Just got dealt a "BIG DEAL" Card

[hakrjak]

Check this out:

Gorgeous $1 million dollar mansion in an exclusive Colorado Springs gated community located right next to state parks on both sides. 6 beds, 6 baths, 1.5 acres, 4 car garage. Surrounding houses range from $800k-1.5 mil and up -- Some of our richest local residents live here.

Listed at $389k (Just reduced)... Needs about $100k of rehab, foundation work, etc.

Holy snikees! How do I resist this?

The plan: Move into it for 2 years, do the rehab, and then sell it for huge TAX FREE profits!

The problem: It would take every penny I have to be able to move into this thing with an affordable note. I'd have to clean out my 401k, and dump my entire savings into this to scrape together the $100k down payment I would need, and maybe sell some properties to get even more... I would have to go into debt for the rehab. This would be extremely stressful for me, and would probably prevent me from doing any flips on the side for the next 2 years. (My side flips make $15-20k each though, 2 to 3 per year... This property would make me around $3-400k tax free in 2 years....Ugh...) If I lost my day job during this time, my empire would probably implode.

Any ideas on how I can make this happen? Maybe somebody wants to partner up for 50% of the net profits?

Too much risk for the reward? Should probably just walk away?

Cheers,

- Hakrjak

 

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[Sid23]

Partner with someone with $$. Decide on a fair split. You move in and do the rehab. They are hands-off money partner. Once sell, split profits.

 

[MJ DeMarco]

Have a link to the house/MLS listing?

 

[Russ H]

Hak-

We just got stung on a fixer that needed way more time (and $$$) than we anticipated-- and I've been doing rehabs for almost 20 years.

You're great at small fix 'n flips-- and these lower priced houses are the ones that are selling in this market right now.

Still, sounds like you could get a conforming loan on this place-- prob w/a great fixed rate (do the fixed, please-- so little diff right now between fixed and variable).

Danger would be over-improving or taking out HELOCs against the prop (I've been there).

If you do decide to give it a go, figure out how in the heck you'd live there during a foundation fix. We did this (replaced the whole foundation, forming/framing took weeks, while we had guests staying there, then the pour took 8 large cement trucks). Big foundation.

I'd never do foundation work in cold weather. Too much cold air running up under the house. Not to mention plumbing issues . . .

These are the kinds of rehabs I did 10-15 years ago. Great if the market is appreciating (which it probably will). MUCH bigger payoff-- $250K tax free ($500K if you're married)-- BUT-- MAKE SURE THE $250K/500K TAX BREAK CONTINUES!!! I'd heard it was not going to.

-Russ H.

 

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[hakrjak]

MJ -- Here's the link to it on Zillow:
3420 Cathedral Spires Dr, Colorado Springs, CO 80904 - Zillow

Price just dropped to $389k, which isn't reflected here yet.

Not many pics though, so I'm going over there in an hour with my cam to snap some shots with my Realtor and explore the work it needs with my own eyes.

It's a beautiful 65 degree day in Colorado Springs, might as well get out and do some house hunting!

Cheers,

- Hakrjak :banana:

 

[hakrjak]

Hak-

We just got stung on a fixer that needed way more time (and $$$) than we anticipated-- and I've been doing rehabs for almost 20 years.

You're great at small fix 'n flips-- and these lower priced houses are the ones that are selling in this market right now.

Still, sounds like you could get a conforming loan on this place-- prob w/a great fixed rate (do the fixed, please-- so little diff right now between fixed and variable).

Danger would be over-improving or taking out HELOCs against the prop (I've been there).

If you do decide to give it a go, figure out how in the heck you'd live there during a foundation fix. We did this (replaced the whole foundation, forming/framing took weeks, while we had guests staying there, then the pour took 8 large cement trucks). Big foundation.

I'd never do foundation work in cold weather. Too much cold air running up under the house. Not to mention plumbing issues . . .

These are the kinds of rehabs I did 10-15 years ago. Great if the market is appreciating (which it probably will). MUCH bigger payoff-- $250K tax free ($500K if you're married)-- BUT-- MAKE SURE THE $250K/500K TAX BREAK CONTINUES!!! I'd heard it was not going to.

-Russ H.

Ain't that the truth -- I just completed a 6 bedroom, 3 bath monster with 2 bonus rooms and a giant kitchen. Was the biggest I had ever worked on, and it took a lot out of me. I learned a lot from that one though, and still made decent money -- so I'm bringing more knowledge & money in future deals at least.

I'd probably need a cash partner to front me some of the down payment and rehab costs to make this work -- But it could be a great deal for both of us, even if the property doesn't appreciate a dime. If it does go up in value over the next 24 months, then that would just be gravy to divy up 50/50.

Cheers,

- Hakrjak

 

[hakrjak]

Well, I just got back from touring it -- And it is indeed a beautiful house. One of the nicest foreclosures I have ever toured because the previous owners didn't trash it before they left.

As soon as you drive up the driveway you notice cracks throughout the whole driveway which speak to the soil conditions of this area. I've known for years that this area has soft soil and has special conditions for building on it... Apparently the builders didn't follow these requirements, because when I got into the house I noticed several large cracks in the floor on 1 side of the home. It's almost as if it's shifted down the hillside slightly on one side of the house. There were a couple of minor drywall cracks, but no major tilting or shifting like in some houses I've been in.

It's clear that I'd have to get an engineer to survey it and propose a fix, but I'd have to get the house under contract first before I'd bother with that. From a laymen's point of view, and from what I've heard from others -- it looks like you'd have to jackhammer up most of the bottom floor / slab, and repour it by bringing in a cement pourer through a window or door. Then you'd just patch and repair the drywall. It really didn't look that complex at all.

1 positive note -- The house has been on the market since November, and from the Realtor cards left in the house, there was only evidence of 1 other person even looking at it. We think that the bank could accept an aggresive lower offer like $300-325k perhaps?

- Hakrjak

 

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[hakrjak]

Hak -

I feel like I have to respond (I love following your projects), but don't have any good thoughts or suggestions...

Personally, that part of the market (anything over $200K) terrifies me right now from a resale standpoint, but by the same token, I'd *LOVE* to be doing a high-end flip.

I think the idea of living there for next two years is great. First, it will allow you to manage the flip schedule pretty easily (you feel like you need to rush it), which will also allow you to learn as you go along. Secondly, you save a lot of money in taxes when you eventually do sell it.

Of course, as Russ pointed out, living in a rehab can't be very easy or fun, so you need to make sure you and your family are comfortable with the inconvenience you'll experience.

Looking forward to hearing how your thought process evolves on this one!

Thanks bud! Truth be told, I love just the idea of living in such a large and beautiful home... It might be hard to part with in 2 years because the views alone are worth $1 million dollars easily. It's on a hill that overlooks the entire city. You're right though -- selling might be hard because of market conditions -- I'd have to be prepared to leave it on the market for 6 months to a year just to find the right buyers.

Cheers,

- Hakrjak

 

[John]

One thing I'd look at very carefully are any Home Owner's Association bylaws or local ordinances that might affect what you're trying to do. In neighborhoods like this there can be some very steep costs and very strict rules that can take you by surprise:

What are the HOA dues? Costs of ongoing maintenance to house and yard required to stay compliant with HOA bylaws? Restrictions on construction noise and traffic that might affect your rehab budget and schedule? Make sure you take all of this into account when running the numbers.

Good luck with whatever you decide!

 

[hakrjak]

Trying to attach some pics I took:

 

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[Russ H]

oooh, oooh-- I forgot to tell you first time around:

Biggest mistake I ever made for a live in/fixer/rehab was to buy a house that had only ONE BATHROOM, and didn't add the 2nd first.

BIG MISTAKE.

So make sure you've always got one nice bathroom in working order-- w/a few 3 gallon water bottles filled w/tap water in the room, for those times you flush and the main is off! :banana:

-Russ

 

[hatterasguy]

MJ -- Here's the link to it on Zillow:
3420 Cathedral Spires Dr, Colorado Springs, CO 80904 - Zillow

Price just dropped to $389k, which isn't reflected here yet.

Cheers,

- Hakrjak :banana:

Man you guys get a ton of house out their for the money!

Anyway from your first post I wouldn't do this unless you can find a partner.

Your business you said is doing about 2-3 flips a year, which in this market is pretty good, but things should start to pick up soon. You should be able to do a lot more. If you stop your business now you will be losing ground when the market picks back up.

A property like this will fit into your business when you can buy it, rehab it with cash and turn it over fast. My 2 cents.

Besides at this point the market is shot, your going to have to sit on the expensive stuff for awhile. The cheap stuff is selling, I'd stick with that market.

 

[hakrjak]

A property like this will fit into your business when you can buy it, rehab it with cash and turn it over fast. My 2 cents.

Besides at this point the market is shot, your going to have to sit on the expensive stuff for awhile. The cheap stuff is selling, I'd stick with that market.

True, True....

The expensive stuff is selling, it's just taking a lot longer. Gotta be ok with waiting 6 months for a buyer. The positive thing here would be that I could probably get it for $325k and sink in maybe $100k, and flip it immediately for $800k -- and $800k would be one of the cheaper houses in the neighborhood. Just a thought... Maybe I should approach it from that angle and not try to live in it -- just find a cash partner who can put up some money, and split the net profits 50/50 in a shorter time frame.

I know I could use a $200k profit, could anybody else?

Cheers,

- Hakrjak

 

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[Colbehh]

I agree that you'd be way over extending yourself. You're taking a huge gamble with everything you have, and it'd take ideal conditions for this to work. I wouldn't take the risk.

Beautiful house though.

 

[hatterasguy]

You know your market, around here the more expensive stuff is very quite, I doubt we will build anything over $400k this year.

If you have confidence that you can sell it for $800k in 6 months than I would go for it. You should have enough wiggle room to mitigate the risk a bit. The more expensive stuff can drop in value hundreds of thousands, its not like little $200k capes that may drop $20k.

 

[biophase]

Why does zillow show that this house sold for $368 in Dec 08?

Never mind I found it.

Citimortgage paid $367,997 for it on Dec 10 2008

 

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[hakrjak]

According to county records -- the last good sale on this property occured:
08/05/2004499000Good sale; verified

Comps in the neighborhood seem to support a much higher price. Zillow shows:

1. <LI class=even>Sold 03/16/2009: $810,000
   3110 Angel Ter, Colorado Springs, CO 80904 <LI class=odd>Sold 08/26/2008: $513,000
   2770 Black Canyon Rd, Colorado Springs, CO 80904
2. Sold 04/08/2008: $1,007,500
   3620 Twisted Oak Cir, Colorado Springs, CO 80904

I do have to say that it seems like this house is actually on the smaller side for this neighborhood though. As I was driving around today, it seemed like many of the houses were 10,000+ sq ft 12 bedroom mansions, etc.... I think this is a positive thing, because you always want the cheapest entry level house in a kick a$$ desireable neighborhood.

Still giving this some thought. I came up with a basic plan that could get me into this house -- It's pretty much like threading a needle with a lot of hoops that must be jumped through.... Let's see what you guys think:

1). Sell my principal residence
2). Get this one under contract for $325k
3). Put $65k down, 20%
4). Have a payment including HOA dues & everything of $1717 a month (About $350 more than I pay right now)
5). Sell another property of mine, and get $60k of equity out of it.
6). Use the $60k of equity to fix the foundation and rehab the home over the 2 years we live in it.
7). Sell the property after 2 years for $800k+ and pocket the profit.

Seems pretty straight forward, although it requires that I sell 2 of my properties, which I'm not sure how fast I could make that happen. 1 of them has renters in it until October, so we'd probably have to move into the property "AS-IS" and wait until next year to get he money to actually start the rehab! I'd be willing to do that....

- Hakrjak

 

[kurtyordy]

is it me, or is it in perfect shape besides the foundation? from the pics, it looks like you could move right in.

 

[MrPink]

I am putting my vote for pulling the trigger.

You can do 15-20k flips all day long (which is really impressive), but this in a whole different league.

You can also make money through other projects over the next 2 years to help with rehab costs.

 

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[hakrjak]

is it me, or is it in perfect shape besides the foundation? from the pics, it looks like you could move right in.

That is correct -- it's move-in ready....

If I want to sell it for profit I'd have to make improvements, Seems like it was built in the late 90's so it definitely needs updates. I could move in tomorrow and live there for a year or 2 before I even fix the foundation if I wanted to.

One thing I just noticed on the MLS for it though:

Terms offered: CASH

Remarks: Serious investors only -- Does not qualify for financing. Seller not making repairs, no notice to correct.

Hmmmmm, I've never heard of that -- I thought you could get conventional loans on property in need of major repairs? Maybe not because it's foundation related?! A construction loan perhaps?

Cheers,

- Hakrjak

 

[Redshft]

That is a very beautiful home. I have no experience in flipping homes/RE so the only advice I can give you is go with your gut. You'll never know if it was a good idea or not if you don't try.

Don't be afraid to play devil's advocate though and consider worse case scenarios.

 

[MJ DeMarco]

I said this somewhere else, but be very careful with foundation problems. The house down my block had a foundation problem and it took 6 figures for it to be repaired. Its been vacant now for 2 years because the agent has to disclose the foundation issues to the prospective new buyers -- the home comes with a 10 year warranty on foundation. As soon as it's mentioned, people get scared and don't buy.

It sounds like the house is on land similar to my development -- it needs special prep before building.

 

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[hakrjak]

Thanks MJ -- I'm checking with my Realtor right now on if we'll need to disclose past foundation issues in my state... I had heard that from Jscott before in Atlanta, but didn't know what my local laws were on the subject. If we don't have to disclose it, then it would be really nice Hate to scare future buyers for no reason.

I did just get word that there's a local bank who would probably front me the cash in a hard money type loan to get around the "Cash" requirement -- so that's a good thing.

Cheers,

- Hakrjak

 

[Russ H]

Hak-

Just to answer your prev question, it's pretty normal to have "CASH" sales, esp for RE that needs fixing.

We got loans on lots of these props, but that was back in the days of irrationally exhuberant lending practices.

Thing is, seller does NOT want a "subject to" offer-- they want an "AS IS" offer, w/a specific close (having time to get your inspections and other dd done is perfectly acceptable), but they ALSO typically don't want to see a loan contingency.

Thing is, even if you don't include a loan contingency in the contract, if you get down to the end of the closing period and don't have the $$$ or loan, all you do is forfeit your good faith deposit (and all of the $$$ you spent on inspections).

We typically spent at least $1K on inspections-- 2 whole house inspectors (one always caught things the other didn't, and we were able to negotiate down on the price-- ALWAYS), plus a pest inspection (incl termites, dry rot), roof, haz mat (can be part of title search), and other stuff like flood or earthquake (whatever applies to your area).

We'd lock these things up w/a contract w/a 45 or 60 day close, sometimes extend the close if we had issues (tried like crazy never to do this, but it did happen), and we drove our mortgage broker HARD to get the loan done in time. Was a race to the finish (esp the one time we got an SBA 7A loan in 28 days), but we've always come through. We've also had Plan B backups (like hard money in place if the SBA loan didn't fund, etc).

Lots more hoops, as you say. I'm concerned that it only sold for $500K in 2004. We're seeing props around here sell for as low as 1990 prices-- and median is about 1998. So $500K seems a bit high to me, if you have $100K worth of work to do. But that's our area-- your area is different, of course. Look at what year the median prices of the high end foreclosures are going for to base your offer-- OR (our technique): Come in high, at asking, AS IS, then once you've done your dd, tell them how much extra $$$ in problems you found that they did not fully disclose (we'd get bids). In our state, this became part of the public record, and the RE agent now had to disclose all of these costs to future buyers-- so they usually came down to our price. Be careful, though-- foreclosures may not have these disclosure rules for future buyers.

-Russ H.

 

[hakrjak]

Well my Realtor got back to me today -- He said that we do not have to disclose the foundation repairs, but it would be a good idea to. He said that he'd do it on the disclosure form you bring to closing, and he'd just make sure we had a stamped engineers report certifying the fixes, and he's never heard of anyone backing out of a deal at that point because of such a thing.

You're right -- my price projections could be high. I try to be as conservative as possible in my estimates. We've seen no major drop in property values out here, except in some areas -- But, being ultra conservative I might revise my estimate of the final sales price down from $800-850k to maybe $6-700k just to be safe.

At that level it would still be a killer deal to buy & move into for a few years while fixing it up and tricking it out to be the perfect custom home. Then plop it back onto the market once things are doing a little better. There would be no major rush, since we'd be living in it -- We could afford to leave it on the market for years if necessary to get our asking price.

Cheers,

- Hakrjak

 

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[hakrjak]

Just got the #'s from my construction loan / hard money type lender.

I'd have to put down $97.5k, and he'd loan me the $60k projected to fix the foundation up. Then I'd refi into a standard loan after 6 months or so. Payments would be $2k per month.

Seems a little out of my reach... I think I may have to pass on it, sadly -- I hate when you find a house in the perfect area, where it would work perfectly for what you are trying to do -- but you simply can't afford to make it happen.

I'm simply not wealthy enough yet... Must use this as motivation to make more money this year!

- Hakrjak

 

[Russ H]

Hak-

As much as you may be tempted to "go w/your gut", I'd suggest something different (and I have a VERY big gut, ask anyone!

Go with the numbers.

Do the numbers a few times, but always come back to:

GO WITH THE NUMBERS.

If 2K/mo is too high a reach for you, then don't do it. YOU KNOW what works for you, and what does not.

We have over $30K in debt service/prop taxes due each month, but this is backed up by cashflow from the B&Bs.

As long as the cashflow continues, we can pay the bills.

Lenders give us money based on how well we cashflow-- so it's on our business's earning power, not our own personal earning power.

You know all that-- reason I bring it up: You may want to look at something, sometime, that generates cashflow (besides a j.o.b.). If it can grow and be scaled/automated, you can take on bigger projects.

Warning: Bigger projects have bigger payoffs, but they also have WAY bigger penalties if things go south!!! So be careful! :smxF:

-Russ H.

 

[hakrjak]

Yes Sir, it's all about cashflow.... If I had more of it, I could have got this project going. Since I've been selling properties the last couple years and getting equity out, I only make about $600 a month from passive cashflow right now. I'm down to 5 properties right now -- I need to increase that # as soon as possible with some smart cashflowing investments.

Cheers,

- Hakrjak

 

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[hatterasguy]

No worries, their is always another good deal.