Late yesterday afternoon I received a call from an eviction attorney we work with. They’d received “four messages in the last 24 hours” from a lawyer representing a client that occupies a home we purchased in last month’s Detroit tax auction. I left a note at the house just after we won the auction. I simply stated I was the new owner and would be happy to try and work something out for them to stay if they wished. My name and phone number were included.
I didn’t hear anything for two weeks, so we filed a 30-day termination of tenancy giving the occupants 30-days to move out before court action. That 30-day period expires on December 2nd.
I didn’t hear anything… until yesterday.
The lawyer had a sob story about how the occupants have lived there for 39 years, went through divorce, got scammed by someone claiming to help her purchase the home at auction, etc. While I sympathize, I ultimately don’t care anymore. Everyone has a story.
Still, I was willing to work with them. The lawyer asked if we’d be willing to sell the house back to her. That’s a hard no, because we purchased the house with the intent of keeping it for at least 10 years (likely longer). I told her we’d consider signing a lease and allowing the occupant to rent, but I quickly realized that was likely not going to happen when she asked if we’d consider “$400 or $450” for rent.
I literally laughed out loud.
I told her we’d consider it at $800. But the reality is this person hadn’t paid her property taxes for years. I don’t know how long Detroit let’s people go without paying, but I know it’s 3+ years. How would she afford to rent the house if she wasn’t paying her ~$1,000/year in property tax?
The lawyer said she’d “call me right back” because the occupant was blowing up her phone. It was hours later before I heard from her again, and she simply said she felt that this was outside her expertise and she was terminating her representation of the occupant.
Yes, it’s Thanksgiving. Yes, it sucks to be getting kicked out of your house this time of year, especially after living there for 39 years. And I almost feel bad. But I remind myself that I didn’t put the current occupant in this position, and I made every effort to try and work with her.
It hasn’t been 6-7 weeks (when I first wrote my note) that they were aware they were losing their house. They’ve known this day was coming for at least a year, but really more.
It seems every day is an adventure in the real estate business, and I love that about it.
Back in June I wrote about how Stripe is out competing PayPal in just about every way imaginable. But the post primarily focused on their new “Advance” product which is now re-branded as “Capital”. It’s a fantastically competitive offering for businesses looking to borrow money.
Turns out, LightStream is similarly competitive in the world of personal loans.
After my most recent rental property buying spree, I found myself a bit low on cash. We had enough in the bank to do some cosmetic improvements on maybe one house, but that’d leave five properties that I wouldn’t be able to rehab any time soon unless I did one of two things:
My first thought was to get a private loan from what is referred to as a “hard money” lender. This is essentially just a person that has extra capital to loan to flippers. These loans are short-term in nature, usually only 6-12 months because the idea is that you use the money to rehab the property and then either sell it or refinance out of it, paying back the loan when the transaction completes.
The problem is these loans are very expensive, usually 12% – 15% interest or higher. I spoke with a fellow investor that also loans, and he actually suggested I do not take hard money for several reasons. He cited the high cost and the added pressure of getting a rehab done quickly when I was also attempting to juggle so many others.
Going the delayed financing route
So I considered my second option. The five houses that need significant rehab were all purchased in the last five weeks. To get a conventional loan that allows me to pull out maximum value I’d need to wait a six-month seasoning period. But if I wanted to put a loan on any of the properties now, I could. I’d simply be restricted to a loan that is equal to the purchase price plus closing costs (assuming it appraised for enough to do that). This is referred to as delayed financing.
It’s easier to see as an example.
Let’s say I purchased a home for $37,000. I know if I put $45,000 into rehabbing it it’d be worth $115,000. So I decide to do just that, and I complete my rehab in two-months.
Great! Now let’s get a mortgage on it and get that cash out.
The house appraises as expected and I’d get a loan for $86,250… $4,250 more than I put into the house. Fantastic!
The only problem here is that I’d need to wait four more months to do this. It’s simply the regulations tied to conventional loans. And remember, if I’m using hard money to get this done I’m paying an extremely high interest rate while I wait, eating into my profits.
But let’s say I decide I don’t want to wait six months. I could take the loan right after rehabbing it and pull out my initial purchase price of $37,000. This is called delayed financing, and it’s not ideal in a situation where you put a bunch of money into rehab.
That said, it could be advantageous in my current situation. Let’s say I do absolutely nothing to this house and it appraises for $50,000. This isn’t out of the question considering I purchased it off-market and surrounding homes have sold for $110k – $125k. A bank would loan 75% of that value, or $37,500, but I’d only be able to pull out $37,000 because that was my initial purchase price.
The problem here is I’d still be left having to rehab the house, sinking another $45,000 into it that I wouldn’t be able to get out for six-months (assuming it’s worth the cost to refi it again). But it would give me some working capital to get to the rehab on the other four properties.
Exploring a personal loan
But there was potentially one more option: a personal loan through a more traditional lender. A friend had just told me about requesting a $25,000 loan from LightStream to put toward renovation expenses on a fourplex he recently purchased. They actually approved him for $50,000 at a 6.89% interest rate on a 144 month term. That’s fantastic.
So I figured I’d give it a shot. The application was insanely quick, taking me just a few minutes. The next day they sent a request for some documents via email. I uploaded them in another few minutes and waited. I had an answer that same day… the exact same terms my friend was granted.
It’s hard to say no to terms like that. When the next best alternative is a sacrificial delayed financing on one of the properties or an expensive hard money loan, it becomes extremely attractive.
It will be interesting to see if more real estate investors start leaning on LightStream (or similar products) for short term funding. The terms are hard to match. LightStream is apparently a division of SunTrust Bank, but something tells me the product was likely acquired rather than built internally. But I haven’t dug into that.
Regardless, props to a bank (I hate banks) for making a move into this space and creating such a seamless experience. I never even had to speak with a human, and that’s always a plus in my book 🙂
It’s been a busy week. Kaitlin and I closed on three new houses. All of them need rehab work. One needs an insane amount, but it will be a fun project (I hope).
The crazier thing is that none of these houses were on our radar until last Wednesday, the 13th. I was driving back home after securing a house we’d taken back from an eviction (more on that in an upcoming post) when my phone rang. It was Dave, a realtor I worked with to buy one of our first Detroit rentals. We’ve taken some stabs at others since then, but haven’t been able to get an offer to land.
Dave had emailed me that morning about a house on Courville St. in Detroit’s 48224 zip code. He knows I’m looking for more over there, and I’d recently told him I’m hunting for a full rehab. This one fit the bill. It’s a 3 bed, 1 bath brick home, and a gorgeous old home on a very strong block. I know the area well and essentially committed to buying it as long as we could get it under $38k.
But that’s not what Dave was calling me about. An agent in his office was supposed to be closing on a home off Chandler Park Drive on Farmbrook St., also in the 48224 zip. The buyer did their final walk through the morning they were supposed to close and walked, leaving the owner occupied seller high and dry with their packed U-haul in the driveway.
The house had been listed at $20k and the buyer had talked them down to $14k. Dave said it was a good deal, and I believed him. I was ready to buy it on the spot but he wanted me to walk it first.
The next day, Thursday of last week, I drove down and walked Farmbrook. It’s another 3 bed, 1 bath, all brick house. It’s rough, but I like the location a lot. Comps fall in the $55k – $60k range and it needs probably $25k – $30k of work. Not incredible, but a solid buy-and-hold.
After that, I shot over to Courville with a friend and we managed to get into the house. I loved what I saw and texted Dave that I’d move on both.
A crazy quick close
The title work was already done on Farmbrook, seeing as they were supposed to close last Wednesday. So we closed that this Monday for $14k. The woman at the title company was actually working on Sunday, calling me, and getting it wrapped up for Monday. Impressive. It was by far the quickest I’ve seen a house and closed on it (just two business days).
There also happened to be a two-unit house up for auction on the Detroit Land Bank Monday night. The house is in the 48238 zip code, specifically in Russell Woods. It sits across the street and five houses down from one we already own. I knew it was coming up, but hadn’t decided if I’d stab at it. I figured after having bought Farmbrook and closing on Courville, I’d better pass.
But I didn’t.
We won the auction for $8,000. The jury is out on whether that’s going to be a smart buy or not. I’m hoping we can complete the rehab for <$70,000 but I’m not holding my breathe. I haven’t been inside the house yet, but the detailed photos clearly depict a house in far worse shape than I’ve ever tackled. That said, we’re hoping to spread it out over time. I wouldn’t be surprised if the rehab takes us 18 – 24 months.
Today we closed on Courville for $37k, making that the third house this week. We estimate it needs $40k – $50k in rehab. The one next door sold for $105k over the summer, and comps go as high as $125k. So that should be a nice win.
Lots of work ahead
I’d love to say I’m looking forward to a break, but that was the easy part! It’s been an even busier month and a half. We picked up two houses in mid October via the Detroit tax auction. So we’re now sitting on 9 total properties, two of which are duplexes, comprising 11 total doors.
Of those 11 doors, only 3 of them have tenants right now. And seeing as most of these have 5-6 months seasoning left before we can refinance, we’re going to have to pick and choose our battles. That said, two doors are already financed out and just need some relatively light work to get rented.
The second phase of the Wayne County tax auction concluded yesterday. I wasn’t aware the auction was taking place until a friend mentioned it to me at a meetup early this month.
Registration opened on the 10th and the list of homes up for auction was available slightly before. It was a grueling process as there were some ~1,500 homes to sift through. I went through every single one and came up with a short list of 50 houses I was interested in.
I managed to narrow that list down to 35 homes, mostly based on second looks and weighing them all against different areas I know and like. I then used my weekends to drive every single one of those 35 homes, walking the outside of them, videotaping my thoughts and findings, and even getting into several of them either through an open door or broken window.
Here’s a shortened clip of me walking a property I bid on but ultimately didn’t end up getting.
No, most of the properties I was going for did NOT look like this. But this was a special circumstance, and I really wanted to tackle this project. Unfortunately, it went for more than I was willing to pay ($30,000).
Also note: I do not recommend entering abandoned/vacant properties alone like this. This was my first (I ended up getting in about 10 of them) and I was pretty nervous about the whole thing.
After walking the list of 35 I narrowed it to just 10 homes I wanted to bid on. Of those 10 I ranked them from “must buy”, “really want”, “would like”, and “OK losing”.
Ultimately I purchased one of my “must buys” and one of the “really wants”. I purchased one other house for a guy that grew up in it. His family lost it to taxes and he agreed to buy it from me on a land contract if I was able to win it in the auction. It’s a bit of a story, but I’ll write about that later.
Overall, this was a positive experience. I learned a lot about the tax auction process, found some new areas in Detroit that I like, and became increasingly familiar with the ones I already knew. It was fun, and I’m hoping the homes we purchased appraise high enough where we can pull all of our cash out. That’s the ultimate goal.
The title company left my house a couple hours ago. I officially have two mortgages under my name (including our primary). In early June we closed on our first rental property, a small 3 bedroom, 1.5 bath bungalow on the East side of Detroit.
It’s funny reading that post now. Our tenant never signed up for online ACH payments, and she’s been late with rent for both months she’s owed since closing. Her husband isn’t on the lease, but he’s living there… sometimes, at least. I received a text from him last week stating he “no longer lives at the house” and “won’t be responsible for anything going forward”.
Fun. He was the responsive one of the two.
The next day he said he’d “still be responsible for the bills”. Who knows what next week will bring. I digress.
Our rough plan for these homes has been to pay cash for properties that need little to no rehab, get them for under market rates, and then refinance most or all of the money back out. This was the first full cycle of that plan, and it went pretty decent.
By the numbers
I like numbers. They don’t lie, and it’s easy to tell if you’re making the right moves. A lot of my friends and newer investors I meet tend to appreciate the numbers too, largely because they don’t have any of their own yet and want to get a baseline. Consider this my contribution to newer folks looking at investing in Detroit.
The home appraised for $45,000. We’re able to take out 75% of that value immediately, up to our total purchase price plus closing costs. Here are the quick numbers on the mortgage:
Loan amount: $33,750
Closing costs: $1,597
Taxes/Insurance/Prepaid Interest: $1,762
Total cash received at closing: $30,391
So when all is said and done we’re left with about $11,000 cash invested in the house. It’s not terrible, but it’s not a huge win either. That’s not including the $1,700 we’ve received in rent over the last two months. So at this point we have about $9,300 invested.
Here’s a quick glance at our monthly costs going forward:
Mortgage: $180.15
Taxes & Insurance: $151.45
If we assume no capex, repairs, or vacancy (poor assumptions, yes), we’d get our entire cash investment out in just shy of 20 months ($9,300/[rent – monthly costs] or ($9,300/$468.40). This assumes $800/mo in rent. In reality, we’ve been receiving $850/mo because our tenants have been late and pay a $50 fee for the privilege.
Obviously, we’re going to have expenses come up that fall outside of those fixed monthly costs. I’m tracking everything in a spreadsheet to keep an eye on it. It helps me keep track of expenses, but I also enjoy the visualization of the home’s performance:
How we found the deal
Most newer investors are led to believe that deals can’t be found on the MLS. That’s exactly where I found this one. I spent a lot of time driving Detroit, researching online, and setting up alerts for areas I wanted to buy. When this home hit the MLS for $45,000 it went pending within six days. I was disappointed I didn’t move fast enough, but not for long.
The very next day it was “back on market”. I immediately locked it up and walked through it a few days later. The tenant informed me that the basement drain backed up every time she did laundry. This was likely the cause of the home falling out of contract.
Since I couldn’t smell sewage, likely ruling out a big sewer issue (perhaps this was naive), I decided to move forward and hoped I’d only need to have the drain snaked. Regardless, we negotiated an extra $1,000 off the purchase price (we were initially under contract for $41,000).
Turns out the drain wasn’t a simple snake fix. The pipe in the basement floor was crushed, and we had to replace it. This was the bulk of our above listed rehab costs. Luckily the exterior pipe to the main sewer line didn’t need replacing. That would have been more expensive.
We also fixed a leak in the bathroom sink and replaced the vanity since the leak hadn’t been addressed for months and the vanity was essentially ruined. There was also a leak in the kitchen sink that was an easy fix. Besides sending 7-day “Pay or Quit” notices, the house has been hands-off ever since.
What I’d do differently
The transaction went relatively smooth, especially for our first purchase. But my biggest mistake, in hindsight, was giving the appraiser what I believe to be a reasonable value for the home.
When I received a phone call to set up the appraisal they asked me, “what do you think the house will appraise for?” I was caught off guard and told them I thought it was worth $45,000. That’s exactly what it ended up appraising at.
Next time I’ll shoot higher. While there’s no Zillow estimate for the house, Redfin lists the value at an estimated $53,500. It’s been creeping higher since we closed on it.
A $50,000 appraisal would have allowed us to cash out $37,500 rather than $33,750. After closing costs that’d have put an extra $3,750 in our pockets and leaving us with about $5,250 total cash invested to date. Using the same calculation from earlier, that would bring our cash invested payback period from 20 months to almost 11 months. So while the numbers are small, the impact is material.
If the home managed to appraise for $55,000 we’d have no cash left in the house to date. That’s the goal!
Moving forward
We already have three other homes we’ve purchased, including our first duplex. We’ll be getting the loan process started on these shortly, so I’ll have plenty more to write about soon.
The fam and I were scheduled to head up north to Harbor Spring a week ago Wednesday and hang out with my Dad and step mom. The universe had other plans.
Not long after I woke up, my handyman was video calling me, walking me through one of our Detroit rental properties because it appeared to have been broken into.
It was. And the water heater and furnace were gone.
The incident was extremely disheartening, and so far it’s been my biggest setback in our rental property journey. We ended up boarding the house up, leaving on Thursday instead, and I mostly forgot about the incident while gone.
We had a lot of fun. Tucker enjoyed boating, riding grandpa’s tractor, cutting the grass with grandma on the zero-radius riding mower, hanging at the beach, hitting the farmer’s market, and plenty else.
Here’s a photo I took of a small, tucked away beach we hiked to.
Ryder had no fear of the water.
Tucker loved playing first mate and driving the boat.
Now that we’ve been home a couple days I’m nearly caught up on work stuff, but still figuring out how to proceed with our rental property. A lot needs to done yet to get a tenant in place.
The good news is I’ve had time to digest everything so I’m not nearly as stressed as I was. But we’re closing on another property tomorrow, and it feels like there’s a never ending list of things to do.
The more I get into the rental property business, the more I think about real estate. That’s great, because I love it. There’s a massive rental demand in Detroit, and with houses so cheap I don’t quite understand it. Surely, if you can pay $900 per month in rent you should be able to afford a house for $40,000-$50,000, right?
But I’ve dismissed this, figuring maybe people don’t have the credit score to qualify for a mortgage, lack the discipline to save for a down-payment (although FHA loans allow for just 3% down), or can’t hold a steady job long enough to show an ability to make monthly payments.
These are all potentially very viable reasons. But what if fewer people simply aren’t wanting to be home owners. According to FRED, that seems to be the case:
The US home-ownership trend has clearly been heading lower since the peak in 2004, but you could argue that the ownership rate was artificially high due to low lending standards, and it’s simply been equalized in recent years after a big price adjustment.
Perhaps that’s the case.
But when I read articles about Amherst Holdings’ Main Street Renewal, it gets me thinking. If you’re at all interested or involved in the rental market, you should give the full article a read.
But the TL;DR is that they operate a single family home rental investment firm that currently owns 16,000 houses. They’ve leveraged technology to filter listings, bid on them automatically, and then lean on their scale to rehab and outfit the homes cheaper than an individual buyer could.
This isn’t too far from what Zillow and other companies are doing. They buy homes, do light rehab work, and resell them. It’s not a far stretch for these companies to start getting into the rental business themselves.
The real question on my mind is whether the desire to own a home has changed. The jury is still out on that as we look to millennials. Some believe they’ve (technically “we”, I guess) simply delayed home ownership much like they’ve delayed marriage. Or perhaps they simply can’t afford it. I’m not sure I buy either argument.
And at what point does it become clear that the next generation of would-be homeowners aren’t simply delaying it but truly don’t desire it? I’d imagine it’s sometime in the next 5-10 years.
And if the desire to own a home truly is disappearing, it’s an unfortunate one. Homes may not necessarily be investments (although they certainly can be), but they do come with many advantages including tax benefits and a guard against inflation. If you’re renting you’re always on the wrong side of inflation as your rent will increase over time.
If the next generation is having a hard time saving for retirement, they’re really going to have a difficult time if they also opt not to own their home.
This past Saturday morning I did our final walk through for a home we’re purchasing in Detroit. This is actually the first house I ever walked through, the first one we put an offer through, but it will be the second to close. The sellers are from France, so we’ve had a heck of a time getting all the paperwork done to wrap it up. Apparently the Embassy is involved on the other end.
But I digress.
Since it’s been so long we wanted to walk through the house again to make sure nothing has changed. As my agent and I did checked out the home we noticed something we hadn’t before. The house had five bedrooms, not four.
It was listed on the MLS as having four bedrooms, and we hadn’t noticed previously that it had five. That may seem crazy, but again, this is a different ballgame.
When you walk through a $50,000 Detroit investment property it’s not about the bedrooms, the open floor plan, etc. You’re purely looking at the mechanics of the house to make sure there’s nothing substantially wrong with it.
The age of the furnace, water heater, signs of water damage, condition of the roof. These are the big ones because these are your large capital expenditure items.
When we walked through on Saturday we were already aware of those things. So we were exploring the house more than we did the first time, and sure enough there was an extra, legal bedroom.
How does a home get listed with one less bedroom than it actually has?
Simple. The listing agent likely never stepped foot in it. The owner also (definitely) never stepped foot in it. Somehow, at some point in time, this house was listed as a four bedroom and they just copied the data from the old listing.
It was a pleasant surprise, and it will add a good bit of value. We’d already gotten a very good deal on the house, and this is going to sweeten it further.
Growing up I remember my dad often referencing “Biziorek luck” when things didn’t go right. I get everyone has bad luck, but we did seem to have more than our fair share. Nothing super terrible generally happened, it’s more that kind of luck where things that should go smoothly never seem to. It’s funny in a sitcom but not in real life.
Kaitlin has similar luck. If we’re out to dinner, for example, you can bet on one of two things (if not both) happening. Her order will come late and last, or it will be botched. She says it’s happened her entire life, and I can vouch for at least the last nine years.
So when we try and do something together you can bet we have a rough time of it. Enter our recent HELOC. We started our HELOC application process on April 12th, and we still haven’t closed. We were supposed to today, but the bank screwed up yet again. Somehow they managed to grossly miscalculate our line of credit.
This is probably the sixth issue we’ve dealt with during the application process. The biggest one was a previous HELOC that was opened on our house by the previous owners. It was paid in full when we closed but the bank failed to discharge it. How that happens and how it gets by so many people I have no clue. I’m just thankful we weren’t actually trying to sell our home (what a mess that’d have been!) and that we have a good relationship with the previous owners. We were able to expedite the discharge by getting the previous owners to help us out. Normally it takes 60-90 (wt-actual-f!?).
I hate banks.
Hopefully we’re closing this HELOC on Monday, because we have accepted offers for investment properties closing in as soon as 9 days 🙂
We closed two days ago on the property I walked through the other week. I wasn’t sure we were for awhile. The closing documents credited a prorated June rent to us for the 28 days in June that we’d own the property. The assumption is that the landlord had collected June rent.
I knew they hadn’t. Heck, I knew they hadn’t collected May rent. So I was delighted that they were scheduled to pay us our prorated amount so I wouldn’t have to hassle the tenant for it.
They weren’t delighted.
In fact, they wanted that line item removed from the closing docs. When we said no they claimed they were collecting May rent “this week” and wanted to delay closing until they could collect June rent. We weren’t about to sit around waiting for them to collect rent from a tenant that’s chronically late, so we gave them 24 hours. They chose closed as scheduled on Monday.
The only thing the sellers provided us was an old lease signed in 2017. The tenants phone number of the lease was clearly no longer active. We had no keys, no email address for the tenant, no documentation on a lease renewal (the 2017 lease was for a year), nothing. Clearly the previous owner was running a tight ship.
I finally had the chance to drive down to the property last night. The freeways were a mess as we got pounded by a thunderstorm. In fact I should have been in a car wreck on my way back when I had to slam on the brakes, course corrected as I slid forward, then across two lanes miraculously making it to the shoulder without hitting anyone. That was fun.
But before that I was able to meet with the tenant. She’s super nice, and I’m excited for her that she has a new full-time job. We cleared everything up, got her phone number, email, etc. (I forgot to mention the keys), and we’re setting her up with online rent payments. There’s still a ton to do, but the first one seems to be in the bag.
