How I Bought a Craigslist FSBO

In August, 2014, I purchased an investment house in Nashville, TN that I found advertised on Craigslist. It was a rented single family house for sale by owner, due to a relocation out of state. I responded to the ad by email and requested the address of the property since it wasn’t stated. The address is required to move forward with any analysis, and to see if the deal is worth pursuing further. If I don’t like the location, I forget about it.

Next, I proceeded to do my usual information collection about a property. I look it up on the county tax assessor’s website to find out the lot size, square footage of the house, year it was built, zoning classification, past sales history, and appraised value. This data gives me an introduction to the property and lets me figure out the price per square foot. However, the square footage stated on the tax records is not always accurate, so it is wise to verify the actual area of the physical structure. In fact, the tax records were 600 square feet off from the actual area of my first primary residence.

The house on Craigslist had the two most important features that I am looking for in an investment property: location near a red hot neighborhood, and a cheap price tag. This house was just a couple of blocks from the historic Germantown neighborhood, and priced at only $72,000.

Germantown, and the adjacent Salemtown have experienced a staggering amount of new developments over the past few years, ranging from the historic converted former factory, Werthan Lofts, to the Luxus Germantown new construction, where the corner unit is priced at $1,079,900. Grant Hammond of Metropolitan Brokers has that listing.

– Luxus Germantown

The close proximity to Germantown’s development made the Craigslist house appealing enough to pursue. I drove by and looked at the exterior of the house and the neighboring properties on the street. While there were some chain-link fences and unkempt lawns, the street had sidewalks, and I saw two houses with building permits posted. I scheduled a meeting with the owner to see the interior. It was occupied by a renter, who was a friendly fellow that showed me around the house. It definitely needed some updating, but was comfortably habitable in as-is condition. I soon made an offer.

The owner of the house lived in Ohio, so I dealt with him primarily through email along with a couple of phone conversations. We discussed the price over the phone, and I explained my lower valuation because of the necessary roof replacement. I emailed a purchase and sale agreement that we both signed, and deposited the earnest money at the title company that was handling our closing. Indeed, we closed the purchase about three weeks later, for $62,000.

The lease for the tenant that lived there was set to expire just a few weeks after our purchase closed, and I intended to list the property on the MLS to sell it in as-is condition when he moved out. I didn’t want to take on a full renovation. I would rather have significant time saved in exchange for not as much profit. The plan was an example of how I have adapted my business to take advantage of the current demand-heavy market. I still like that plan, I just haven’t done it yet.

The tenant called me a week before he was scheduled to move out and said he couldn’t find anything acceptable to rent close to town for about the same size and price. It is a common problem caused by the growing pains of Nashville.

I quickly calculated that holding onto this house and continuing to rent it to him would save me thousands by avoiding short-term capital gains taxes. If owned for less than a year, the capital gains are counted as regular income, and taxed at that higher rate. Plus, not selling it in 2014 would save an additional sum. My earnings from other properties sold in the calendar year were already enough to pay taxes on. The profits from selling the Craigslist house would push me into a higher tax bracket, where the marginal rate is even steeper.

Of course I didn’t discuss my tax strategies with the tenant, but we did agree on a small rent increase that was acceptable for both of us, as the monthly amount he had been paying was well below the market rate for a three bedroom. The increase boosted the income to a range that made the numbers work for me, and he was happy to stay at an affordable house he was content with. It turned out to be a beneficial situation for both of us.

Going forward, I think the best course of action for this Craigslist house is to continue to rent it to the current tenant and let the immediate area accelerate in its improvements. Values are appreciating to the point that just by owning the house for another year or two could result in an extra $20,000-40,000 when it comes time to sell. If that is the case, I will be thrilled that I held onto the house, even when I have to pay the taxes on it.