I started writing an article this week that went over investing terms and rules like the 70% rule and ARV.
After about two paragraphs I was bored out of my mind and I decided to write about something more fun and leave that article for another time. After last week’s article about the economy, I needed something fun to write about anyway. Here is a story about a house my father and I bought back in 2004 as a fix and flip. The situation was not much fun at the time it happened, but everything worked out okay and it was a good learning experience.
Our Foreclosure System in 2004
Back in 2004 our market in Colorado was just past it’s peak and our county was about to lead the nation in foreclosures. We had an abundance of builders and building going on in the area, much more than the population and local economy could support. There were plenty of foreclosures available back then in our area and we purchased our fix and flips almost exclusively from the Public Trustee foreclosure sale. The Public Trustee had different rules back then and there were many tricks to getting a good deal at the sale. At the time, there was a 75 day owner redemption period after the foreclosure sale. Junior lien holders could also redeem the home after the foreclosure sale, which made for an interesting 75 days. We would bid on the homes at the sale and then wait to see if anyone redeemed or we would try to buy 2nds, we would try to buy judgments or we would try to contact the owner and create a lien with them. With a 2nd, judgment or lien we could redeem the home from whoever bought it at the foreclosure sale. We had to pay off the bid amount, any interest from the sale and other costs like insurance or whatever the trustee would allow. It took a lot of strategy and risk to get a great deal at the trustee sale and there was a lot of fraud going on as well.
The Purchase Process
This particular house was built in the 1990s and was a ranch with a basement. The home looked a little neglected from the outside, but not too bad for a distressed home. On this home we did not bid at the trustee sale, but we did contact the owners and create a lien with them. This was all legal back then, but seems very sketchy thinking back on how things were done. We loaned them $1,000 to create a Deed of Trust, they signed a Quit Claim Deed giving us rights to the home and we also had an agreement saying if we ended up purchasing the home, we would give them another $4,000 if they left the home in good condition. There were many deals where we bought 2nds or did a Deed of Trust like this and lost our money, because we didn’t end up with the house. At the end of the 75 day redemption period we ended up with the home and no one else redeemed ahead or behind us.
When we first saw the home, the owner let us walk through the entire house. There were many things we saw that should have sent us running away from the home. At the time, we saw a great price and we weren’t that knowledgeable about an up and coming drug: meth.
There were security cameras on each corner of the exterior of the home, which is a huge red flag on homes in a lower price range. When we went in the house it smelled weird, but we were used to horrible smelling homes. We though it was a mix of cigarette smoke and trash at the time. They took us downstairs to the basement and there was another guy messing with some stuff in a room that they said we couldn’t go in right now. Another red flag is when the owner won’t let you see the entire house. The last and most disturbing sign of something amiss, was there was an entire family living in the home. We met the children who were probably teenagers and they were not all there. My guess is the chemicals in the home had affected everyone and the children more so due to them developing. We never put any of this together until a little later in the story. To us at the time, everything looked great and we made the deal with them.
A Surprise in the Paper
We had given the occupants a few weeks to move out when we saw a rather disturbing article on the front page of the local paper. It was a story about a meth house being busted that was very close to the house we had just purchased. Then I read the address and realized it was the house we had just purchased.
The gentleman living there, who had been our main contact had decided to get some gas without paying for it. A policeman happened to be in the area and followed the gentleman home (the house we owned). The gentleman in his brilliance went inside and left the front door wide open, the policeman went in and found them cooking meth.
The gentleman went to jail, the police took over the house as a crime scene and we were a bit overwhelmed with everything. The gentleman even called us from jail and asked my dad if he was going to get the rest of his money. Um….. No.
How to Clean up a Meth House
We had never dealt with a meth house and at the time we didn’t know much about the drug. We did some research and were not very pleased with what we were finding out. It looked like a complete gut job might be in store and of course insurance did not pay for this type of incident. On top of everything else, we had no idea when the police would release the home and how that situation would work out either. I had heard of police seizing drug houses and possessions and auctioning them off.
Luckily we did not have to deal with any of the clean up, because the house burned down!
We saw that article in the paper as well before anyone informed us. One night someone had broken into the home and either accidentally or purposely set the basement bed on fire, which spread to the curtains, walls and ceiling. The fire department was able to put out the fire before then entire house went up in flames, but the damage was done. Due to smoke and water damage the house was a total loss.
Not only did we buy a house that turned out to be a meth house that burned down, but we were investigated by the local police for setting it on fire ourselves. I guess it made sense to look at the owners first, since the meth clean up was not covered by insurance, but the fire damage was. Bother my dad and myself were interrogated by a local policeman in one of those little concrete rooms. I am not sure if they were just going through the motions, but the policeman interviewing me was very young and reading all the questions off of a piece of paper. It only took about a week for them to clear us and decide it was one of the previous owners friends who had broken into the house looking for meth, who set the fire.
After we were cleared of setting the fire, we had to deal with our insurance company. They had to conduct their own investigation and it took six months before they approved our claim to rebuild the home. Luckily we knew a great builder and he was able to demolish the old house and build a brand new home on the existing foundation. About a year after we had purchased the home, we were ready to sell it!
The crazy part, is we still made a little bit of money on the deal even after waiting a year for the insurance approval and the rebuild process.
Photo: Ian ForresterThe Meth House, The Cops, and Me: A True Real Estate Investing Story by Mark Ferguson