Well it’s done! The home is finally fixed my family is all moved in!
So for today’s post, I am going to share my experiences buying and fixing up a repossessed property. But first, if you are new to this blog, you can start here from the beginning of this Real Estate investing journey.
There were definitely a few hurdles I encountered and you can learn from my mistakes. The home I will be talking about in this post today will be the 6th repossessed home that I have purchased and rehabbed in my lifetime. However, this new home is unique in a few ways,
- This is the first property I have paid for with cash no mortgage.
- This is the first property I have purchased being married.
- Unlike the homes in the past, I don’t plan on flipping this home. I plan on keeping this property.
- That means, I need to prepare this home for the long-run.
These new variables listed do change the way I invest in Real Estate in a good way.
Goal for this home
My original idea for this home was to convert the home into a rental property. That is a good idea because if I were to do that at this point in time, I would render a sweet return on investment (math shown later). But where would I live? At 32, my wife and I are ready to stop renting and settle down for a bit. So we will plant in this home for a few years so long as the economic circumstances continue to stay strong here in the Heartland.
The home is a 3 bedroom and right now the size is just right. But I may add an additional bedroom on this home if the good Lord blesses my family with a child. So I will keep that option open for now.
That being said, since I plan on staying in this home for a while, the goal is to fix-up/invest in making this house an efficient modernized suburban castle. Below are some lessons learned during my fix-up process.
Save thousands and buy a repossessed home
What is a “repossessed” home you say? Well, I am glad you asked. A repossessed home is a property that has been repossessed from the homeowner. Normally, this is because the previous owner could no longer afford to make the monthly payments due to whatever circumstances. Aside from the financial incentives, buying a repossessed home is good for the local community. This is because vacant homes bring down their neighborhoods value due to many concerns and the unsightly aesthetic of an empty home with an improperly manicured lawn.
On the financial side, because repossessed homes normally look ugly, you get a nice discount. Obviously, the amount of the discount you get depends on many factors. In my case, I was able to get my home about 35% lower than the market value. I then fixed this home up via a little Sweat Equity. This fancy term just means I get an increased value in a property earned from labor.
Where do you find repossessed homes?
Through many months of searching on mibor.com was how we located our home. You can also contact a local Realtor, they normally have a nice little database of properties. Also, you could browse local neighborhoods you like. Normally repossessed homes have a messy yard and a pretty bright orange sticker on the front door informing you that the property has been winterized.
As mentioned here with any home you buy, get an inspection. If the home is older than 15 years plan on replacing the items below,
- AC Unit
- Dishwasher (if there is one)
- Refrigerator (if there is one)
- toilets: Not necessarily replacing the toilets, but valve replacements and make sure there are no leaks under the toilet. In my opinion, it’s worth lifting the toilet and adding a new seal just to inspect the ground below and verify there is no mold.
- If you have a crawlspace, inspect for water residue and ask how old the sub-pump is. Moreover, inspect the corners of the crawlspace and ensure that water does not reside there when it rains. During heavy storms, water will probably leak into the crawlspace, but the sump-pump should be competent in pumping it out. Standing water will lead to moisture and then mold.
I would factor these costs into purchasing a home. For instance, if your home purchase maxes out your savings, you should not buy it. Count on these items costing you money in the short term. Don’t exhaust all your resources and make sure that you have an emergency fund.
You can use the items in the bullet points just mentioned as a way to negotiate a lower purchasing price. Make sure you have a professional opinion when you are negotiating a lower price. This is because the seller of the home always wants to get the maximum profit and you (the buyer) want the maximum savings.
Inspect and haggle a lower price
As mentioned earlier in this series, if I would have done a proper home inspection, I would have likely found mold in the crawlspace. This mistake cost me roughly $6,000 to repair. Hindsight is always 20/20 but had I known there was mold, I would have offered way less for the home.
To a certain extent, every home has some level of mold in the air quality. But you can buy an air quality kit and test the level of mold in any home you are interested in purchasing. Aside from the peace of mind you get from knowing your house is safe, you can also use the lab documentation from your Air quality test to haggle a lower price.
Save thousands and do your own demolition
I am not a carpenter in any way. However, ripping up old hardwood floor doesn’t take much specialized skill. The same is true for ripping out old carpet and removing all the trash left over from the workers. In all honesty, I contracted most of the work in my home simply because I have a full-time job and was able to pay a painter and carpenter. I played project manager and Mr. demolition.
If I would have done all the installation work on my own I would have saved a lot in labor. But since I removed all the trash and prepped the areas for the specialists I also saved lots of money.
After removal of the floor
A little paint before installing the new floor.
After pic. Totally worth the effort!
Here is a pic of the reverse angle
One area you can really save some money is if you prep for the painters. This entails,
- Removing all the doors, light fixtures, electrical outlets.
- Taping-off all the trim areas and cabinets.
These simple acts save the painters hours of labor (in my case that was 8 hours total). Most painters charge $25 per hour, so that was a grand total of $200.
I didn’t calculate how many hours it took me to do my own demolition. But the general contractor told me he charges $800 per day to have his men come out. We both estimated that by doing my own demolition, I saved myself two days worth of work which equaled to a savings of $1600.
As you may see in the pictures, I got my teenage niece and nephew involved in the work. They were able to learn how to use power tools and valuable lessons on how money works in the real world. Oddly enough, my little nephew was very curious in learning about mortgages and debt. Once I explained how a traditional mortgage destroys wealth and elaborated on the power of compound interest, he seemed enlightened. I really don’t know how much he understood. At the very least, I planted a debt-free seed in his brain.
Foyer to the great room
Beginning, middle, and end
I am going to round the math here to keep it real simple. Also, I am not going to count my labor as a cost. (I am not too sure how I should calculate that.) The purchase price of this home was $109,000 I spent roughly $18,661 fixing this home (materials and labor). As of now, I am seeing similar properties in my neighborhood sell for $140,000 to $150,000 That means if I were to sell today, I could potentially gain a sweet $12,339 in the most pessimistic situation and $22,339 in the most optimistic situation. Keep in mind, I worked on this home over the weekend and it really only took me 4 months to get this place up and running. Not a bad way to make passive income since I contracted the specialized work out to professionals.
Should I dabble in property management?
Here is why I want to convert this home into a rental property. So far, I have $127,661 in this home. Similar properties in my neighborhood rent for $1200 per month. That is an annual gross of $14,400 per year revenue. Which is nearly 12% return on investment and I am not even talking about all the tax incentives of being a landlord (keep an eye out for a future post on this topic). However, I do understand that being a landlord is not as romantic as it sounds. I will have to keep up with home repairs and general property management duties. I do not know what my net profit would be and I need to find a mentor for this endeavor. I think I am about two years away from being able to turn this into a rental property so I have some learning to do.
As you could see, the list below is all-inclusive. I even added the cost of the meals I paid for while my nephew was working. The items in the purple are technically repairs we could have gone without and the items in red are expenses I was not expecting. As embarrassing as it is to list my mistakes, perhaps you could learn from my blunder. I know I will never forget.
|Mold Restoration Services||$2,440.90||Unexpected|
|Mold Restoration Services||$2,443.45||Unexpected|
|Bathtub and Walls||$386.06||Expected|
|New Kitchen sink||$74.00||Bonus|
|Work for toilet installation||$144.53||Expected|
|New AC Unit||$1,250.00||Unexpected|
|Contractor for AC Work||$805.00||Unexpected|
|Chick-Fil-a (lunch while working on the house)||$13.81||Expected|
|Chick-Fil-a (lunch while working on the house)||$11.99||Expected|
|counter top pain, rust remover, rust protection for cabinet parts (menards)||$32.59||Expected|
|dairy queen (for Matt and Eve)||$21.00||Expected|
|Dollar store (brushes )||$2.14||Expected|
|dollar store (painters tape, spackle)||$4.28||Expected|
|Dollar tree (paper for cabinets & vases for serving spoons)||$10.70||Expected|
|Dollar tree (paper for cabinets)||$10.70||Expected|
|New Duct Work||$600.00||Unexpected|
|Eve and Matt labor||$50.00||Expected|
|Home depot (masks, gloves, stuff like that)||$13.51||Expected|
|Wall paint and repair, schellac floor, labor||$1,725.00||Expected|
|Little Matt pay||$20.00||Expected|
|Little Matt pay||$30.00||Expected|
|Lowes (gutter extensions)||$51.27||Expected|
|Menards (power drill, blinds, silicone caulk, other stuff, paint rags, sand paper)||$75.46||Expected|
|Menards (sander, sand paper, other stuff)||$17.23||Expected|
|Menards (screws for table, screws for cabinets, felt for furniture, etc)||$21.82||Expected|
|Menards (truck to move the tub)||$29.62||Expected|
|New toilet top||$8.56||Expected|
|paint brushes (dollar tree)||$2.14||Expected|
|paint brushes (rural king)||$2.95||Expected|
|paint roller, plastic to cover cabinets, brushes||$14.10||Expected|
|paiting supplies for cabinets||$16.31||Expected|
|quarter round (lowes)||$34.67||Expected|
|Quarter Round (Mendards)||$87.73||Expected|
|quarter round, menards||$11.18||Expected|
|Rural King (brushes and things to clean the paint)||$6.45||Expected|
|sand paper + gum||$8.88||Expected|
|shower head, quarter round, window caulk and gun||$56.00||Expected|
|stuff for painting cabinets (lowes)||$12.71||Expected|
|Thai spice (celebration meal)||$68.19||Expected|
|vinyl floor installation||$2,740.00||Expected|
|Walmart (hammers, snacks)||$16.53||Expected|
Here is a little walk-through video I made
Questions for you:
- What items did I leave out or what items need clarification?
- Would it be helpful for me to share what tools I used for Project Management?
- Do you have any experiences with property management?
- I need to start studying up on this next chapter of my life.
If you’d like to start from the beginning of this series, click here!