55K cash out after purchase on this win-win-win deal in Ann Arbor
Here is a little deal we did last month that has worked out well for everyone involved. We have some retired relatives that have been struggling financially as their increasing health issues have led to soaring health care expenses, even with good insurance, a modest pension and social security. They sold their house a while back to move closer to family, and so rising Ann Arbor rents were also squeezing them. I had been searching for a real estate solution to this problem, something that might benefit both us and them. They could qualify for a small loan, but had no cash. I had been looking for a duplex in Ann Arbor that would provide enough income from one unit to cover most of their housing costs if they lived in the other unit, but those are tricky to find, especially in their price point and with the right condition and tenant status. We also explored the down payment assistance programs from the state, which were a possibility but very tricky to navigate.
We finally settled on a different sort of deal all together—something straight out of chapter one of the first real estate book we ever read—the Carlton Sheets’ Low or No Money Down Real Estate Program. My husband ordered it after watching an infomercial while recovering from knee surgery ages ago—that’s what started us down the investing path. And boom—strategy #1—buy a property with a split-able lot and sell it immediately. Classic.
There was a small house on the edge of Ann Arbor that was listed with an agent I knew—I’d gone through it last fall, but the listing eventually expired. It is a 2/1.5 that could be a 3/2 with some tweaking, and it was on a moderately busy road. It looked a little shabby on the outside, and had an odd set-up with the only full bath accessed through the master bedroom. But it was in pretty good condition inside. The seller had sold it on land contract and then had to foreclose—two different times. He listed it last spring for 225K, got a full-price offer, and then wouldn’t make any concessions for the roof repairs and other issues. He never got another offer and the listing expired. By January of this year, he took our offer of 150K. (There’s a cautionary tale in and of itself.)
The beauty is that it has an attached lot that is accessed on another road. The seller probably didn't split it because it would have made the house even more difficult to sell.
We considered building on it ourselves, but construction loans for investors are difficult to come by and expensive, so we talked with a builder that we have worked with in the past who has a number of investor partners. The builder arranged to have one of those investors buy the lot right after closing on the house. Since the lot was already separate, we arranged to make the first purchase two transactions—one for the lot for $1, and one for the house, on a mortgage. We didn’t want to trigger problems with the home mortgage when the lot was sold.
So we gifted our relatives the down payment for the house, after wrapping some of the closing costs into the loan with seller concessions and ahigher sales price of 155K. They then sold the lot to the investor right after closing for $35,000 and were able to pay off their medical bills and have funds to take care of the deferred maintenance on the house. The monthly payment will be slightly lower than their rent and never go up, other than property tax increases, so they will breathe much easier. We will inherit the house at some point, which will make a great rental for our retirement income. They could also move out in a year or so and have about $500 a month cash flow, if desired, or even flip the house in two years after some renovations and come away with a another nice little chunk of change, tax-free.
And then, in another twist, we made an arrangement with the builder for my husband to actually be the project manager for the new build on the vacant lot. He is about to get his builder’s license and wanted a mentor on his first ground-up project, so this was perfect. The builder is very busy and needs extra help for this and other projects, so my husband will get paid $20,000 to run the project, learn on the job with a very experienced builder, and expand our network of subs, supplies, and cash investors. So that’s $55,000 cash out on a $155,000 purchase, that will potentially cash-flow $500 per month if rented. And a big win for our relatives, for us, and for the investor/builder.
I'll add a few pictures. Sorry if they are sideways--can't seem to rotate them.