Appletree - Foreclosure Purchase, Rehab and Retail

We purchased this house out of the MLS, paid cash and did a full rehab. To be upfront on this, I lost money on this deal. We lost just under $5,000. I consider this deal my own personal $5,000 hands on seminar. I borrowed hard money for most of this job and was in it about $35,000 of my own cash. Even though it was a loser, my hard money lender got all their payments and their principal back. In this business you only have one shot at keeping your word. This lender has loaned me an additional $175,000 since on different houses because they know that I will pay them back. No matter what never, ever screw your lenders!

In my opinion there was two factors that tanked this deal. First, my rehab budget was blown out by about $7,000. This house was in rough shape and we suffered from job creep. With everything we made nice what we didn't touch got uglier and we had to fix it. This bad boy ended up getting the full monty fix up. Gutted the kitchen and both bathrooms, replaced every door, scrapped the ceilings and re-textured them, new double pane windows, interior exterior paint, stainless appliances, granite the whole works. We ended up spending $43,000 total on the rehab.

The second factor that I think we really suffered from was that I underestimated the smaller square foot inventory and the lack of resiliency. When I purchased this one in September it was hands down the cheapest per square foot buy in the city and looked to have a retail price of around $155,000. This house was 1119 square feet. The larger homes, 1500+ square feet were all in the high 100's to the low 200's and were not selling very well at all. As we transitioned to 2009 all the inventory took a 20-30k drop across the board. What that left me with was a buyer pool that had a tough decision; either purchase the nicest small house in the city or purchase a much larger house that is in rough but livable condition for the same price.

Square footage and an extra bedroom won out. From a price per square foot perspective I still did real well compared to my peers. I feel that is because of the meticulous rehab and the attention to detail all our rehabs get. We put out a solid product that is heads and shoulders above my competition.

This experience taught me to focus on 1400+ square foot homes because the buyer pool in my target market has spoken and they want more elbow room. It is funny how things work. We had the nicest house for sale in the area hands down, it was a great end of cul de sac lot that was much larger then just about everything in the city, it was better then new and we couldn't get a penny over $135,000 no matter how hard we tried. I even experimented with the marketing of this house by trying a quasi auction type listing. It worked and we received multiple offers but couldn't squeak out anything higher.

We paid $80,000, sold it for $135,000, spent $43,000 on rehab, credited the buyers $5,500 towards their closing costs and I paid the buyers agent a 4% commission and after all the holding costs we lost.

In my opinion you can't call yourself an investor unless you have lost money. Everyone strikes out occasionally.

The slideshow is here.