  anybody else have any great stories about picking up investment properties?

Continue reading the rest of the story (links will be updated as the parts are published).

 

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