2nd buy & hold - Utilizing private money

[Eric Van Deman]

Investment Info:

Single-family residence buy & hold investment.

Purchase price: $280,000
Cash invested: $10,000
Sale price: $588,000

2nd Investment property - Utilizing private money on a difficult to finance condo

We purchased the condo as part of a buy & hold strategy to take advantage of a market downturn and wait for appreciation.

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

- Massive upside potential. We purchased in 2008 from a bank for $280,000. At the height of the market the property had sold for ~$700,000 and again for around ~$800,000 between 2003 and 2005. The building was involved in a lawsuit against its developer, which resulted in the building failing to qualify for traditional lending causing unit prices to plummet further in addition to the macro real estate issues dragging down the market at the time.

How did you find this deal and how did you negotiate it?

The unit was listed on the MLS. There were a number of similar bank-owned foreclosures in the building at the time. We offered on multiple properties within the building and were rejected by multiple banks until finally finding one ready to make a deal.

How did you finance this deal?

Found a private money lender willing to fund the deal who provided an interest rate that was half the market rate at the time in exchange for 50% of the appreciation upon sale.

How did you add value to the deal?

-We knew the lawsuit would either be resolved via a settlement with the developer or a special assessment by the HOA. We built the potential assessment into our math on the deal, and still believed it to be a winner.
- We completed minor cosmetic items as the building was only a few years old including paint and carpets. The largest project was installing ~1,200 square feet of bamboo flooring.

What was the outcome?

The lawsuit was settled with the developers and extensive repairs were completed by the HOA at no incremental cost to the residents. Following conclusion of the lawsuit, purchasers were able to obtain financing within the building and prices recovered along with the greater market economics. We ended up living in the condo for a few years, so we were able to take the homeowners exemption from a tax perspective to roll the proceeds from our investment into a 16-unit apartment complex.

Lessons learned? Challenges?

- The resolution of the lawsuit and building repairs took a little longer than planned.
- We paid a lot of appreciation to the lender, but without his help we wouldn't have been able to close the deal.
- We should've found a way to buy more units in the building.

Did you work with any real estate professionals (agents, lenders, etc.) that you'd recommend to others?

Sylvia Theissen - central Denver realtor