It was 1997 and my then wife and I learned she was pregnant. We were both college educated, making good money (I was 25 and she was 23), but we hadn't saved any money. 1997 was the middle of the 1989-2201 real estate crash in the Antelope Valley (Palmdale and Lancaster), CA. I saw an ad in the newspaper for a 4 bed, 2 bath house for $110K, FHA assumable. I called the guy and he explained that he was a bachelor who wanted to move and he owed $130K on the house. He was going to make a final payment of $20K to the bank to bring the balance to $110K, then the new owner who assumed the loan could refinance. I told him I did not have a problem making the $1,100 per month payment, so instead of him paying the bank $20K, give me $15K and he gets to keep $5K.
He of course loved the idea, but I didn't know him (or trust him) and we couldn't include the $15K transaction in the escrow. So we created a second escrow independent of the assumption escrow, but they closed concurrently. He funded the $15K and I received the $15K upon closing the first escrow. I told my them wife that we had to stay in the house for 5 years since it was upside down. We stayed there exactly 5 years to the month, sold it, took the $10K in equity and purchased our next house in 2002. Now here comes the fun part.
We purchased our second house in May 2002 for $200K with the $10K cash from the first house. We then signed a purchase agreement to purchase a third house in March 2003. At this time our first house was appreciating at $5K per month. We put $3K down on to purchase a $400K house that they hadn't even broken ground on. it took them 18 months to construct and close on the house. When we closed in September 2004, the second house was worth $350K (we had $150K in equity) and the third house was worth $600K ($200K in equity). So we had $350K in equity from these two house, all of which came from the $15K that I was paid when I bought the first house.
So yes, it is possible to buy houses with no money (or get paid to buy someone's house).
Nice job and way too go!
Great story. Sounds like the market timing was on your side too.
How's the market in Lancaster? I was out there a few months ago and it didn't seem like buy and hold deals were profitable.
Wow ... only in CA!
wow. Very inspiring
This is truly amazing! Way to go Michael!
Thanks for the response from everyone. I put 6 houses under contract using the same model in Frisco, Texas at $150K each with $9K total ($1,500 earnest money per house) and within 3 months they had appreciated a total of $125K (over $20K each). I had some personal issues come up (was going through a divorce) so I wasn't able to close on them, but I got my $9K back. So it's just not in CA.
You have to do your research, develop your investing model, test it using historical data, and then apply it within the criteria of the model. I spent 6 months researching Texas markets before I settled on the Dallas area. I then connected with a real estate agent through an agent in CA, told her the criteria of the houses I was looking to buy, and she found them within a week. I flew out to Texas, met her, saw the properties, signed the purchase agreements and paid my earnest money.
Once you've made money and lost money, it's easy to make it again. I lost my money because I lost my focus of what's important: God. I put money and material things ahead of God and he took everything away from me to show me what matters and what's most important: my personal relationship with God. So now I have the right mindset and I'm ready to get back to making money, because this time I will know how to treat it and what to do with it. I have a very interesting belief system that is explained on my Facebook page at https://www.facebook.com/believedeclaredo (stands for Believe, Declare, Do).
sounds like you are investing in appreciation. That's very risky. Yes you had a great experience, which is awesome, but the market could have gone the exact opposite way and you could have been underwater. What happen in 2008? We're you able to ride the wave and still expand your portfolio? Or was it rough?
Investing in appreciating is only risky if you don't know what you're doing. In the model I developed, the only risk was the $3K earnest money deposit. If the house value had not increase or had decreased when they finished building the house in 3-6 months, you would simply walk away and not close the deal. The worst case scenario is the builder would keep your earnest money. Except in CA I have never heard of any reputable builder keeping anyone's earnest money.
So to recap: I invested $10K with a risk of losing a maximum of $3K and unlimited upside potential. This is the classic scenario of purchasing a "call" option (I used to trade options online) where the option value increases by a factor of the increase in the underlining asset (in this case the unbuilt house). So it wasn't risky at all.
As far as what happened in 2008, I got out of the market in 2005 and had to let go of my 9 properties under contract (for which I received all of my earnest deposits back), At the time I was doing this I projected that the market would top out in 2006 (I have a degree in Economics and over 15 years experience of data analysis). You have to take risks in order to get large returns. It's all about how you manage the risk, which I am very good at (I manage a $100 million annual operating budget).
Entertaining, Risky, Rewardable.
Good Job Sir.
@Michael Evans it sounds like a good idea on paper, but I still think it's a gamble.. So if I'm understanding correctly, you are building a house. If the property begins to decline in value during that time frame you are going to walk away and the builder is stuck with this property upside down? To me, it sounds like you are trying to time the market. That's extremely tough to do.
Sounds like a fun real estate journey. What model did you use to come up with the housing market topping out in 2006? Was this model only for CA or TX or nationwide? Thx.
@Christian Bors I closed three deals in 2005 using this method. Let me clarify. I entered into purchase agreements with tract home builders (like KB) who were selling houses to the general public. I paid my earnest money of $3K in CA and waited for them to build the house. Upon completion, I would decide to close or not. Home builders are used to people falling out of escrow for various reasons. If I decided not to close, they would refund my earnest deposit. I would close if there was enough profit in it for me. At the time I needed only $10K to close on a $300K home. I would then immediately resell the house a FSBO at the current market price. So if I purchased it at $300K and it appreciated to $330K by the time it was built, I would list it for $330K. If I had $5K in closing costs, I would net $25K in profit. One of my friends that I did this deal for held the property for an additional 3 months because the prices were still increasing. He sold his house for $355K with $7k in closing and holding costs, for a net profit of $48K.
I am just now getting back into the real estate investing game, so I will do my research to see if my model will work again or if I need to tweak it. I applied a modified version of this model in Frisco, TX where I entered into purchase agreements on 6 houses for $150K each. I never closed on them, but in 3 months they appreciated to about $175K each. Same principle.
@Minh L. I used to track a lot of different economic indicators and was in the process of developing a predictive house pricing model (didn't complete it). The main indicator I used was the affordability index for each state. It had reached an all time low in 2005 in CA at the time I was doing these deals, so I knew by definition that home prices couldn't continue to increase at the rate they had been. I predicted that the higher end counties (Orange, San Diego, Ventura) would decline the greatest by percentage, but I was wrong. It was the lower end counties and areas (North Los Angeles, San Bernardino, Riverside, and Fresno) that got clobbered.
I recently had the opportunity to hear Bruce Norris (a man after my own heart) speak about his prediction for the CA market, and he is very uncertain, because the CA market is doing something it has not done in the last 3 real estate cycles since 1970: it is pausing rather than continuing to run up. He believes this pause is due to the government intervention in restricting first time homebuyer's ability to get mortgages. But like every cycle, greed is coming back into the picture and banks are loosening their qualification requirements, so we'll see what happens.
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