Buying a Vacant Distressed Property

Buying & Selling Real Estate
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Buying a Vacant Distressed Property

Bill Mitchell
Mansfield, TX · Member since 2013 · 207 posts · 26 votes

It looks like I will be able to get a smoking deal on a property here in DFW that I might buy for myself its so cheap. Well, buy for myself temporarily. I was considering taking title and then sticking the property on auction.com to sell to the highest bidder, just to get my feet wet a little instead of just assigning the contract.

I have never purchased an investment property like this before. What items do I need to get in order to proceed?

Utilities: How do I have these killed once title has been transferred.


Insurance: How would I go about getting this property insured? Its vacant and distressed, but what happens if it somehow burned to the ground? I would sleep easier at night if I were able to get some sort of coverage.

Liability: I will own a vacant distressed, house that is not structurally sound for a month or two (hopefully) before it sells. But what if someone were to break in and injure themselves, I need some sort of protection against this.

Anything else I left off the list feel free to add, thanks everyone.

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Dev HornPro Member
Flipper/Rehabber · Arlington, TX · Member since 2013 · 1k+ posts · 2k+ votes
12y

Another cost to consider - taxes. Another alternative to an LLC is a trust, but I'm not sure if a trust would protect you like an LLC. But trusts are relatively easy and low cost to set up.

The utilities are basically just like if you were buying the house for yourself - once you have the deed transferred to you, you just call them and they'll switch them over. Your homeowners insurance will cover the liability issue. If someone breaks in and gets hurt, I'm not sure they have much of a case. But a contractor or potential buyer could fall, or the house could catch on fire, so you definitely have to get insurance to protect your investment. Tell the agent that you expect to own the house for only 4 months or less so they can get the right/pricing product for you.

Those are your primary holding costs - utilities, taxes, and insurance - in addition to the cost of financing (e.g., points & payments on hard money, etc.). The key is quick turnover - if you hold it too long those holding costs eat up your entire profit margin.

So, that brings me to a bigger question - why would you buy and hold this house if you are not planning on rehabbing? Are you thinking of doing a quick double-close sale? In that case, you might eliminate the holding costs. But I'm concerned that if you hold a non-rehab deal, you're just losing money every month waiting for it to sell for not much more than you paid for it, so the holding costs could wipe out your profits FAST.

I've got a cool spreadsheet for analyzing a deal which really helps you consider ALL the costs involved and estimate your profit based upon the month that you sell the property (send me a note & I'm happy to share). Really helps you see how your profit vanishes as you hold a property longer than 2-3 months.

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  • Wayne Brooks
    Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
    12y

    Utilities....call the utility co.

    Insurance....call an insurance agent

    Get title insurance. You sure it's a smokin' deal? How much in repairs, for a structurally unsound house?

    1Reply
  • Don KonipolBusiness Member
    Investor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes
    12y

    @Bill Mitchell as per liability, purchase it in name of a newly created LLC or corporation with the property being the entity's only asset.

    Private Mortgage Financing Partners, LLC
    WebsiteView Page
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  • Dev HornPro Member
    Flipper/Rehabber · Arlington, TX · Member since 2013 · 1k+ posts · 2k+ votes
    12y

    Another cost to consider - taxes. Another alternative to an LLC is a trust, but I'm not sure if a trust would protect you like an LLC. But trusts are relatively easy and low cost to set up.

    The utilities are basically just like if you were buying the house for yourself - once you have the deed transferred to you, you just call them and they'll switch them over. Your homeowners insurance will cover the liability issue. If someone breaks in and gets hurt, I'm not sure they have much of a case. But a contractor or potential buyer could fall, or the house could catch on fire, so you definitely have to get insurance to protect your investment. Tell the agent that you expect to own the house for only 4 months or less so they can get the right/pricing product for you.

    Those are your primary holding costs - utilities, taxes, and insurance - in addition to the cost of financing (e.g., points & payments on hard money, etc.). The key is quick turnover - if you hold it too long those holding costs eat up your entire profit margin.

    So, that brings me to a bigger question - why would you buy and hold this house if you are not planning on rehabbing? Are you thinking of doing a quick double-close sale? In that case, you might eliminate the holding costs. But I'm concerned that if you hold a non-rehab deal, you're just losing money every month waiting for it to sell for not much more than you paid for it, so the holding costs could wipe out your profits FAST.

    I've got a cool spreadsheet for analyzing a deal which really helps you consider ALL the costs involved and estimate your profit based upon the month that you sell the property (send me a note & I'm happy to share). Really helps you see how your profit vanishes as you hold a property longer than 2-3 months.

    3Reply
  • Bill Mitchell
    OP
    Mansfield, TX · Member since 2013 · 207 posts · 26 votes
    12y

    @Dev Horn

    Another great reply as usual.

    In regards to getting utilities switched. (This is a hypothetical) What would you do if the owner themselves do not know who provides services to the house? I wouldn't be surprised if that happened at a vacant house I looked at, some of these owners are incredibly negligent.

    Do I need a special type of insurance for a vacant property? Or do I just call up GEICO and ask for a policy.

    As to why I am buying it as I am sure you have found, some properties are really only possible to wholesale by taking down yourself. This particular property, without going into the story, would be very difficult to show and the buyer would have to buy only going by pictures and not looking inside.

    Thats not likely to happen. But I know at the price I negotiated its a smoking deal, so I am thinking about taking it down myself.

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  • Dev HornPro Member
    Flipper/Rehabber · Arlington, TX · Member since 2013 · 1k+ posts · 2k+ votes
    12y

    @Bill Mitchell I'm not sure about GEICO specifically, but you can speak to a local insurance broker about a short-term policy for this. Builders get these "builder's risk" policies while they are constructing houses; basically the same thing for when you are doing a rehab & flip.

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  • Ariel Echevarria
    Humboldt, IA · Member since 2013 · 58 posts · 5 votes
    12y

    @Dev Horn can you shoot that spread sheet to me as well. i found whay looks to be a vacant house up the road. i have yet to speak to the owner but want to be prepared. Can i send you a link to the property and get your initial thoughts? i know houses in the area sell for a lot more than what the original owners paid. i live on the same street actually. they paid 30k back in 2005 so im assuming they owe quite a bit less than that.

    0Reply
  • Mike Marko
    Cincinnati, OH · Member since 2013 · 37 posts · 7 votes
    12y
    Originally posted by @Wayne Brooks:
    Utilities....call the utility co.

    Insurance....call an insurance agent

    Get title insurance. You sure it's a smokin' deal? How much in repairs, for a structurally unsound house?

    Wayne has hit this on the head. Are you sure it is a "smokin' deal"? I have been burnt in the past. Make sure you inspect the property thoroughly, and if you don't have the experience to do so then consider the ~$350 for a home inspection insurance that you don't walk into a money pit.

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  • Dev HornPro Member
    Flipper/Rehabber · Arlington, TX · Member since 2013 · 1k+ posts · 2k+ votes
    12y

    Hey @Ariel Echevarria - send me your email address in a private message or to my email address below & I'll send you that spreadsheet. You're welcome to send that property link as well; not sure if I'd have much insight on it tho as I just don't know that area.

    To analyze a property, you need to get recent SOLD COMPS in the area so you can determine the price per square foot. Multiply that $/Sq.Ft. by the number of Sq. Ft. in your subject property and you'll have a good estimate of the ARV (after-repaired value) of your subject property.

    Next, you need a good estimate of the repairs necessary to bring the property up to that full retail value.

    Once you know ARV and REPAIR ESTIMATE, you can apply a simple formula to determine the price you might offer:

    (ARV x 70%) - REPAIRS = OFFER

    Most of our marketing is targeted to people with EQUITY so they can negotiate on price. It's tough to make a deal work with no equity.

    Hope this helps - obviously there is more to the game but that's my "Real Estate Investing in a Single BP Post" course". If you read this, send me $3,000! =)

    0Reply
  • Ariel Echevarria
    Humboldt, IA · Member since 2013 · 58 posts · 5 votes
    12y

    so I sent a yellow letter to the owner of the house that still appeared to be vacant as of yesterday. Hopefully I hear something back. The second I do I'll let yall know. I'm hoping to get the property for dirt cheap. If I get a good deal I'll post the terms on here to get feedback and possibly a buyer interested. The houses in the area sold for 69k on average. I bought mine for 114k and I'm a block up the road. Of course mine was updated and had

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