In May of 2006 I located a neighborhood that was ripe for rehabs:

1. It consisted of 50’s-60’s homes, most of which need work.
2. It was one of the least expensive areas of a higher-than-average-priced city.
3. It was experiencing a revitalization.
4. The neighborhood had recently appreciated so owners had equity - assuming they didn’t refinance it out (some did).
5. My personal favorite - foundation issues! Sellers are generally aware of foundation issues and don’t want to deal with them. As investors, we know most foundation issues can be repaired.

I sent my first batch of 70 handwritten postcards to every house on two streets and received 14 calls. That’s right, 14 - a 20% response rate. One of the responses was from Betty, a delightful lady who had not lived in her home on Pine Street since she remarried, over three years ago. She had owned the home since 1956, raised her familiy there and found it difficult to let go. I told Betty that I was interested in purchasing her home if she was interested in selling. We scheduled a viewing for the following week.

TAD had the property listed at 1490 sqt, slightly larger than most in the neighborhood. Unfortunately, the house was only a 2 bedroom so i needed to squeeze in a 3^rd bedroom. Based on comps, I estimated the ARV (after repair value) was around $135k.

The following week I met Betty and her husband, Rex, at the house. The drive up appeal was great. I was glad that I decided to send letters to every house on the street as I wouldn’t have picked this house as a motivated seller on drive-by. I spoke with Betty and her husband for 10-15 minutes before entering the house. It is very important to establish a relationship with the seller before ‘getting down to business’.

The kitchen was updated in the 80’s so was slightly outdated, but in good shape. Betty added a large sunroom, master bath and walk in closet to the back of the house. The master closet and bath was huge for the neighborhood and was well updated. The sunroom could be converted to a 3^rd bedroom for a few thousand dollars. The wood paneling needed to be replaced - maybe $4k to tear it down, texture and paint. The foundation was a little uneven so I estimated $3k since it was pier and beam with good access.

I asked Betty what she wanted for the house. She said the man across the street told her was worth $130k. I mentioned that may be possible if the property were a 3/2 in perfect condition but she’d have a hard time getting that without a good deal of work. I said that I’d run some numbers and get back to her the next day.

I felt that I had a chance to purchase the property for $100k. But, with $10k of work, I knew that $100k would be tight for me to rehab or wholesale it. However, the property was in good condition so I may be able to sell it as a handyman special, as-is. I called Betty and offered $100k. I told her that I had cash and I could close it as soon as she’d like. She wasn’t thrilled with the offer and said she’d get back to me.

One week passed. Betty called and asked if I would buy it for $120k. ‘Sorry, 100k is all I can offer,’ I said. She said she’d get back to me.

Another week passed. Betty called again and decided to accept the offer if I would pay all the closing costs. I agreed. The next day we walked through the contract, step by step. She was a little leery so she asked to have her friend review the contract. A week later, she signed it. Since the property was vacant, I convinced Betty to let me hang a lockbox so I wouldn’t need to bother them with access for inspections.

As soon as I had the contract, I got an estimate on the foundation for $1200 and had a drive-by appraisal based on ARV (after repair value) which came in at $140k. I posted it at craigslist.com for $110k, as-is, no closing costs. I had 10 responses in the first 24 hours and showed the house a half-dozen times during the next 6 days. I closed on the purchase and had two parties ready to submit offers within a few days. I told them both to submit their best offer by Friday 5pm. I would not pay any realtor fees or closing costs unless the equal amount was added to the $110k asking price. The better of the two offers was $115k with $3k in closing costs. The sale closed 20 days later. After my utilities, appraisal and closing costs, my net was $9,641. Not bad for a few hours of work.

Looking back, I am proud of this deal. Not as much for the profit but that everyone €œwon€ in this deal. The seller didn’t want to mess with foundation issues, updating the property, realtors, buyer negotiations, etc.. She was ready to let go of the house so she received a fair price for a quick, cash sale with no contingencies. The buyers, a young couple purchasing their first home, got a great deal on a very nice fixer-upper in an upcoming neighborhood.

Lessons learned on this deal:

1. Build a good rapport with the seller. Betty sold me this house because she liked me and trusted me.
2. If the house is vacant, require the seller to allow you to hang a lockbox. Unrestricted access to the property is very valuable for a quick flip.
3. If you plan to sell it to a handyman or new investor, get contractor estimates and ARV appraisals on the property to ease their fears about foundations, valuations, etc..