From "Buy & Hold" to "Buy & Burn" to ???

[Bob Langworthy]

This deal has evolved and I'll post updates here when relevant. I added a brief post about this on my profile, but here are the rest of the details:

This is my second deal. My first was a vacant office building that I bought, renovated, and filled with four tenants (including my accounting practice). It's a great investment, so I told a realtor friend that I'm interested in multi-family and asked him to send me regular emails of listings in my area.

After a couple months I called him to say, "I'm going to stay in my lane and stick with commercial." To which he replied, "No problem. I just got a call from a bank today looking to have me unload a property for them. It's a house on 1 acre, 5 miles away from you. And they're asking $18,000." I asked what's wrong with it. And he said, "For that price, does it even matter? The median home value here is north of $200,000."

This was February of 2018 and I decided to go look at it. I was 95% certain that I would buy it, renovate it, rent it, and possibly refinance. But when we went to look at the property, this is what we found:

The front was a mess.

The back was even worse.

The inside was bizarre.

And the basement was frightening.

But it was so cheap! So I offered $12,000, they countered with $13,000, I accepted and on March 16th I wrote a check for this mess. In addition to the house being a disaster, there was a separate garage that was caving in, piles of trash in the yard, two old bread delivery trucks, a rusted out Ford Bronco, rotting building materials, and miscellaneous fishing gear strewn about the yard. What to do?!?

I knew after looking at the house that it couldn't be remodeled. So I decided to tear it down...or have the fire department burn it down? Currying favor with the town government seemed like a good idea, but I realized that there would still be rubble to haul away, all of the trash in the yard, and the foundation might be damaged by the fire. So I found a local contractor who was willing to tear it down. We went back and forth on price and I talked him down by reminding him of the value of the scrap metal that he could haul off and sell to a scrap metal dealer. I also knew that his work was limited because most side roads were posted (heavy vehicles not permitted due to frost heaves, etc.). In the end we agreed to $12,000 to tear the house down, haul everything away, and grade the yard. 

Once that was done I decided to look at putting a modular on the foundation and renting it out. Growing up my dad built ~75 modulars, so I was familiar with the concept and liked the plug-and-play idea. But a basic turn-key package was going to run me $175,000 - $185,000  in addition to what I had into it and the numbers didn't work at that price.

So now I have a nice 1 acre lot with a foundation, well, and electric for $25,000. 

Market value is in the $60k - $80k range. There is a .5 acre grassy area to the left of where I was standing when I took this picture. My sons and I are working on taming that and trimming some brush to improve the look and feel of the place. I would call it a lawn, but the grass had probably never been mowed and is very coarse. 

The new plan is to hold on to the property and look to do a 1031 exchange into a commercial building. Stay tuned for more developments!