What’s That Smell? I’m Out.

     This is the third installment in the story of my hoarder house. In the first installment: What’s That Smell? Not Cat Piss ─ It’s Opportunity, I outlined my three possible exit strategies: wholesale to a rehabber, clean up and wholetail to an owner occupant, and full rehab and retail sale. In the second installment: What’s That Smell? The Plot Thickens, I outlined why I thought the second option (wholetail to an owner occupant) would not be viable and that I would try a wholesale for one week. The plan was to list with a wholesaler for one week (due to weather concerns). If the house didn’t sell quickly it would be rehabbed fully.

     This house had attracted a fair amount of attention locally because it was associated with a good story. I posted the previous blog entries here and on my facebook page (Damn the Recession). Most of those who inquired would not be buyers, at least, not at a price that would make the sale appealing to me. I am not a wholesaler. I do not maintain a list of active buyers and have never marketed a property by e-mail. There are several active wholesalers in my area who are quite successful at this. In fact, I originally purchased this property from one of them.

     I heard about this property when the wholesaler announced it at a local REIA meeting. This was hours after he had signed the contract with the seller—the property had not been listed anywhere. I recognized this as a strong purchase possibility and asked the wholesaler to keep it off his list until I could get inside. I had never done business directly with the wholesaler but we both knew of each other and trusted each other. He agreed not to send the property out to his list. (Real estate gets much easier when you develop a reputation for following through on your deals and can hold a property without a contract.) The obvious choice to blast this property out was the wholesaler I purchased it from. I knew I would have to leave enough room for another rehabber to profit for this sale to work. I came up with a number. The wholesaler thought it would attract attention. Since he had just received a commission on this property a few weeks earlier he offered me a very reasonable rate to send it to his list. He sent the e-mail and found a buyer the first day.

     Why would I be willing to leave money on the table for another rehabber? There are risks with every rehab and resale. Putting a check in one’s pocket eliminates those risks. For this particular house there were several risks that were difficult to quantify. First, the house is located in West Bloomfield which has a desirable school system but this house is in a section of West Bloomfield which feeds into the Farmington school district. Farmington is still desirable but most people moving to West Bloomfield would probably prefer West Bloomfield schools. How would this translate to the final sales price? I don’t know. It might lower the price $10K-$20K (compared to a similar house with West Bloomfield schools) or it might mean the house would sit on the market waiting for a buyer who didn’t care about the schools or one who preferred Farmington schools

      Second, this house had a large great room which was added in the 1980’s. It is a wonderful space and it could easily be made even more so but it makes this house a few hundred square feet larger than other houses in the neighborhood. How would an appraiser value that space? They would probably increase their appraisal somewhat for the extra living area but with no other direct comps and with appraisals frequently coming in low I could run into an appraiser who gave me credit for half of the usual price per square foot for this area, maybe even less. After rehab I would be looking for a sale price of ~$90/ sq. ft.—a low appraisal might cost $15K.

     Third, this house had a boiler heating system. There is no ductwork. There is no central air conditioning. That is not unusual for the neighborhood but we planned on bringing this house to market at a price of ~$325K. There are still many people in Michigan who do not have central a/c and do not need it (I am one of them—there was no central a/c in my home when I bought it. There is now but I rarely use it.) Most people who are spending this much for a house in my market demand central a/c. There are ways to compensate for the lack of central a/c with attic cooling systems (I planned on using one) which are not prohibitively expensive. I have never added duct work to a house and though it can be done I do not have experience estimating that expense.

     A quick sale would net me ~20% on my $140K purchase price within 45 days. I estimated I would spend ~$90K on a rehab of this property and that it would take ~3 months. This is a large house which had not been maintained well for quite a while. Though it appeared structurally sound there might have been some costly surprises waiting to be discovered. If the house sat on the market the holding costs and opportunity costs of not being able to redeploy my funds rapidly could have been significant. The quick sale eliminated all the other risks.

     I had not invested much into this property. Some electricity for running the ozone machines, the fee for a couple dumpsters (we filled two, there was enough material left behind to fill a dozen more), and a couple guys to load them. Including the sale commission I was out of pocket ~$5K. The way I structured the sale allowed me to incur no closing costs. That’s right, none. (I will expand upon this in my next blog post.)

     This story is still ongoing. The buyer has cleared the house of its contents and has listed it with wholesalers at a higher price. The rest of the story will not be mine to tell. I’m out.