Diary of a PIG -- Fredericksburg, VA -- SFH

72 Replies

In a nod to Ben Leybovich, I bought a PIG.  I'm going to tell everyone how things work out for me on this thread.

The deal:

2/1 house in Fredericksburg, VA. It's a very small 725 single story all brick on a crawlspace built in the late 50's. I bought it at REO auction for $42,500 including buyers premium. I paid all cash using a LOC on another investment property, but may refi into a conventional loan down the road. I estimate the ARV at about $90k on the retail market, but it's difficult to find comps as that street is fairly unique. The cheapest house in all of Fredericksburg on the MLS right now is $81k and it needs a lot of work.

I would venture to guess that this is the worst neighborhood in Fredericksburg -- definitely class D.  Virtually every house on the street is a rental unit.  Almost all the property sales appear to be distressed.  My wife says she doesn't want to go there at night, but seems to be ok during the day.  There are a couple of old couches in the yard, a window a/c unit in the front of the house and a towel stuffed in beside the ac unit to close the gap.

Crime searches in the neighborhood don't turn up anything terrible though so I don't think it qualifies as a war zone.

This was sold as an occupied REO which means I haven't seen the inside of the house yet and I don't know anything about the tenant history. I like that the exterior is all brick and seems to be pretty sound from the few drive by's I've done. I'm pretty much banking on the hope that I can do a full gut of this house if necessary for less than about $45k.

Long term, I'm not sure yet what I'm going to do with this property.  A fellow BP'er has another one just like it down the street that is on the market for $900/mo.  He says he's getting really good traffic, just waiting for the right tenant.  I'll let him identify himself if he chooses.  If that holds up, and I spend very little on the rehab, then this will be the closest any of my properties come to the 2% rule.  There's another listed for $995 on the same relatively small street.

Alternatively, I thought of just flipping it and selling it as a starter home or investment property.  I've noticed that the same investor owns both of the houses next door to mine.  I would think I could unload it there pretty easily too.

I also have considered doing seller financing, getting a good size downpayment and holding the note.  Worst case scenario I would think is that I get the house back in a few years and start over again.

My immediate plan is to knock on the door tomorrow and find out who is living there and if they have a lease.  I think that discussion will largely dictate the direction this goes for at least the first few months.  The possibilities I see are:

1.  Tenant living there but can't or won't produce a lease and wont sign a new one -- treat as squatter -- offer cash for keys and/or give 30 day notice to quit.

2.  Tenant living there with current lease.  Ask for copy of lease, honor existing lease for as long as they want to stay.  Reassess at end of lease term.

3.  Tenant living there with expired lease in month-to-month continuation -- get him to sign a new lease or give him 3 months to leave (I think this is required since this was a foreclosure I don't intend to occupy).

When and if the tenant leaves, then I'll go in and decide what work to do and where I go from there.

I'm looking forward to hearing everyone's comments and feedback.

Eddy

Rental market in Fredericksburg is still going strong. $800-$900 is at the low end of rental rate in Fredericksburg market. You will be facing challenging tenants. There will always be people looking to rent the problem is placing the right one in your property. Sometimes you would be better off having a vacant property than a bad tenant. Good luck with your new investment.

I assume that you haven't had any contact with the lessor.  If the occupant does produce a lease, how would you validate it?  If it is not a profitable lease, could you void it and force them to prove that it was in fact a valid lease?

Originally posted by @Carol Wilhite:

I assume that you haven't had any contact with the lessor.  If the occupant does produce a lease, how would you validate it?  If it is not a profitable lease, could you void it and force them to prove that it was in fact a valid lease?

Carol,

I was thinking it would be a lot of effort for someone to fake a lease. Am I being naive? In any case, if its anywhere near market rate I'll just take it. If its absurd then I'll have to think of something.

Eddy

Congrats on the property! I'm curious to the area since I live in Fredericksburg also. Definitely keep the updates coming. There's also the local REIA meeting in Fred that meets once a month if you are looking for other investors in the area. This coming Monday it will be in Woodbridge this Monday but normally its right off of Rt 3. Congrats again!

@Eddy Dumire

  why do you classify this as a PIG.. seems like a straight forward distressed asset sale with a unknown tenant in place... risk is tenant totally thrash's the unit you have no recourse since the lease is not in your name.  but that's the risk of being an investor.

form the sounds of the locals you got a great buy.. from the sound so of the locals tenat selection is important IE lots of crappy tenants before you find a good one.

I sure like our Portland OR. market put a rental up get 50 hits on craigs list 40 have ficos over 700... you just have to pick the one you want.. LOL

@Jay Hinrichs

This entire venture for me is an experiment.  This is my third house.  My last two were very different properties.  They are in desirable A/B neighborhoods.  The properties have already appreciated significantly from where I bought them.  But they don't meet any of the "Rules" that are so pervasive.  2%? Ha! I don't even meet the 1% rule on my first two.  50/50?  If that's true then I'm in trouble.  70%?  I'd never find a house in my market.

To my wife, this property is terrifying. She has already voted for every exit strategy that leads to a sale. For me, I think it's just going to be a lot more work but with a better ROI than the other properties.

The reason I call it a pig is because I think it meets the @Ben Leybovich definition.  No, it's not a 30,000 property like he describes here:

http://www.biggerpockets.com/renewsblog/2014/02/25/why-you-should-not-buy-cheap-houses/

But it my market, it may as well be.  I can't imagine that anyone really wants to live in that neighborhood.  All the houses have sold for about the same price for at least 2 decades without real appreciation.  Nobody is scraping off the old ones and building anything better. And it's a 2/1.

I guess the reason I think its a pig may be just that it's so far outside my comfort level.  I do think I got a really good price and that's really the only reason I bought it.  I was pretty sure that I could come out ahead one way or another.

So that leads to a new question.  Nobody else in the neighborhood has expanded the footprint of these houses.  It's an entire street of 25x29 brick boxes that are more or less identical.  Should I entertain the idea of doing an addition and converting this to a 3/2 or 4/2?  What would be an acceptable recovery time for an improvement like that?

I'm going to visit the property today and knock on the door. Wish me luck.

@Eddy Dumire

 maybe you just flip it and make a quick 10 to 20k and let someone else have the Joy of being a landlord in a ( as you describe crappy hood)  your wife is happy your happy you made money.. nothing says you got to keep these things... best of both worlds.

there is a reason there is so many low end rentals to choose from.. burnt out landlord syndrome is very real in these areas.. people just get tired and finally give up.

its that live well sleep well theory... plus you don't get shot or mugged

@Jay Hinrichs

Flipping is definitely something that's on the table.  I really can't make any decisions until I find out who is in there and what their tenancy status is though.  I guess I need to start drafting up my letter to the occupant.

Eddy

@Eddy Dumire

  good luck with it... I have not bought courthouse foreclosures since about 06 but prior to that I bought about 100 a year.... here in Portland OR>

and that is always the tough part knocking on the door and letting someone know you just bought their home.. Of course ours were the previous home owner so those are really contentious events.. and you WILL get some folks that take out their frustrations and bad luck on the house.. I have had houses totally gutted on.. I mean everything taken kitchen bathrooms mechancials copper you name it they stole it before they left  :)  but that's big boy investing and goes with the territory.. I have also had past owners turn over the house like they sold it to someone.. house clean swept carpets nice.. keys on the island all manuals in the drawers etc... and of course everything in between.

I wouldn't call it a pig.  Probably a solid C.  If you want a pig, look closer to 20640.  I'm seeing 2/1 properties there in the sub 20k range on the mls.

Thanks for the info @Jassem A.

I looked at the zip you provided.  Yes those are definitely some cheap properties and some certainly qualify for the pig designation.  My opinion is that my area is very expensive in general, so what may be a pig at 20k in Indian Head, MD is still a pig at 42k in Fredericksburg.

So I had an interesting weekend.

I went to the house on Friday evening and knocked on the door.  Keep in mind that until now I haven't seen the inside of the house or spoken with the occupants.

There are apparently 4 people living in the house.  They were very friendly, but I'm assuming that almost nothing that they tell me is true.  I was speaking pretty much exclusively with two of them, a woman and her fiancé.  The other two are supposed to be leaving.

They told me that they had been to court just 3 days prior because the foreclosing lender had filed for unlawful detainer.  I really couldn't make out what the outcome of the court date from them, but looking in the court records online, I now see that the order was to vacate on 8/7/15.  Part of the terms of the auction were that I don't get to pick up any of the pre-existing eviction process from the bank.

Here's where I think I made my first bad decision.  When I introduced myself, I asked if they had a lease in place, told them that if they did I would honor it, and also told them that if they didn't have a lease they could stay by signing a new one with me.  Of course I did all of that without first finding out who they are and running background or credit checks.

They stated that they would only be interested in renting if the property were repaired.  According to the occupants, the property was determined to be unlivable by social services and that caused the last tenant to move out.  They claim that they rented the property from a property manager for $700, though they never signed a lease.  I personally think that odds are pretty good they broke in and are squatters. 

The condition of the property is pretty bad.  They were very polite the whole time and let me walk through the entire house and take pictures.  What I found was: front door lock set loose, like maybe not changed very well.  Rear door glass broken and covered with cardboard.  Char on back burner of stove extending up to cabinets from fire on stovetop.  Kitchen cabinets falling apart.  Water heater not working (yes they're staying there without hot water -- gas isn't turned on either). All flooring needs replaced (though there are hardwoods beneath the filthy carpet).  Furnace not working and appears to be about 40+ years old.  Rot around multiple windows.  Water from kitchen backing up into tub.  Lots of junk laying around the yard (couches, etc).  Minor wall damage.

Here's my spitball repair cost estimates:

Plumbing backs up in shower 300
Entry Doors (2 doors) 1000
Replace windows (9 windows) 3000
Replace water heater 700
Replace HVAC/Install Ducts 5000
Replace Cabinets 1500
Replace Countertops 500
Replace Stove 300
Encapsulate crawlspace 2000
Replace flooring 1400
Paint/Drywall repair 2000
Total 17700

I'm pretty confident in most of the costs here, but if anyone has any additional feedback on the cost of new HVAC duct installation and the crawlspace encapsulation I'd appreciate it.

Sidebar: I'm thinking it would be better to encapsulate the crawlspace and then run the HVAC duct work through that area rather than through the attic.  It seems like I'd have less heat/cooling loss through the crawlspace than the attic.  I'll have to check with HVAC guys unless someone here knows.

My theory was that there is already a whole lot wrong with this house and there are people already there who are ready to sign a lease.  I figured if they would pay me close to market rent ($800/month). Then I could fix the major items first, and gradually keep making improvements as long as they continued to keep paying rent.  This would save me at least 2 months rent while I get a new unlawful detainer process through the court and another month's rent during vacancy, and probably at least one more while on the market.

4 months vacancy or about $3200 lost revenue vs. keeping it occupied by tenants who may trash it further (if even possible).  I thought keeping it occupied would be my best choice and that I would start by fixing the most pressing issues like the lack of hot water and trash removal.  Each new $800 rent check would suitably encourage me to fix another major item, leaving the most decorative (like flooring and painting) for the end.

We agreed to meet on Monday (today) to sign the lease. Last night I texted the tenant to set up a time.  She stated that her fiancé was in the hospital and that she wouldn't be able to meet me to sign and pay before Friday.  Hmmmm.... going downhill already.  I told her that this was not a good start and that I either need a signed lease and a check on Friday or they will need to vacate.

Oh almost forgot... one said she had a criminal past -- just found a felony case for petit larceny - 3rd offence and the other said something about getting out of rehab.

Oh my.

@Eddy Dumire , sounds like they are squatters.  My guess is they don't have money to pay for dinner, much less pay you for rent and deposit.  I would not want them in the house during the time I was putting in thousands of dollars of mechanicals, appliances, flooring, and such.  Odds are, they would steal and sell what had easy value, and ruin things like floors and such.

Go to the courthouse and initiate the eviction process now.  The sooner you start the legal eviction process, the sooner they will be out, the sooner you can start rehabbing the house, and the sooner you can collect rent for it.

@Randy E.

I'm pretty sure you're right about them being squatters.  They both claimed to be working though.  I also agree with you totally about the risk of them running off with materials.  I think that I've already committed to offering them a lease though. 

At this point, my plan is to see if they come up with the first month's rent and security deposit.  If so, then I'll meter my spending very conservatively and start by repairing things that are either required for habitability or buried so deep in walls that it will take a whole lot of effort to remove.  As long as they keep paying and keep the unit in decent condition, I'll continue to pay to make improvements.

Of course, if I don't have a good check in my hand on Friday then I'll start the eviction process.

I've found that my county does unlawful detainers every 2nd Monday of each month at 8:30 AM.  I thought I'd go on the 10th and watch and see how it works. 

Does anyone know if a squatter needs a 30 day notice to quit or can I just start unlawful detainer proceedings immediately?

The other avenue I'm really curious about is if I can take over the bank's unlawful detainer case.  The bank won an unlawful detainer case against them 3 days before I closed on the house.  They were supposed to vacate per that judgement on 8/7 (Friday) anyway.

So to my surprise, the occupants initiated a call to me on Thursday to set up a time to sign the lease and give me the first month's rent.  We arranged a meeting time for Friday and they gave me cash and signed the lease.  We walked through the property together and noted the things that needed to be addressed.  Overall they seem like very nice people.

@Joshua Dorkin often mentions on the podcast how real estate investors often have a poor reputation and how we're actually providing a service to communities.  The occupants -- now "tenants" -- thanked us many times for giving them a chance.  They also asked if we would ever entertain the idea of selling the house to them.  They seem like very nice people and maybe I'm being naïve but it feels good to help people and give them a second chance.  I'm certain they meet the demographic that most investors -- myself included -- would flat out reject under normal circumstances.

At any rate, I think I'm still way ahead on this investment.  If they stay and continue to pay, then I've collected rent on a distressed property from basically day 1 of ownership.  If they leave in the middle of he night, I'm really not out much.

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.

We hate spam just as much as you