GARDNER WAY: The BRRRR That Left Me Feeling Cold

*Definition of BRRRR – buy, rehab, refinance, rent – (normally the fourth R is for “repeat” but in my case it is a rating - this article includes some adult language and I definitely don’t want to repeat this project!)

I probably should have known better up front. We had purchased a supposed flip property the year before; a house of the same age by the same builder in a nearby neighborhood. It hadn’t sold and was paying for itself via a lease option arrangement. It was the height of the most recent economic /real estate bust. But I had the fix-up fever, and we had the time available, and I had a young man that could use the work, and I just knew I could make this place better.

We did make it better. Of course we did the usual lipstick stuff like paint and carpet, but also a new heating system, a relocated laundry, heat to a previously unheated addition, privacy fence and fresh sod – big stuff – expensive stuff.

And it turned out great. We listed it for sale (I didn’t have my license at that time). We had plenty of showings with positive remarks about the property and the price. But we also heard over and over “don’t like the neighborhood”. When we cleaned the drywall dust out of our eyes we realized they were right. The houses on either side were well kept by long term owners. But there were other homes on the street with piles of old tires, waist high weeds, peeling paint and garbage cans parked at the curb 24/7.

In 2011 the market here was soft at best; and it was now September, school was in session and showings had dropped off. We had interest payments to make; and decided to rent it out for a while. I put an ad on Craigslist and began screening inquiries and checking references. Then I got a phone call. It was early morning and the line was a little noisy. The caller identified himself as a sergeant in the Army – calling from Afghanistan. His wife had moved to our area to be near family during his deployment. She couldn’t find anywhere to live that was the right size and within budget. The kids had started school and they were all camping at the homes of family. They needed a house now. There were four kids and three dogs. I thought about my pristine carpet, clean yard and freshly painted walls. “Please ma’am,” the soldier said. “I need to know my family is in a good place so that I can concentrate on my job here.” Oh jeez… how do you argue with that? I agreed to schedule a showing and interview. She showed up; with 8 million tattoos and bright orange hair. But she was well spoken, and the kids were bright and cute. We wrote a 9 month lease. That got her through the school year, him home from deployment, and a house available for sale on the first of June. She turned out to be a great tenant who took wonderful care of my house. He came home briefly at Christmas. I baked them cookies to thank him for his service. When she left in June my house was spotless.

But the neighborhood hadn’t improved; nor had the market. My Realtor said to rent it again.

The next renters were a young couple living together for the first time. He was an oil field worker with a great income. She was a college student with a part-time job. Background checks were good, landlord references were good. He wanted a 6 month lease but I wouldn’t do it. That would leave me with a vacant house in the middle of winter. No thanks. We agreed on 11 months. The month of May would be a good time to list it for sale.

I don’t know when they broke up. I had them depositing money directly into my bank account so I never saw them. But the payments stopped. I tried to call both of them with no answer. I posted a pay or quit notice and got a call back from a stranger. She was gone, he was the new roommate. The boyfriend was working out of town a lot (which is common in the oil field). I got the roommate’s info, told him how to pay, and the money showed up - for a while. I called the roommate again. The boyfriend had kicked him out and was moving out himself – he bought a house. I called the girlfriend and played dumb when she answered. Oh no, she explained, she hadn’t lived there for a long time, she didn’t owe any money. Well here’s Tenant 101 college girl - your name is still on the lease and you are still liable. That got her attention. She reached out to the now ex-boyfriend who then called me. He’d be moved out shortly. His security deposit would cover the rent. Except it didn’t - because this time there was damage to repair and cleaning to be done. He tried avoiding me for a time. But when I figured out the address of his new home and threatened to get a judgment and slap a lien on his beloved new house, he paid up.

So far, so good. Except for this damn neighborhood…

The subdivision had an HOA and covenants that were supposed to protect against the type of blight we were seeing. I attended the annual meeting and found a pitiful handful of well intentioned volunteers who didn’t know what to do. I knew what to do. I hold an HOA management license. I volunteered for the board with the stipulation that I would be the Treasurer and was promptly elected.

I had seen the distributed financial statements and they were a mess. Huge amounts of unpaid assessments, big gaps in the accounting, no line item budget, no reserves. In fact the previous Treasurer was owed $2000 because she put her own money in the account to make checks stop bouncing. (She made the mistake of leaving the checkbook with the President when she took a vacation.) No one was enforcing the rules to make the neighborhood look better; and the park – our responsibility – looked pretty crappy. I spent almost 2 years pushing, pulling, dragging the HOA into state compliance and the budget and checking accounts into the black. The best thing I did was to go head to head with the long term President who was a bully and a thief. I proved that thousands of association dollars went missing under his watch and he ultimately resigned and settled at mediation for $2000 in lieu of a court judgment. So long Larry. I hired reliable people to care for the park and people to patrol and issue compliance letters for junky residences. By the time I sold, the neighborhood was much improved.

In the meantime, I was still a landlady. My next tenants were a young family with 4 children. I spoke at length with their current landlord. They had been there 5 years – no problems. However, their family had grown; and the apartment was small and on an upper floor. They really needed to be in a house with a yard. Good references, but they were a problem almost from the start. I would drive by while taking care of my HOA duties and the lawn was a foot high. As former apartment dwellers, they didn’t own a lawn mower and were not eager to buy one. The second month the rent was late. Then again. Then again. About 8 months in I posted yet another pay or quit notice. A neighbor called me – did I know my people were moving out? No, I didn’t. I guess “quit” is one of the options of pay or quit; but I hadn’t expected that.

They owed a lot of rent. They owed a big water bill. The kids had written on the walls. There was Koolaid on the living room carpet. The deposit wasn’t going to cover all this. I filed for judgment and garnished his wages. But he was already being garnished for child support by a different woman. The law only allows you to take a certain percentage of someone’s check and I was second in line. I received regular payments but they were small; like $20 bucks at a time. My husband shook his head the first time I showed him one. “That poor son of a bitch. He should have never messed with you.” After about 2 years the checks stopped coming. He had quit his job and I had no (cheap) way to find him. I wrote off the balance – over $2000.

I mentioned a neighbor calling me to rat out the tenants. I am not a slumlord and I don’t want my properties to be a problem for those that live near them. I wrote a letter to each owner-occupied home on the block. I gave those owners my name and contact information and told them to get hold of me if they ever had a problem with my tenants. Unfortunately this became very handy with my last set of tenants…

Nicole and William had been renting a house that was up for sale and they needed a new place to live. I called their landlord and was told that showings had been difficult because William worked at night and slept in the day and they had dogs that needed to be locked up before showings. The landlady felt the house needed to be vacant in order to sell. There were 3 kids and two dogs (later I found out that there were actually 4 kids and 3 dogs and a cat). They loved my spotless, roomy, 4 bedroom house. I made them pay the full security deposit up front; but allowed them some wiggle room on the rent payments for November and December (unexpected move, Christmas, etc.) We structured the payments to match their pay periods and they would be caught up by December 31st. Wrong… they got behind and stayed behind for most of their tenancy. A few weeks after they moved in I saw my address and William’s name in the published police blotter. He had been caught illegally dumping electronics in the desert (instead of paying the mandatory recycling fee). Great, I had rented to a litterbug. I hate litterbugs. I also started getting late notices from the water company; they weren’t paying. I nagged and badgered them through winter and spring. My house looked dumpy outside. Garbage cans out front 24/7, Christmas decorations still up in February, dead looking grass. I was on the HOA board and my property was in violation of the covenants. The weather got warm and there were noisy parties on the rear deck. I was already pretty much done with them when a neighbor called. The police had been at my property the night before and a known drug dealer had been seen coming and going with one of the teenaged daughters. Of course this call came the one week where they were actually current on the rent (but not the water bill). I notified them that it had been 6 months and I was going to inspect my property. Nicole tried to delay me by saying she was sick (that’s okay – I’ll only be there a few minutes), she said that she should be given 72 hours notice (not in Colorado sweetheart). Finally, after about 2 days of arguing, we showed up to look and it wasn’t pretty. Every bi-fold closet door was broken. The dogs had stood on all the furniture and licked the walls bare of paint throughout the home. There were additional animals and children not noted on the lease. They had placed a large swimming pool in the middle of the grass backyard – no way the lawn underneath would survive. The house was cluttered, dirty and it was obvious if we let them stay that the damage would just get worse. We left and the next day I posted a quit notice based on lease violations – no offer of redemption. Nicole went ballistic and called and emailed arguing her side. The 3 day quit deadline passed and they were still there. I began the official eviction process.

I am privately a potty mouth; but in business I am polite, firm, and play by the book. They hadn’t paid the water bill and I allowed the utility company to shut it off. Nicole called screaming. My husband watched me arguing with her on the phone. I repeated myself several times and then lost it. “Here’s the deal Nicole – pack up your raggedy, ill-behaved brats and your snot nosed, wall licking fur balls, and your useless, sh*t for brains husband and get the f*ck out of my house. If you continue to live there without running water I will report your sorry, drugged out ass to Child Services and see what they have to say about all this.” Then I hung up. My husband was staring at me with his mouth open. “Geez, dear” he finally said.

I waited a week. Neighbors reported that they hadn’t seen anyone there for a few days. We went over and knocked then unlocked the door. It was August and the smell and heat hit us instantly. There were a thousand flies buzzing around the ceiling. Both toilets were dry on water but full of sh*t. There was furniture, clothes, rotten food everywhere. I took a bunch of pictures and as we were leaving they showed up. Nicole was belligerent - what were we doing in her house? I politely reminded her that in Colorado we didn’t need permission to enter and I waived my camera in front of her nose. “I’m sure Child Services will be interested to see how you guys live.” William told me they needed another 24 hours and it would all be cleaned up. That was Tuesday night. On Thursday morning I sent my contractor over to assess the damage. He called me and said they were still there and threatening him. I told him to pack up and leave. Once he was gone he sent me a two word text: “F*cking tweakers!” It took another few days but they were finally gone and I changed the locks. I found out that both of them had lost their jobs and I had no way to find them. As a parting shot I contacted the references on their original application (parents) and reported that I thought their grandchildren were in danger; and just for spite reported the same to local law enforcement.

It took a few months and thousands of dollars to bring the house back to good condition. It was October - not the best time to list a house for sale – but I was done renting this one. We actually found a buyer pretty quickly (via another Realtor – not my broker). We were scheduled to close the week of Thanksgiving. I was literally locking my office door to head for the closing when my Realtor called. The deal was off. The buyer had failed to get his financing and just hadn’t told anyone and the other Realtor wasn’t checking in with the lender. I could have cried. I called my hubby and told him to go to the house and turn off the hot water heater and turn down the thermostat. Selling a house between Thanksgiving and Christmas was probably not going to happen.

My Realtor got it right back on the MLS and we were pleasantly surprised when a showing was scheduled for Thanksgiving weekend. Maybe we could get it sold. On Monday I called my Realtor – how did it go? Terrible he reported. Terrible? How could it be terrible? The house was spotless and priced perfectly. He explained that a young female Realtor and her clients, a young married couple, had only made it part way through the house. They had opened the storage closet under the staircase and found A DEAD CAT! They all got so freaked out that they left right then.

I went home that night and as I tried to tell my hubby the sad story I did cry – but I was laughing too – and by the time I finished he was also laughing and wiping his eyes. To this day we have no idea where the cat came from (although it appeared to have starved to death). Workers had been in the house. Hubby had been in the house. No one saw a cat. At that point the home did sit through the holidays. But the first week of January we got an offer.

The new buyer had the home inspected and that was when we learned about Federal Pacific Electrical panels – FPE. Thousands were manufactured in the 1970s to the mid 1980s. They were never recalled; but they are now frowned on by lenders and inspectors. Apparently they worked fine until they didn’t. When they didn’t work they failed to throw the breakers and allowed fires to happen. So dang, another $1100 out the window when we had the panel replaced. (We have replaced several others since then – but since we knew to look for them it was factored into our budget.)

In mid February we finally got to a closing table and collected a check. The bylaws of the HOA stated that you had to be a property owner to serve on the board; so I was able to gracefully extricate myself from that obligation as well.

In looking at the bottom line, after 4 years of ownership, it is pretty clear that it wasn’t a great idea. But do I add value for lessons learned and gray hairs earned? Probably. And $100-$200 per month per door is considered an adequate income. But this one was just so painful…

So, how did it all turn out? The bullet points and spreadsheet are below.

• I learned a lot about being a landlady (and have actively chosen not to be one since then – I’m really a flipper at heart).
• We left the house better than we found it.
• We left the neighborhood better than we found it.
• We left the HOA in better shape than we found it.
• I met another investor who bought a house across the street and we became great friends.

Was it worth it? You look at the numbers and decide…

GARDNER WAY AMOUNT NOTES

RENTS 2011         4413

COSTS 2012        -6642 CARRY COSTS

RENTS 2012          9283

COSTS 2013         -9797 CARRY & REPAIRS

RENTS 2013          9700

JUDGEMENT 2013 2710 JUDGEMENT AWARDED

JUDGEMENT 2013 -2072 JUDGEMENT UNCOLLECTED

COSTS 2014          -12257 CARRY & REPAIRS

RENTS 2014            8745

TOTALS                   4083             NET INCOME AS RENTAL

PURCHASE 2011   -71000

FIX UP COSTS 2011 -34891         ORIGINAL REHAB

SALES PRICE (GROSS) 121500     2015

SELLER CONCESSIONS -4500     HELP BUYER WITH THEIR CLOSING COSTS

SELLER COSTS               -8203     COMMISSIONS, ETC.

TOTAL                               2906          NET INCOME AS FLIP

RENTAL NET                    4083

SALES NET                       2906

TOTAL INCOME                 6989             FEB 2011-FEB 2015 (4 YEARS)

                                          $146 / PER MONTH