Fix and flip with a long term hold

[Melissa Murphy]

Investment Info:

Small multi-family (2-4 units) buy & hold investment.

Purchase price: $175,000

Cash invested: $62,000

Large corner lot in a desirable location with multi family zoning. Bought at the peak of the market, rehabbed, failed to appraise and still underwater today. Lots of lessons learned on this one.

What made you interested in investing in this type of deal?

In early 2007, I found a single family house with an unfinished basement with zoning allowing for up to 6 units. Applying for a commercial loan, the property at acquisition was expected to appraise after the rehab was done at $310,000, but then the market changed.

How did you add value to the deal?

After spending 9 months on the rehab and over $120,000, costs kept rising. Although it was on budget with our estimates, the market changed, and I paid for 3 appraisals to secure end financing on this deal, and I couldn't get an appraisal over $210k. Essentially, I was underwater on a construction loan by almost $50K. With an interest only loan, the monthly balance just kept climbing.

What was the outcome?

After calling the local lender to see if I could work out a short sale option, the bank was absolutely not going to take a penny less than what was owed, even though this was late 2009 after the market had fully adjusted. Finally refinancing and taking a second note from a private lender, I was able to keep the property although it was frustratingly underwater.

Lessons learned? Challenges?

Looking back, it could have been so easy to walk away from this property being $50K underwater, and today, almost 10 years later, I still break even with a great tenant in place and the outstanding balance. Today, I barely have equity in the property and will continue to hold the property until some day I can take advantage of the zoning. Biggest lesson learned is being so excited about the zoning, that I overpay on the acquisition when the strategy didn't match the investment planned.