Foreclosures…A True Story

October 28th, 2007 categories: Buying, Real Estate News

So you want to get a deal…what about a foreclosure? Well the truth is, there really aren’t as many as you probably think there are, but if you can find the right one, you can walk into some instant equity. A client and good friend of mine, who I’ll refer to as Joe (Voluntario, LLC.), recently acquired a great piece of real estate up in Santa Barbara.

Joe contacted his agent (I only get to help him with purchases in San Diego), Mark Moseley, and told him that he was looking for a great deal. What Realtor hasn’t heard this a million times? Joe is a contractor by trade and an investor on the side – but I consider him to be an investor that happens to build homes. Anyhow, Joe asked Mark to find him a property that was zoned as an R-2 (each city has their own definitions, but essentially this means that you can have 2 homes, or units, on one single lot) or better, so that he could add on a unit, or two and resell them. His agent came back to him with a single family, detached, 3 bedroom home, that was on a lot zoned as an R-3 residence.

The best part, was that this home had been on the market for several months and had been in and out of escrow a few times (both times the buyer had to back out because they couldn’t qualify for the loan – surprise, surprise). Oh yeah, the home was also a foreclosure – aka Bank Owned. Unfortunately for someone else, the home had been purchased two years ago, for about $880K. The bank took the house back earlier this year and put it up for sale for $799K – a 10% price reduction. To make a long story short, the bank dropped the price multiple times until they hit $699K and finally got some action – an offer at $650K and another at $619K. Both buyers failed to get financing.

Joe saw this as a great opportunity to put in a low ball offer and offered $526K cash. The bank countered him at $599K and Joe countered back at $541K – still all cash and included a letter listing all the reason why they should accept his offer (this can be great tool to use – this sets your offer apart from the others and it gives the seller a sense of who you are, making you more than just a dollar amount on a piece of paper – although Joe’s letter took a slightly different approach). What happened next is best described by Joe’s email to me…

“They responded 589. I walked. They got an offer of 570 and accepted; it fell out and a week later they asked if would still take it at 541. Of course.”

Joe will be closing on this deal in a few weeks.

After drafting three different conceptual plans, the city finally accepted one of Joe’s proposals and it turns out he’s going to have to tear down the existing home completely. After researching the area and looking at the future housing demand, Joe has decided to build Blueprints a triplex, consisting of one 2br/2.5ba and two large 1br/1.5ba units. His goal is to put between $400–500K into it and net about $400K. The homes will have a cottage-like feel, complimenting the existing neighborhood. The homes will also be equipped with appliances, have hardwood floors and even feature upstairs decks.

The added benefit is that since Joe is a contractor, his building costs are much less than it would cost someone like you, or me (it would probably cost $800K–1 million for a client). On top of this, Joe has arranged for tenants to move into the existing home until they get all the permits and are ready to tear it down. Talk about covering all your bases.

To me, this is a well thought out project and an even better investment. Joe…

acquired a property with great potential for less than market value
will take advantage of his skills and connections to save money
did his research and knew what the best use of this lot would be
used conservative figures to pad his expenses

Estimated Project Time: 9 months

Estimated Total Costs: $900K

Target Sales Price:$1.4 million.

Predicted Net Profit: $400–500K

Well done and good luck. Granted this isn’t a done deal, I’m pretty sure Joe will do just fine on this venture. So what should you, the investor, take away from this? For one, you need to have a good Realtor who understands your needs and will be just as dedicated to you, as you are to him (or her). You also need to have a solid plan and know what you can afford to do – both in terms of time and money…be conservative – especially if this is your first project.

With that said, if you’re looking for a great deal, or would like a free list of foreclosures, or short sales, in your area, just let me know.

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Foreclosures…A True Story

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