Bought properties at a surplus sale and can't unload them

19 Replies

My husband and I decided to invest in some properties last summer from our county surplus sale.  We had a "mentor" that got us into this and charged a fee for his guidance.  The whole idea behind these were to buy them and then sell them on contract.  I had posted about my experience with this in another post and was told to ditch this mentor.  Which, I have since done!

I am now finding myself in a situation where we have 2 out the 3 investment properties left and I can't sell them to any wholesaler around for anywhere close to what we paid for them.  It blows my mind what wholesalers buy or offer to buy properties for.  I thought we got a great deal at the sale on some of ours, but I am seeing things differently now.  I have a wholesaler telling me to take their offers because we are going to lose money regardless and the longer we hold them, the more we will lose.  

One house is a 2brm house in a decent area, not super distressed, comps showing in the high 20's.  I can't even get $6000 for this house..

The other one came with two parcels, one with a 1bdrm house and one with a converted garage stripped down to the studs.  This one comps out around the same for each lot.  I can't get close to $7000 for both combined.  

Am I missing something here?  

Holli,

It's unfortunate to hear that you are having a difficult time wholesaling the properties but have you thought about rehabbing them, then selling retail? Or rehab then rent? It's always a good idea to have a plan B, C, and D in case plan A doesn't work out.

We'd hate to invest anymore money into them at this point.  Wish we had the capital to do that.  

Originally posted by @Holli Phillips :

One house is a 2brm house in a decent area, not super distressed, comps showing in the high 20's.  I can't even get $6000 for this house..

 Hopefully a lesson learned on "free" houses.

Look at your numbers... lets say you're right... the comps are in the $20s... say $25k.

You want $6k... and I'm guessing that's a mark up from what you paid "just" to sell it to a wholesaler... the wholesaler is also going to want a market up to find a cash buyer fix/flipper.  What is his time worth?  Is he going to work for less than $2,000... $4,000... $6,000 a transaction?  Lets say $4,000... that's not a ton of money per "deal"... but man, that's a HUGE mark up on a $6,000 property.

So now he's in $10k selling to a fix/flipper... they want to be at 70% of $25,000 or $17,500.

So if he bought it for $10k... he has a $7,500 budget for repairs... if you read anything by J Scott, it's hard to do much for less than $15,000... and that's purely cosmetic.  By your own admission, this property isn't "that" distressed... which means it "is" distressed.  But lets say by some miracle he can do the rehab for $7,500.

Now what?  He took that risk... all for a $7,500 gain?  All it takes is 1 surprise in the walls and he's not only working for free, he's losing money... Electrical, Plumbing, Asbestos... any of them could completely wipe out his profit.  Sure... making $7,500 on a $7,500 rehab, two for one improvement sounds great percentage wise, but the numbers are too small for that to matter.

So maybe he isn't planning to sell, he flips to himself as a landlord, he wants to save the closing costs (which I didn't even mention above and would eat away $7,500 pretty quickly). He buys it, gets it ready, and rents it for $500 a month. But, why? He bought and rehabbed a $25,000 property for $17,500... I'm sure he can buy $25,000 properties for $20,000 or less all day long off the MLS, through Craigslist, wholesalers, etc... and NEVER have to worry about the risk of a rehab. He's a landlord, not a flipper... if he were a flipper, look above, the margins wouldn't make sense!

I agree with the wholesalers... get some capital back, lesson learned, and move on.  If you have access to the capital and believe your own numbers, chase it... but having money tied up with no clear way out... get the cash back in your pocket and put it to work in a useful way instead of allowing it to waste away in a sunk cost.

Does the 2 bedroom have any rental potential?  Would you be able to sell it to an investor(or even flipper) and offer owner financing?

I would try to market these directly to investors.  These deals would be very thin for an agent or wholesaler.

We have been advertising to anyone interested that we can do seller-financing.  We paid $6000 for the 2bdrm and $4200 for the other two combined.

Nathan,

I think you are correct on the whole distressed thing.  Our "mentor" rated all the properties we looked at before the sale and he didn't think this one was really that bad.  I am learning the difference now!  These surplus properties are a whole new ball game because you really don't know the condition of these properties until you go to sell them or rehab them.  

Originally posted by @Holli Phillips :

Nathan,

I think you are correct on the whole distressed thing.  Our "mentor" rated all the properties we looked at before the sale and he didn't think this one was really that bad.  I am learning the difference now!  These surplus properties are a whole new ball game because you really don't know the condition of these properties until you go to sell them or rehab them.  

 Any time you can buy a house for $6,000 you should be really wondering why though.  At some point there is a floor for rent... even in terribly distressed areas, there is still some minimum a house will rent for and I'm thinking it's the $200 - 400 range for a 2 bedroom home.  Having a home available with anywhere NEAR that kind of margin is just a huge red flag.  Per previous posters... someone who have just gone rent to own before letting it get foreclosed.  Have a renter pay $400 a month for 3 years and they own the property!

Like I said, it just doesn't feel right to me.  Unless the house has wheels on it, anything below about $25,000 seems strange to me... generally the dirt is worth more than that... and if it's not, why would you buy a house anyplace where dirt has no value?

Take the hair cut and move on.

Maybe take the haircut on the land and use the cash to improve the house.  If you're good at flipping, you might add enough value to not only get your money back on the purchase and improvements, but enough to cover the haircut you took dumping the land.

I would either rent it out or consider it as a learning experience. And chalk it up to education cost. Which I know is easier said than done :)

At this point I'd just like to unload them.  They are not rent-ready at this point.

First, you have to understand that you are the wholesaler and there usually is not enough room for two wholesalers.

Let's run some numbers. let's assume that the ARV is $27,500. Based on my formula there is about $9,000 available for rehab to make the house worth the above amount. What do you think it would take?

How about a rental?  If it could rent for $400, assuming a 60% expense ratio and a 10% cap rate the property would be worth $19,200.

I would determine the fix up cost.  If it is about $9,000 then the property should be worth about $6,000 to an investor.  If it will take more I would sell for whatever you can get for it.

Good Luck.

Bill

Send me a message with the address....  Please and thanks!  

At anything over 4K, I would just sell the 2 bedroom.  It sounds like the other property may be worth next to nothing.

Have you tried offering the 2 bedroom at 100 to 150/month - owner financing?  Or market the whole portfolio for 200 to 250/month.  

Hmmm? Seller financing, distressed property, more than it's value = predatory, so owner occupied are really out unless you fix them so that the property qualifies along with a borrower to obtain financing. Not such a problem selling to an investor, just make sure they can do the job.

Leasing? Probably the better route, see a bank, a hard money lender would probably finance the repairs, if you have experience, then get it rented. Landlord by default!

Do you have a vo-tech school nearby? Get with the teacher, students can be supervised, use the place as a project, sell, pay the hard costs, be nice and make a contribution to the school and keep the change.  

Partner with a rehab guy, let them get their money back first, then split the sale.

Might hit up the non-profit housing entities if you have any in that area, Habitat For Humanity can do rehabs, it's not always a new home and others do the same for low income housing. Might look in the direction of Veterans organizations too.

Now, here comes the slumlords, LOL.

I've turned down free houses! And no, you can't dig the dirt up leaving a strip mine behind in a residential area.

In some areas, if there are no toxins or asbestos issues, the fire department might use it for training, might be better selling an empty lot.

Here, the Amish will take a house for the materials, they will clean the lot off cleaner than vulture cleans road kill.

You might be in the salvage business.

Good luck! :) 

Not sure what "surplus properties" means there, but here they're properties left over from tax deed sales, where no one was willing to bid the taxes owed.  That fact, in and of itself, makes me not even interested in looking at them.  Why would I be willing to buy for that price, when no one else in the investing world was?

I would "Put Lipstick" on them and place them all into individual land trusts. Then, I would sell on Craigslist, yard signs, POSTLETS, as fixer uppers, with low down payments-maybe $2,000 each/maybe less. Trustee issues Beneficial Interest. If they pay, you are golden. If they fail to perform, instruct Trustee to withdraw Beneficial Interest. Since it is only 3, you will fall under the radar of Dodd Frank, but be sure to VET each buyer. You might even consider having a Licensed Mortgage Officer VET them. Don't undertake to scam anyone, perpetually rotating these properties. You want genuine buyers who will take full ownership.

When I do this, I usually sell quickly.

Stay away from GURU's and Mentors. You have all you need right here.

start a nonprofit, donate property to the nonprofit, write it off as a tax deduction. I started my nonprofit housing for $450. It's not 501c approved yet but If I wanted to I could donate property to it. Aftet that, go with what Bill sugguested, firefighter training homeless shelter etc. As a nonprofit solicit free supplies, labor, leftover contractor supplies, paint to fix the property. 

Do your research first bc once u donate a property to the nonprofit, it cannot be transferred out...EVER!  Good luck! 

Sorry to hear about the experience so far.  Excess inventory houses tend to be major renovations which don't bother me.  Please send details to my email and I'll take a look.  May be of interest to me or one of my friends that rehabs as well...or if nothing else I will offer some ideas.

[email protected]

Perhaps you could ebay these and get closer the 6k+ I imagine. 

For the property with 2 parcels, I would definitely look into donating it to Habitat for Humanity or some other non-profit if they were interested.  Consult an accountant, but your write-off could probably be your purchase price if they are going to use the property.

Free eBook from BiggerPockets!

Ultimate Beginner's Guide Book Cover

Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks and techniques delivered straight to your inbox twice weekly!

  • Actionable advice for getting started,
  • Discover the 10 Most Lucrative Real Estate Niches,
  • Learn how to get started with or without money,
  • Explore Real-Life Strategies for Building Wealth,
  • And a LOT more.

Lock We hate spam just as much as you

Join the Largest Real Estate Investing Community

Basic membership is free, forever.