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Updated about 8 years ago, 11/30/2016

User Stats

82
Posts
88
Votes
Joe H.
  • Developer
  • Chicago, IL
88
Votes |
82
Posts

From Abandoned Shell to $1.1+ Million Valuation in 4 Years

Joe H.
  • Developer
  • Chicago, IL
Posted

I started investing back in the bottom of the recession or, as I like to call it, the Great Turkey Shoot of 2010. I was snagging some pretty incredible deals back then, but the jewel of them all was a beautiful brick six unit building that had been abandoned mid-construction. This property was actually damaged in a fire in the 2000's at which point the owner decided to take the money and complete a totally unpermitted renovation and expansion. Of course the project involved adding a masonry addition to the rear of the building within a few feet of an active Elevated (Chicago "L") train line. Naturally the city isn't too keen on this kind of behavior and the owner was slapped with a stop work order. As if that weren't enough, the bank followed suit by foreclosing and then totally neglecting to secure the property. It quickly became a drug den inhabited by homeless people who proceeded to literally crap all over the place. 

About this time I was scouting the area knowing that Lagunitas Brewery, Cinespace Film Studios, and a few other big name businesses were about to redevelop a nearby abandoned steel mill and improve the area. I ran across the building (which at the time had a beautiful copper cornice) and was obsessed. The asking price was $125,000 which was pretty steep considering the all the hair on the deal. Then, a few weeks later, I noticed a price drop to $25,000 which really piqued my interest. I drove by and noticed that all the windows had been smashed (to get the aluminum frames), the cornice was stolen, and apparently all the plumbing was gone as well. I called the broker and he said "make us any offer", So I did, I gave him an offer for $5,000, quick close. They countered at ZERO dollars if I was willing to let them quit-claim it to me and transfer all the liabilities from the city court cases to me. Best negotiation of my life.

The reason the bank was so motivated to sell was that the city had moved the building to demolition court and basically told them either fix it up, sell it, or demolish it or we will demo it for you and send you the bill. The property had multiple building court cases against it and was basically totally open to the elements and vagrants.

I spent the last four years repositioning the property and doing just about every legal maneuver you could possibly have to do to the building. I first had to get all the court cases under control which meant totally buttoning the building up and literally shoveling foot tall by three foot in diameter piles of dried feces out of the place. If you know anything about Chicago, the city is, well, less than helpful. So the next step was to attempt to get permits. Of course the zoning no longer allowed commercial spaces (and this building has a wonderful brick garage and corner retail space) despite the fact that my building had a commercial space since 1893. So I had to go through the process of securing a zoning change which in Chicago is a monumental task. That took almost a year to complete. After the zoning was taken care of I finally worked my way through the permit process which took 364 days as I had to clear both the stop work order and all other city complaints along the way. Finally I secured the permits and was able to close a hard money loan with only this property and one other I owned as collateral, no cash in. I've spent the last six months finishing rehab and, low an behold, my baby is no longer a terrifying abandoned crackhouse, but has emerged as a beautiful mixed use rental asset. 

I spent over $500,000 on construction, but now have a $2,000/mo NNN lease on the comercial space which takes almost a third of my taxes off my hand. I am getting upwards of $1400 for 2BD units and as high as $1750 for 3 BD units. My monthly NOI is just shy of $10,000 and, given the total gut job, my expenses are super low. At an 8 cap the property is now valued in excess of $1.1 million and I am in the process of refinancing to a longer term commercial loan to lock in these low rates for at least the next five years.

User Stats

82
Posts
88
Votes
Joe H.
  • Developer
  • Chicago, IL
88
Votes |
82
Posts
Joe H.
  • Developer
  • Chicago, IL
Replied
Originally posted by @Isza A.:

Wow!! Such a wonderful and inspirational story Joe!  I have a smaller building sort of similar to yours in the Pilsen area (18th and Ashland). Would really appreciate some advice from you or any one else at BP. It is a 3 story building with front and rear apartments on the 2nd and 3rd floor. Commercial on the first floor.  2nd and 3rd floor is water damaged and has been empty for 5 years now. First floor is occupied. I do not have any experience and I am stuck as to where to start with the project. Please advice me as to where to go or books to read.  Thanks a million!

 Wow sounds like you have almost the exact same project as me. Message me if you would like to chat more, I can probably answer any question you have considering I just got ran through the ringer on all the fronts I'm sure you are facing. Sounds like you have an even better location than me though!

User Stats

45
Posts
25
Votes
Bob Norris
  • Investor
  • Kennett Square, PA
25
Votes |
45
Posts
Bob Norris
  • Investor
  • Kennett Square, PA
Replied

Great example of creating value-for you and the neighborhood. Congratulations!

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User Stats

32
Posts
19
Votes
Louis Kelley
  • Investor
  • Katy, TX
19
Votes |
32
Posts
Louis Kelley
  • Investor
  • Katy, TX
Replied

Awesome sir -- I love reading a success story.

Thanks for sharing.

User Stats

82
Posts
88
Votes
Joe H.
  • Developer
  • Chicago, IL
88
Votes |
82
Posts
Joe H.
  • Developer
  • Chicago, IL
Replied
Originally posted by @Bob Norris:

Great example of creating value-for you and the neighborhood. Congratulations!

 Yeah, you learn quickly how much the neighbors are invested in the future of that pretty, but abandoned building on their block when you do a project like this. I constantly have people stopping asking questions and telling stories about their aunt who used to live in the building. Also, maybe it's just coincidence, but all of the sudden the vacant gravel lot around the corner is a paved and landscaped parking lot and the yards in front of the cottages across the street are clean and trimmed. A little "broken window theory" at work IMO!

User Stats

39
Posts
4
Votes
Paul Krause
  • Fix & Flipper
  • Rancho Palos Verdes, CA
4
Votes |
39
Posts
Paul Krause
  • Fix & Flipper
  • Rancho Palos Verdes, CA
Replied

Thanks for sharing your story!  Since you had zero acquisition costs, curious how much did the legal bills, permits and local taxes  added up to while you were repositioning and rehabbing the property?  Thx!

User Stats

1
Posts
0
Votes
Jo Anne Tortorice
  • Houston, TX
0
Votes |
1
Posts
Jo Anne Tortorice
  • Houston, TX
Replied

That's impressive.

User Stats

6
Posts
1
Votes
Dean Kim
  • New to Real Estate
  • Olympia, WA
1
Votes |
6
Posts
Dean Kim
  • New to Real Estate
  • Olympia, WA
Replied

Awesome success story! Thanks for sharing this and inspiration. 

User Stats

27
Posts
5
Votes
Cabri Griffin
  • Los Angeles, CA
5
Votes |
27
Posts
Cabri Griffin
  • Los Angeles, CA
Replied

Is there a way to get a list of properties that have been sent to demolition court?

User Stats

57
Posts
6
Votes
Jennifer S.
  • Property Manager
  • Orange County, CA
6
Votes |
57
Posts
Jennifer S.
  • Property Manager
  • Orange County, CA
Replied

This is the type of story that inspires me and just confirms my thoughts that anything is possible in real estate. Thank you for sharing this and a great big high five to you for your vision to see what others obviously missed, but more importantly, your drive and determination to continue to see the bigger picture despite the roadblocks!!! :-)

User Stats

14
Posts
3
Votes
Nate Guinane
  • Investor
  • Saint Clair Shores, MI
3
Votes |
14
Posts
Nate Guinane
  • Investor
  • Saint Clair Shores, MI
Replied

Great looking rehab! Nice job. Most people give up halfway thru projects like these, says a lot that you saw it thru the whole process

User Stats

82
Posts
88
Votes
Joe H.
  • Developer
  • Chicago, IL
88
Votes |
82
Posts
Joe H.
  • Developer
  • Chicago, IL
Replied
Originally posted by @Cabri Griffin:

Is there a way to get a list of properties that have been sent to demolition court?

 There is, I actually used to get calls from random investors right after I bought it trying to buy it off me because they saw it on public records. You need to go to the court house (Daley Center in Chicago) and pull all the court cases filed. The owners contact information is usually there. 

User Stats

82
Posts
88
Votes
Joe H.
  • Developer
  • Chicago, IL
88
Votes |
82
Posts
Joe H.
  • Developer
  • Chicago, IL
Replied

Oh and it was brought to my attention by another member of Bigger pockets that I should have mentioned that I was 24 years old when I picked this place up and am 28 now. It's been quite a learning experience...

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Account Closed
  • Investor
  • Lisbon, Portugal
8
Votes |
48
Posts
Account Closed
  • Investor
  • Lisbon, Portugal
Replied

Congrats on the adventure Joe. It was definitely worth it!

And thank you for sharing.

User Stats

617
Posts
456
Votes
Karen O.
Pro Member
  • NYC, NY
456
Votes |
617
Posts
Karen O.
Pro Member
  • NYC, NY
Replied

Just Wow!  It's Lovely.. Congratulations.  

User Stats

180
Posts
93
Votes
Aaron Linden
  • South Bend, IN
93
Votes |
180
Posts
Aaron Linden
  • South Bend, IN
Replied

Joe H. Wow thank you for sharing this amazing story it is great to see what is possible!

Aaron

User Stats

10
Posts
6
Votes
Fred Hixson
  • Harker Heights, TX
6
Votes |
10
Posts
Fred Hixson
  • Harker Heights, TX
Replied

Joe H. 

Amazing work.

I could see how that could sink somebody regardless with an unforeseen suit.

Jumping out there to take the property off the bank's hand, did you have a good idea of what legal hurdles were stacked against you and how much that would cost over all in permitting/attorney's fees? Did that factor into an analysis?

Joe H.

User Stats

82
Posts
88
Votes
Joe H.
  • Developer
  • Chicago, IL
88
Votes |
82
Posts
Joe H.
  • Developer
  • Chicago, IL
Replied

I certainly had more than a layman's knowledge of the system, but looking back on it the answer is "I had absolutely no idea what I was signing up for". But that's OK because it was a learning experience through and through. What I did know is that there was a lot I didn't know so I was careful to be extremely involved personally in every step of the process and to regularly consult attorneys about each step. Ultimately that is what made the project a success, anyone can learn these processes if they are willing to go through trial by fire with a good legal team. At the end of the day you are everyone's hero for being the person willing to come in and clean up the mess for the bank, the city attorney, the city inspectors, the neighbors, etc. When you put yourself in that position good things happen as long as you keep pushing the project forward and are responsive to every challenge.