Our general approach and current real estate portfolio is targeted to longer term, buy and hold, cash flow investment opportunities. Nonetheless, sometimes a good deal comes our way through our connections that is a bit different yet worth pursuing.
In this case, we informed an auction company that we would be willing to purchase a specific home they had in their roster. We researched the market comps (in a market we were already very familiar with), determined a likely sale price (eventually selling for $1,000 more than our estimate, so our market valuation was very accurate), estimated repair costs, deducted initial purchasing closing costs + eventual sale closing costs, deducted holding costs (insurance, property taxes, HOA dues, utilities, investor loan interest, etc.), determined an acceptable profit for the project, and then back calculated all of that to a maximum price we were willing to pay.
This particular property went to auction an amazing FIVE different times. Each time we were outbid, but the buyers either didn’t have the funds, or got in over their heads, or had various excuses for not completing the transaction. Eventually, the bank and the auction house wanted this property off their books so they called us directly. We stuck to our top price, but reinforced our investment experience, access to capital, immediate nonrefundable security deposit, and track record of performing through to completion of a sale. We would and would perform, and that resonated with them. The auction house representative “didn’t think the bank would accept our lower offer”, but the fact that they contacted me personally was a good sign. Sure enough, the bank accepted and we were on.
We had two exit strategies for the property: 1) Rehab and keep as a rental or 2) Fix and flip. After further analyzing both options, we moved this one from our usual buy and hold strategy to the fix and flip strategy since the ROI was better plus it was just a SFR (single family residential), which is smaller than what we generally prefer to hold.
Two investors asked us to be involved and provide the funds to cover the purchase plus most of the rehab, and we were able to provide them a rate of return that they were quite happy with while secured in first and second positions (the two investors knew each other, so one took first position loan and the other took second position loan on title).
During our initial due diligence walk-through inspections we knew that this property was essentially a cosmetic fixer, which is generally the easiest to rehab and least risky to encounter surprises (that may otherwise occur when tearing out walls, repairing water damage, upgrading old major systems, etc.). The only unknown was the septic system, for which we left a cost buffer (and ended up needing it).
We have a great local general contractor in the area of the property. He was a critical team member in the success of the project. He performed some of the work himself and subcontracted selected projects. He was our local project manager, coordinator, and communicator. Having people like this on our extended team enable us to concurrently scale up our business with other properties and investors.