If you are a property investor in the DFW area then grab a soda and some chips as I’d like to share this great story.

From May to August of 2006, I was focusing on an up-trending neighborhood in Grapevine. Several times I noticed a vacant house at 1338 Airline with major foundation problems and brick falling off the exterior. I had sent letters to every house in the neighborhood but never heard from the owner of this particular home. Finally, one Sunday afternoon I decided to call the owner.

I found the property in TAD and noticed it was not owner occupied. I then looked up the phone number of the owner, Ralph, in whitepages.com. Ralph answered the phone and I told him I was an investor and interested in purchasing his house at 1338 Airline. He said he was recently laid off and would be interested in selling. We agreed to meet at the house the next day.

I determined the ARV (after repair value) of the property at around $140k based on the house across the street that recently sold for $143k. I knew this rehab was larger than anything I had done previously so I decided to make a lowball offer that would give me plenty of room to sell it wholesale or rehab it myself. I determined that a purchase price of $50k would give me $90k of €œbreathing room€ based on a $140k ARV.

I met Ralph the next day and walked through the house. It had massive foundation movement, bricks falling, concrete cracking, floors rotting and needed a complete interior rehab. We made small talk for a while (very important step) and I asked him what his plans were for the property. He said he was going to tear it down. I asked what he thought it’d cost to tear down and how much the lot was worth. He estimated $10k to tear it down and the lot worth $30k. I offered him $50k on the spot, and I knew he’d take it. It was a good deal since he had planned to net $20k after a $10k outlay. Ralph wanted to talk it over with his wife. After 3 weeks of lunches, contract reviews by friends and phone calls we signed the deal for $50k. I closed with cash in 7 days. Then the real fun began!

I called my friend John, who is more experienced with major rehabs. John estimated the rehab at $35k so he offered me $62k. I should have taken it. Instead, I got greedy and wanted to try for 70k. I sent an email to my list of investors and it was under contract within 24 hours at $70k. Two weeks later, after the buyer took a week vacation and spent a week crunching numbers, the deal fell through as the numbers didn’t make sense. Over the next two weeks, I received two more contracts, each fell through after a week €“ too much work. One full month wasted.

By this time, my luck went from bad to worse. On August 15, the city of Grapevine seized 90 cats from the house next door. Of course this brought all the city inspectors out of the woodwork and they started taking note of my house. On September 6th, the cat house was demolished and I received a letter from the city that I had 60 days to get my property up to code or it was next on the chopping block. Just my luck. This house was unsafe for 5 years but 30 days after I purchase it, it gets the dreadful red tag.

I called the city code enforcement office - they were cordial. Basically they just wanted the work to start so it wouldn’t sit for another 5 years. Oh yes, and they also wanted an engineer report on the foundation before they’d grant a permit. Cha-ching!

The 60 day clock was ticking. I needed to start the rehab or sell it. I decided to start getting bids on the rehab while I continued to try and sell it. I called 3 foundation contractors. One wouldn’t touch it, one quoted $24k but couldn’t guarantee it, one quoted $18k. I estimated at least another $15k to re-brick, siding and concrete. I’d be in at 83k before plumbing, electrical or inside updates.

Of course time is another required ingredient on the rehab. With a full-time job, wife and three kids I really didn’t want to spend the next 6 months on this project. I started contacting builders to find out what they’d pay for the lot. I determined that the worst case scenario is to scrape the house for $3k and sell the lot for $40k. Not my favorite option since I’d be in the hole $13k.

Finally, I decided to make one last push to sell at $50k. Fortunately, the right investor came along, paid cash and closed in a week. They apparently have a good deal of expertise in dealing with major rehabs and were excited to start the project. In the end, I lost about $1500 but I am thankful as it could have been worse.

Lessons Learned:
1. Don’t be greedy. Next time, if I have an opportunity for a quick and profitable exit, I’ll take it.
2. Don’t assume that everything can be fixed. Apparently, there are some foundations that are hardly worth the trouble or cost to fix.
3. Prepare for the worst. The cat house next door brought out all the code enforcement inspectors. Once they are involved the rehab costs increase.
4.. On major rehabs, require a large option. This will force investors to do their due diligence before they put in a contract. Not having an option cost me a full month with the property tied up in contracts that were never executed.