Solving problems while maximizing values
This story has a few good lessons and observations that no doubt can be used by you to take advantage of hidden opportunities that often lie in plain view for all to see, however, most people have not been trained or instructed on how to recognize or find them.
The following true story begins with a classic log home package, engineered, manufactured, approved and delivered for use in Alaska. A friend of mine, in 1996, built the home, and I helped him pour the foundation. This leads to our first observation in analyzing this deal: If you know the full history of a property, your confidence and position on the deal can be enhanced.
You can begin to research history and succession of ownership through county records, tax rolls and by contacting previous owners as far back as you possibly can. Optimally you want to end your search by getting to the original owner and builder of the property.
Now, back to our story. My friend had built this house himself and I knew for a fact that he is an intelligent perfectionist. This gave me the confidence of knowing that this owner-built home was a solid structure through and through, not to mention that when the energy rating, otherwise known as a "blow test," was conducted the house was so tight (no air leaks) that he had to artificially ventilate it.
At this point, I had the following information: I know who built it, the quality of construction, it's energy rating and it's value based on what my friend had sold it for to the new owners. This brings us to our next phase of the investigation, the current owners.
Now we turn our attention to the current owners who are selling and the history behind them. Originally they paid $159,000, which by some strange coincidence was the asking price. I'm sure if the asking price was $160,000, it would have appraised for that but my friend made it appear cheaper by keeping below the higher $160,000 bracket. This is known as a pricing strategy.
Our research on the new owners revealed that they had been relocated from New Jersey and they had one child. The neighbor, who is a home inspector and general contractor, tells me a few more details about the family, their habits and the upgrades, and improvements and modifications that have been made to the home. Once again I'm getting good signals that the home is a good one but the owners are a little squirrelly as to their habits and design choices.
Here is where opportunity starts knocking, folks. When you have people who do things that are out of the mainstream of what most people do, you will notice that when it comes time to sell, many buyers are turned off by the non-conformity of the home's general appearance. Let me explain.
These people did the following things: first, they installed a spiral staircase and painted it a fuschia purplish-pink. Yuk! This alone was said to have turned off more than one potential buyer. Also, the original paint had pencil and marker lines scribbled here and there, the faucets and caulking needed some repair, the glass in one of the kitchen cabinets was missing, the walls needed new paint and the yard was overgrown. Along with a few other small details, this was all cosmetic but people couldn't look past it.
Let's get to the real "nails in this coffin" of lost resale value. The following information deals with choosing a good real estate agent who will properly handle your affairs, if in fact you cannot do them yourself, although you should actively participate. Here is where this agent's ineptitude will seal these relocated owners' fate. Let's set the stage: We are now at 2003; our sellers are being transferred and are moving after five years. This is right in keeping with the national average that says that people tend to move every five years. So in conjunction with the move, a relocation company becomes involved. Here comes the red tape!
Our sellers chose a local real estate agent who works half days and delivers newspapers the other half (not too professional). So this agent signs our owners up and proceeds to boggle most everything from the day our sellers are transferred out. The agent does nothing to prepare the home to show well and the topper on this one was the agent had left an inflatable monstrosity of what used to be a swimming pool/fun center half-deflated with stagnant water, breeding mosquitoes at the base of the entryway stairs. What a first impression and such an easy fix!
That's just the beginning because now our agent by some stroke of luck has found someone willing to pay $156,000 for this eyesore, but the agent doesn't research anything and can't come up with the proper documentation for the original well and septic approval. Therefore, the relocation company sends out its own engineer to backtrack and he blows the deal clear out of the water because he doesn't know local protocol and has no original paperwork either. As a result the potential buyers back out and the house sits empty for another six months. Meanwhile, our poor relocated owners back in New Jersey are still paying a mortgage on this while facing percolation tests for a special $10,000 septic tank that isn't needed.
What we have now is a classic stigmatized home and its value is plummeting, the costs are rising and the agent is plumb worn out with phone calls, septic tank manufacturers, engineers, state regulators, cancelled contracts and the sellers groaning constantly. You name it - this thing is looking pretty bleak.
Enter the white knight, i.e., the educated investor. What a relief - someone who knows what to do! Upon watching this carnival of events unfold for a while, I decided to step in. What finally drove me to act was a call to my office that presented an end game. What I mean by this is a military officer called to ask if I had a place that he could rent for two years. At that moment, I told him that I might and that I would get back to him.
As our friend Paul Harvey says, here is "the rest of the story!" The first thing to do was to inspect the property; repairs were mostly cosmetic. Next, I went and drilled the agent for information and at this point, the agent was giving me every scrap of insider information that could legally be disclosed. I now knew that this property could be had for $137,000. Additionally, I would get a 3.5% commission and the seller would pay the closing costs! I had a solid two-year tenant lined up and willing to pay $1,350.00 a month and he would pay his own utilities. An appraisal had been done six months earlier on the deal that had fallen through and it pegged the value at $160,000.00.
The only thing left to do was to get the original documentation from the owner- builder that would resolve the septic issue. I called him up (as he lived less than a mile from his old log home) and he said, "Sure Dan, I have all the paperwork right here?the current agent never asked me for it!" I looked it over and here is what he had: the original design and construction survey, the engineer's original approval of well and septic, the building department's approval and the department of environmental conservation's waiver granting permission to install according to the plans. This completely removed all obstacles to financing and the appraiser agreed. Problem solved in less than two hours!
Now the green light was flashing, so I had the lieutenant sign a two-year lease, give me a check for one and a half month's rent upfront plus last month and a half month as a security deposit for a total of $4,050.00. I then bought the house! I painted, cleaned, trimmed and tweaked the house in 8 days it is now a beautiful showplace on 1.77 acres worth $27,000 more than I paid for it in less than one month. In addition, there is a positive cash flow of over $300.00 a month above my mortgage and escrow payment obligation.
I would also like to add that the spiral staircase is now painted white and it stands as the most beautiful centerpiece to a home as anyone could ask for! All it needed was a vision, some labor and paint.
Let's hit the highpoints and drive home some of the lessons from this series of events.
1. Research and obtain as much history on the property as you can.
2. Pay attention to the quality of construction and types of materials used.
3. Use comparable sales, costs of construction, recent sales prices, assessments, existing appraisals and take into account the cost to cure existing defects to begin to determine a reasonable value.
4. Look for easily correctable problems that turn other people off and correct them.
5. Pay attention to landscaping and the ability to improve upon its appearance.
6. Analyze the series of events that led up to the sale and the seller's current position.
7. Have a plan or end game in mind for using the property once you acquire it.
8. Always try to ask less than full asking price and be prepared to walk away if you don't get the price and terms that you feel justify the purchase.
9. Stay abreast of market conditions and events and be patient; these deals will come your way when you are prepared to see them.
Dan Auito is a dual-licensed real estate agent and appraisal assistant. In addition to being a 20-year veteran of the United States Coast Guard, Dan has also founded a non-profit drug prevention corporation, a real estate consulting group and is the author of "Magic Bullets in Real Estate." This 300-page power-packed book comes with a website that further supports its readers. Please visit with the family at http://www.magicbullets.com we look forward to seeing you!