Ok, so a guy calls me up from my bandit sign and says he is selling his house which is not listed yet. After getting the basic information, he told me that the lot was big. Interesting... I immediately went to the geo-website and saw a sky view of the property and boy was it big. Its over .3 acres and the existing house is placed well.
I went to the city and they confirm that is not in the flood plane and the lot could be split. Good..
I went to see the house and he remodeled it from the bottom up. Its basically a turn key investment. Nice.. He wanted 162k which is full market value. I convinced him that if he sold with an agent and closing costs he would net no more than 93% of 162k, so 150 k. He needed 25k profit which would have brought him to about 155k.
I was negotiating for 150k, but he was confident that if he took it ot the market, he could get what he wanted. And he was probably right. At this point, if I got 150-152k, I could rent out the existing unit with a interest only ARM and get over $100 cashflow. The key to this investment would be to split the lot and build another house and make the real profit on the back side. So, I could buy it for almost market value and still make money.
This is risky for me, because of several factors.
- Its difficult to estimate the appraisal of the house with the lot split.
- I have to estimate the cost of the new build. This was estimated using my buddies construction company that they use. Will they give me the same price for the same floor plan?
- Financing would be difficult when splitting the lot and I would have to add in re-fi closing costs.
- Holding costs are estimated.
- I haven't seen any owners splitting lots in this neighborhood.
- Its not in my farm area.
Ok, at this point, its almost impossible for me to line everything up so I needed a backup plan if the splitting of the lots would not work. The plan would be to rent out the house or better yet sell it on a lease option. IF appreciation stays the same, I would do ok in a year or two. If not, I would break even confidently if I needed to get out. The deal is really predicated on getting the twist (new build) completed. This is essentially buying the property under value because I see the opportunity.
The night before I went on vacation, I offered to put the house under contract for 152k. He told me that its probably better to wait til I get back because he didn't get his official job offer to move out of state yet. Damn!
I called him back yesterday. Guess what? His neighbor bought it for 162k! Turns out he had plans for the land. While I was gone, the seller must of been working it over with his neighbor. I could just imagine the seller saying to the neighbor, " Man, this investor was trying to get me under contract just a few days ago! If you want this property, you better act now, or its going to be gone!!"
The morale of the story is, don't do deals before you go on vacation!