Profile Of My First Rehab In Metro-Detroit.

So over the past year I took the plunge and did my first fully independent rehab deal. I've been involved in many deals in the past as an agent, coordinator, or facilitator in some other way, but this was the first time I was completely independent, no outside money, no training wheels. I found it, I killed it, I dragged it home, I ate it. Well… I say "I" loosely, I had a ton of help from my extended network, it was just the first time all my money was on the line.

By this time, not only had I helped out on other deals in varying capacities, I also had a fairly solid background with the physical act of remodeling, in addition to the transaction/negotiation side. I also married into an extended network of tradesmen I affectionately refer to as "The Polish Mafia". Most of my in-laws are involved in some building specialty from carpentry to drywalling to painting, and if they weren't personally experienced, they usually knew someone who was. Someone who's last name ended in "ski". I personally fancied myself a pretty good tile guy, so I felt pretty confident going in that we had the team to do the work.

The entire transaction took almost 1 year exactly, from the location of the property to closing with the new owner. I can hear you experienced guys gasp and/or chuckle. I know it took forever. Some of that was my fault, some of it was outside of my control. Luckily, my holding costs were minimal since I paid cash. I'll get into all that later.

I'm writing this so 1) some other new guys can get a realistic play-by-play of what your first deal might look like, 2) as a therapeutic exercise, 3) to say "hi" to the community.

Over the years, I've done many transactions with HUD. Their process, like any government entity, can be bureaucratic and labyrinthian… pock marked with rigidity and arbitrary rules that only lawyers locked in the basements of windowless government buildings can write… by candlelight…with a quill. Ok, maybe not, but still, since I knew the HUD game and it was easy for me to make bids on HUD property as a licensed agent, I hunted through the HUD store to find my first deal.

My main criteria (outside the right price) was the location of the property and a minimum size requirement. I wanted to make sure it was in an area that I'd be able to sell it easily. From my agent background, I already had the market knowledge of what neighborhoods would move quickly, and I didn't want it to sit on the market. I also knew that if it was a small house (1000 sqft) it needed a basement to sell quickly at the price I wanted. I also preferred 3 bedrooms (or the ability to make it a 3 bedroom) and at least 1.5 baths. I finally found an ugly little house that had endured some light vandalism in a city called Troy (I live there). It was August of 2012 when I put a bid in.

They were initially asking $95k for the property, but they had the as-is value listed as $110000. The reduced asking price was due to the fact that someone had ripped out half of the kitchen cabinets and existing granite. Half of it was still there. I took a look at the property (I have HUD keys) and I found most of the granite slab from the kitchen in the garage. On top of that, there was some serious exterior ugly, a fence that would be on the ground if HUD hadn't secured it upright with 2x4s, massive overgrowth in the landscaping, cedar shingles that were falling down and funky, and a bathroom that needed to be gutted to the studs. It was also on a corner lot - a factor that would have major ramifications for me, that I was blissfully unaware mattered.

I put in an initial offer for $72,500. Now, if you're not familiar with HUD, the thing they care about is the "net to HUD" amount. That is (spoiler alert!) the net amount that HUD ends of getting from the sale of the house after all their closing costs and the commissions are paid out. When you put in an offer with HUD, the net to HUD is what they will analyze your offer based on. They will either accept it, reject it, or counter. If they counter, they will give you their acceptable "net to HUD" amount. So far, in my experience, this is pretty much their final offer. Whatever they tell you at that point (and they'll tell you in "net to HUD" terms) is your take-it-or-leave-it number. $72,300 was the number they gave me as the lowest "net to HUD" amount. My offer was $72,500, but after all was said and done, the "net to HUD" from that offer would only be $65,975 - HUD wanted that number to be $72,300. I did a little math that that brought my offer up to $76950.

Using the formula I learned from my local REIA (referred to as, I believe, the 70% rule here at BP) was:

ARV (AFTER REPAIR VALUE) x 65% - COST OF REPAIRS = MAX OFFER PRICE TO GET A GOOD DEAL

...for me that worked out to:

$135000 x 65% - $10000 = $77750

Sounded good, so I went forward. I completed the paperwork, sent in my EMD and the world glowed golden with the pride of ballsy capitalist action. I'm pretty sure I (in true Irish fashion), immediately had myself several drinks, posted something about how awesome I was on Facebook, and then promptly fell asleep at 9pm on the couch, snoring. Just a guess, but it's probably a fairly accurate reconstruction.

After I received my ratified contract, I received a call from the closing company. Something was amiss! I'm not sure if this has happened elsewhere in the country, but it was a first for me in Michigan. I was informed that the county the house was in (Oakland County), along with several others, had placed liens on every HUD property. No title company would clear title on any HUD deals until all the lawyers had lawyered it all out together. Great. Apparently, the federal government was committing tax fraud against the county governments by leaving all the foreclosed properties at the homesteaded tax rate instead of paying the non-homesteaded rate. Because of that, until an agreement and a compensation plan was enacted, no HUD properties were closing in those areas. There was also no indication of a projected resolution date.

I was in limbo, and there was nothing I could do about it.

I had only come out of pocket the EMD of $1000, however, I had committed the capital to a deal that could be called up at any given minute. It sucked. I had no choice but to wait. If I was more experienced, had a bigger network, or had access to more capital, I would have been able to do something in the interim. But I was timid and skittish, and nervous of getting caught with my pants down, so I just waited until I heard something.

I had to wait until November 28th, at which time I was told our closing date was November 30th at 10am. Thanks for the heads up HUD! Luckily, I kept everything ready to move, so we closed and I took possession just in time for Christmas, and the freezing. Also, for the record, I formed an LLC (D&G CAPITAL LLC) that actually owned the property. All the paperwork was signed D&G Capital LLC By: Thomas Desmond, Managing Member, except where I acted as myself, the agent. I would suggest looking into some kind of corporate entity if you're going to hold property. I filed it myself (I've filed many over the last 20 years). It costs about $50 and takes about 24 hours, and can seriously save your *&$#.

HUD winterizes everything, so it was already in good shape for the winter. Since the holidays were on, and the only holding costs I really had were taxes ($75 for winter) I decided to leave the property until the end of January when I would start the rehab. I didn't turn on any utilities, so I wasn't incurring the bills. When we did start the rehab, everything went relatively smoothly. We added a wall to make the 2 bedroom into a 3. We gutted the bathroom to the studs and remodeled it with 90% bargain materials and 10% high end materials. This little trick allowed us to keep our cost really low, with a net result of a bathroom that looked more expensive than it was. I've seen this little trick work over and over again. Putting a high end sink or vanity top into a room full of home depot finishes raises up the overall perceived value of the bathroom while only marginally increasing the cost. We did the same thing with the kitchen. We added a mid grade stove and dishwasher (there was already a nice kitchenaid fridge), repaired (and added to) the granite, and replaced the stolen cabinets with off the shelf cabinets from home depot that we painted to match what was there. Everything got painted, and the finished basement carpet got steam cleaned.

For the exterior, we had to tear out all the overgrowth. We opted for the scorched earth policy and pulled 90% of the bushes and BS out, and replaced it all with mulch. We trimmed the trees to sane levels. We had planned on either painting and repairing the cedar shingles, or replacing it with vinyl siding. 80% of the exterior was brick, which was fine after a solid power washing. We got lucky though after pulling a few tiles. The wood underneath was in great shape, so we ended up just taking the cedar down and painting it. It was a major curb appeal improvement.

Another great thing I learned that I will do for every rehab I do in the future, is I made the front door great. I spent a little extra on a nice handle, added a kick plate and a door knocker (with matching finishes) and then painted the door (literally) front door red (that was its name from the Behr catalog). Since it was going to be my buyer's first interaction with the house, I considered it a worthwhile $200 spent. The last thing left to deal with was the dilapidated privacy fence that enclosed a third of the yard.

Early on, I had contacted a contractor to come and give me an estimate on the replacement costs. I generally hate landscaping, and specifically hate digging holes, so this was definitely something I was subbing out. I got a price that sounded good ($1500) and told them to go pull the permits. A day later I got a call and they let me know the city denied the permit. Even though there had been a fence there since 1974, it was non-conforming, and if we were replacing it, we'd need to get a variance. A variance sounded like a multi-month hassle, which I wasn't too interested in. The reason they denied the permit was because, as a corner lot, my property had TWO setback requirements to conform to, one for each street. The offending fence broke the setback requirement of one of the streets, hence the denial. Now, inside that yard area was a deck and a hot tub, plus landscaping. There was also a 9 foot glass door wall leading out to the deck. In general, the entire house was oriented to have this enclosed private area. If the fence wasn't in place, there would be a giant window pointing out into the center of the neighborhood. I can tell you right now, the property wouldn't sell without the fence… or something to make it private. Using arborvitae as a privacy alternative was a possibility, but would cost considerably more. This fence needed to happen.

At this point, I pulled a total rookie move and took free advise from a friend who was a "builder". Like a fool, I took it.

"You don't need a permit to repair an existing structure. Just repair what you have, don't replace it or move the footprint."

It was exactly what I wanted to hear, so it's what I did. I repaired the fence, and let me tell you, I repaired the hell out of it. I repaired it so much, that the only original parts of the fence left were the mounting brackets that held it to the house. Fence, REPAIRED! I did it myself (which was a horrific experience, that won't ever happen again). By the time the fence was up, me and my post hole digger were close. Super close. Like Conan and his sword close. I could have probably crushed a bowling ball with my bare hands at that point. I didn't though, and I probably never will, because I'm never touching another post hole digger again, the window of bowling ball crushing is closed to me forever.

That's fine. I can handle the regret.

Anyway, we were done. It was early April, our inventory was lower than ever, the market was hot, prices were rising, and we had a great house to put on the market. I wrote up the listing ticket. I was about to make some money, close my first deal, and drink until I fell asleep on the couch again. I was a genius… a natural born real estate tycoon. A mogul even.

I got home that night and checked my mail. That's when I found the citation from the city, letting me know that I put up a fence without the appropriate paperwork, and they were about to casually destroy my newly established mogul hood with the omnipotent might of bureaucracy. I can't blame anyone but myself. I knew better. Even as we were putting the fence in, I felt it gnawing at me that this would show back up to bite me in the $#@.

When I called the city to see what happened next, they basically told me "You can apply for a variance, but since you tried to pull a permit and we denied you and you did it anyway, we're probably going to screw you… on purpose… because we hate you now, and we're going to consciously, intentionally wreck your perfect deal. Jerk."

They also let me know I'd have to appear before the city zoning committee, make a case, and do a ton of other things I had no experience doing, and even less of an idea how to begin. They also let me know it would probably take months. Months in the prime sales season. Maybe if I was lucky, we'd be able to get it sorted by the fall, you know, when less people are trying to buy houses like the one I was trying to sell. For the seasoned investor, this might not be a big deal, but for a neophyte like me, with all my own money riding on the line, my thoughts immediately and erroneously defaulted to worst case scenarios of me loosing all my money and being stripped of my property rights while being publicly flogged. In the end, the solution was considerably easier.

After talking with an architect friend of mine who sat on the planning commission of the city, he advised me to call the head of the zoning department, and set up a sit down. I did. I went to all the neighbors and got signatures from them all indicating they didn't mind the brand new nice fence that exactly replaced the old horrible fence that had been there since 1974. I took pictures. I made a diagram. I met with Mitch and explained my situation. I played the idiot card and explained I was running on advise that was subpar. I was generally apologetic and accommodating, which I find works considerably better than being rude and confrontational (a tactic advocated by a surprising number of contractors I spoke with about the problem). I followed their protocols, and a little over two months later, after a 10 minute public hearing, they granted me my variance. I was a mogul again.

After that I listed it and I got an offer the first week it was up. Luckily for me, the market improved during my extended hold time. When all was said and done, we ended up with a final sale price of $154,900 with $5000 in seller concessions. After closing costs, I got to put a $142k check in the bank. I went over on my repair & holding costs by about $6k, but at the end of the day, we realized a net profit of over $40k.

I've already got my next HUD offer accepted, and looking forward to doing the next one with considerably more contracted help. I'm in the process of getting my Michigan builders license, so that will ease the bureaucratic pain in the future. I got some great experience and learned a ton.

Overall here were my takeaways:

• Overestimate Repair Costs and Timelines
• Be legit. Pull permits. Don't mess with the bureaucracy. At least outside.
• It was planned that for my first rehab I would do a large majority of the work myself, to become more intimately aware of the process and details. For my future flips, I will use sub contractors, so I expect my costs to go up.
• I was lucky that the market paced me up. I made more than I expected to make, but I can't expect that in future projects.
• While this was profitable, it's a shame that house has made me all the money it will make me and it's gone now. Once I have a bigger war chest, I really need to buy and hold.
• Some things may happen that will be completely out of your control. Be flexible and adapt. I can't control government lawyers fighting each other over tax liens. Roll with it.
• There is tremendous opportunity out there if your mind is open and you're willing to put the effort into learning.
• The investor community is a great group of people that I share the same mindset with.