Last November I bought a house I planned to flip for $535,000. I estimate the home to be worth about $845,000 after minimal repairs, which is an amazing deal. The catch was, the home had a tenant in place with a ten year lease. I could not talk much about this flip the last 8 months, because I was negotiating with lawyers and the tenant. However, on August 1st, 2016, the tenant moved out and I gained possession of the home! On this episode of the InvestFourMore Real Estate Podcast I talk about the numbers, the repairs, dealing with the tenant, why a ten year lease was in place and much more.
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Was I crazy to buy a $800,000 house with an uncooperative tenant?
This house was for sale as a REO (foreclosed bank property) for many months. The home was priced okay, but it was being sold occupied. The reason it was being sold occupied is the tenant foreclosure protection act allowed a tenant with a valid lease, to keep renting a home after a foreclosure. The tenant in this house took out a ten year lease in 2007 for $2,200 a month, with a family member as the owner. The bank who foreclosed even sued the tenant twice to get her out, but the courts said it was a valid lease. There was definitely a reason I got this house so cheap and most people I talked to about the property thought I was crazy to buy it. I knew worst case scenario I would have to wait a little over a year to get her out and sell the house.
Below is a video of the home.
How was I able to afford to buy a $500,000 flip?
I have had from 8 to 12 flips going at all times in 2016. It takes a lot of cash to flip houses, even with bank financing and private money. If I were to use a bank loan to finance this house, I would have to get an appraisal done and put 25 percent down. Since the home was occupied, there was no way I could get an appraisal done and I really did not want to tie up $125,000 in cash for over a year. Luckily I was able to find a private money lender who was willing to finance the entire purchase price. I had to pay 10 percent interest, but I did not not need an appraisal. I was receiving rent from the tenant of $2,200 a month while she was living in the home, which helped to offset the interest payments every month.
Will I keep doing high end flips?
This is the first flip I have bought for more than $230,000. I find it is very hard to make the numbers work on high end flips in my area. There are owner occupants willing to spend much more than I am, even when a home needs a lot of work. I was able to buy this home, because it had a very unique tenant situation that no one else wanted to deal with. I would love to get more deals like this, but I have not seen any houses in the high end price range with this much profit potential. I will most likely stick to my low price flip strategy. ]
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[0:00:59.1] MF: Hey everyone, Mark Ferguson with Invest Four more. Welcome to another episode of the InvestFourMore real estate podcast. Thank you all for listening as always, I appreciate all the support out there. Today I’m going to talk about my high end flip, which was just vacated this week, super exciting. Been looking forward to this for a long time, there’s a lot of things that went on with a tenant in the property, with a long term 10 year lease, courts involved, lawyers involved, all kinds of stuff going on.
So I’m going to talk about all of that, about the property, I bought it for $535, it’s probably worth around $850 in that range. So I’m going to give you the lowdown on what happened, how we got the tenant out, how it all went down and yeah, it’s pretty interesting and exciting story. So can’t wait to tell you that. Before I get started, just want to remind everybody, I know I push my books and talk about them a lot and the reason I do that is because it’s the easiest way for me to reach the most people.
I spend a lot of time on them, it’s really fun for me to write them and I hope you guys enjoy them, who have bought them. I’m doing a little promotion now where anybody who leaves a new review, I shouldn’t say anybody, the first 30 people who leave a new review on one of my paperback books, that’s Build a Rental Property Empire, How to Make It Big As A Real Estate Agent, Fix and Flip Your Way to Financial Freedom or my new one, How to Change Your Mindset to Achieve Huge Success.
Leave a review for one of those books, the first 30, I will send you an autographed paperback book of your choice, just send me an email, show me the review you left, give me an address and your name, I’ll personally autograph to you, I’ll send it to you for free, no charge to you. So first 30 that end up doing that will get an autographed book. Please keep that in mind and get those in quickly and we can get started here talking about the property I bought.
So I saw this property listed on the MLS on a certain auction site, it had been listed for quite sometime. They were asking like $700,000 for it. I didn’t even really pay much attention to it because they’re asking so much for it and it was in a town I normally don’t buy in, a little far away from me. So I’m like, “I don’t even want to mess with it,” and plus, it was listed as being occupied. So I really didn’t want to mess with it because of that as well.
So what ended up happening was one day I was browsing the MLS or the auction site, one of the two, I can’t quite remember and I saw they had lowered the price a lot. Instead of asking $700,000 or whatever it was, they were asking like $600,000, a little less, and the starting bid was under $500,000. The starting bid was four something. So that got my attention because when I ran the comps and pulled the comps and looked at this house, I thought it was worth over $800,000 and I usually don’t mess with high end flips because of all the cost involved.
Financing cost, repair cost, holding cost because it usually takes longer to sell them, can add up really fast. You can have a hundred, $200,000 of cost into a high end flip very quickly and that will eat all of your profit in most cases because around here at least, owner occupants are willing to buy those high end properties that need work on a lot less margin than the flipper will because the owner occupants is just looking for a decent deal to live in. They’re not looking to make money on it. So I’ve never really seen that good of a deal on a high end flip around here. But at those profit margins, I knew there was some room.
So what I ended up doing is I made a bid on the property for $400,000, whatever it was, $425,000. I knew the auction company probably would not accept that bid, I knew it was too low but it at least got a bid into their system and then I went and looked at the house. I looked at the house, I could see it was occupied, didn’t talk to anybody there but definitely saw I was in really good shape form the outside. You never know on the inside, I’ve seen some really nice houses on the outside that were trashed on the inside but this one looked really nice.
So I went back, waited a few days and I ended up being the only bidder on the house, I was the only one who bid on it and that kind of surprised me but they did not accept my bid, they came back and said, You know, we won’t accept your bid at $400,000 but we would accept $500,000. So at $500,000, I knew there was a ton of room in the property. I also knew if I accepted their bid, I still had a few days to back out because I didn’t have to send my earnest money in for my deposit until the documents were signed, that gave me a couple of days.
So I accepted their bid at $500,000, went to the property, checked it out and I knocked on the door to see who was living there. When I talked to the person at the door, pleasant lady, she said she was a tenant and she had a lease in place. She said it was a 10 year lease and the courts had challenged it and it held up but she might be willing to move out because she wanted to move to the east coast with her husband. Very nice lady, she said, “I’ll send you the lease, I’ll send you all the court paperwork, no problem.”
So I’m like, “Okay, that threw a little wrench into things.” So I did some more research, talked to the title company, tried to find out as much as I could about the property. I was able to find the lease on the property through a title search and it was a 10 year lease that started in 2007. So it was actually up January of 2017, however, the occupant had a three month right to try and purchase the property after the lease was up. So technically she had until May of 2017 to stay in the house. At the time I was doing this, it was October of 2015, that was like a year and a half away.
So that was a long time to have to wait for someone to vacate a house especially when you have $500,000 invested into it. I did as much research as I could, checked into it, tried to find this court cases she was talking about and I could not find any information on these court cases and usually, the courts will not uphold a 10 year lease, they’ll throw it out as invalid, they won’t accept them. So I’ll give you a little bit of background on how that works. The house had been foreclosed on, it was bank owned now, this lady was renting the house from the bank and she was a previous occupant before the bank foreclosed.
So the lease was taken out 2007, actually with her uncle so it was not an arm’s length transaction, another red flag that makes most leases get thrown out like this. But because of the tenant protection act that was in place a few years ago, if someone has a lease on a house that goes through foreclosure, that lease can stay in effect as long as the tenant keeps paying, she doesn’t violate any terms of the lease and it’s considered a valid lease. So when I’m talking about the lease being valid, many times courts have thrown out leases that had really huge long lengths like a 10 year lease.
If any of the parties are related like the uncle being the owner of the home leasing it to a relative or if it’s not market rent. This lease was for $2,200 a month on a house that, at the time that the lease was taken out, it was probably an $800,000 house at that time as well. The market went down and it’s gone back up again since then. So there were three huge red flags that said this lease should never be valid. However, the tenant claimed it was valid but after my first talk with her, she said she sent me the lease and the court cases, she stopped responding to me. Wouldn’t return calls, wouldn’t return emails, nothing. That made me a little concerned as well.
Now I was starting to see why other people were not bidding on this house or trying to buy it because they probably talked to her and figured this out. So I talked to a few different people, talked to my father about the deal, talked to my sister, talked to my team and a lot of consensus was “you’re crazy if you ever try and do this deal, you’re going to get in huge trouble, you’ll get stuck with this house forever.” Another thing popped up along the way that we discovered was someone who had been living in a house before related to the tenant was currently in prison for securities fraud.
So that was another thing to think about was who the people I was dealing with, if someone is in prison, maybe that’s not exactly the right people to be dealing with in this situation. However, I decided to move forward with it all anyway. A lot of people thought I was crazy but I knew there was so much potential in this property even if I had to wait it out, it would probably be a good deal. So I ended up going through with it and closing on the deal.
Now, how? I bought it and paid for it was through private financing. I have an investor who is willing to finance me on many of my deals who used to be a fix and flipper in town but it’s kind of gone to private money investing since it’s tough to find the flips and he loaned me the money at 10% interest at two points. The full amount. I ended up having to pay $535,000 for the property after I paid the buyer’s premium and other costs associated with the auction.
So I paid, I closed on the property, got the financing in place, talked to the tenant again finally after I bought it, she was sort of nice to me. Wanted to know where to pay rent because she wanted to keep paying rent to keep her lease valid and the numbers worked out, I was paying about $4,500 a month in financing fees and she is paying me $2,200 a month in rent. So I was definitely losing money every month but I figured all that into my costs and what I would have to do to buy this property.
So while we had the property, talked to a number of different people about it and finally after enough searching, we discovered there were some court cases that involved this lease. The bank, the previous bank who owned the property had taken this tenant to court to try and force her out of the home, saying the lease wasn’t valid and they lost. The court ruled in favor of the tenant even though it was a 10 year lease, even though she’s related to the owner of the property and even though it wasn’t close to market rent.
The bank appealed that ruling and they lost again. I’ve talked to many lawyers, many people about this case, trying to figure out how and why the court would rule that way and the basic response I got was that judges have a ton of power. They can pretty much decide whatever they want, whether it’s close to the law or not. If they don’t like a party, say if they just did not like this bank, they may have ruled in favor of the tenant just to spite the bank because of the way the bank was acting.
That didn’t give me a lot of confidence in our justice system but they said that’s how it works sometimes and since twice the courts had ruled in favor of the tenant that I basically would have almost no chance of getting it overruled or the lease overthrown if I were to take her to court as well. There was a chance that me being a new owner could bring it to court again but they said it was really slim that I would be able to force her out. I began to negotiate with the tenant, we talked back and forth a few times. I went through the house with her because in the lease it did say I had the right to visit the property with proper notice.
So I saw the house a couple of weeks after I bought it on the inside and the nice part about that was the house was in fantastic shape. I mean the carpet needs stretched a little bit, there were a couple of stains in the carpet, maybe a little paint needed, that was it. The rest of the house was in fantastic shape, 5,200 square feet, all finished, three car garage, lots of high end features, three, four fire places, kitchen, really nice kitchen up, another kitchen down the stairs, great house. So that was nice.
The tenant and I talked back and forth a couple of times, basically she said at first you wanted a $100,000 to move out of the house then she said she wanted $50,000 to move out of the house, things did not go well for us and basically we stopped talking to each other for a few months. I collected my rent, made my payments to my lender, she didn’t respond to me at all and we just kind of waited each other out to see what would happen. During this time I hired one of the best lawyers in the state for the foreclosure matters, handled a lot of stuff and they kind of advised me on how to handle this, what to do.
Thinking about ways to challenge the lease, ways to figure out how to get her out of there forcibly and basically they said, “That’s going to cost me so much money, it’s going to such a hassle, it’s not worth it, especially when you don’t know if she’s actually going to get out.” So they advised me, be super nice, let her contact me and see what happens. She didn’t contact me for two months that I waited very patiently and earlier in the spring and the summer, I contacted her again and said, “Hey, getting close to the spring, summer, just seeing if you were still interested in moving out. If you want to talk more about the situation, please let me know.”
She responded and said, “Yes, I would be interested, please let me know what kind of deal you’d like to work out and maybe we can get something happening. So what I ended up doing, I offered her $10,000, well I offered her $20,000 to move out. Basically said, “I’ll give you $20,000 when you’re out. If the house is great and in good condition, you get the money,” and she agreed in principle to the money but she wanted it all upfront. I said, “No, there is no way I can give you the money upfront, there’s no way that protects me. You could just take the money and stay here and that’s not going to work out.” So we ended up saying, “$10,000 when you sign the agreement and then another $10,000 when you move out.”
So we basically agreed to what we’re going to do but then she was worried that I wasn’t going to pay her. She wanted to be able to place a lien against the house until I paid her, all kinds of weird things were coming up in the deal and it wasn’t working out and the tricky part was I have lawyers on my side advising me on what to do and she did not. For a while she had a lawyer but she didn’t have any council representing her so it’s tough with me trying to negotiate with her. In the end my lawyer suggested I pay for her to have a lawyer to negotiate.
So I actually paid the lawyer $500 to negotiate for her against my lawyers and we got something worked out. I ended up paying her $10,000 when she signed the agreement, that was the middle of July and then when she moved out, I’d give her another $10,000 plus her security deposit which was $2,200 and that happened yesterday, August 1st. So once we got that agreement worked out, everything was civil. We did just fine, the whole situation was great.
She moved everything out. She left the kitchen appliances, she left all the light fixtures, everything looked great, the house looks really good and I can move on with this deal. So if you guys are interested, there is a video of the home on my YouTube page. I’m going to put a link in the article notes for this podcast. But you can also just search “Mark Ferguson” on YouTube and I’ll pop up or “InvestFourMore” on YouTube and I’ll pop up. I went through the house, showed everything.
It is a very nice house and the repairs, I would say it might need $20,000 in repairs. We’ll see for sure. That’s probably the absolute most but we have to replace a little bit of carpet upstairs, do a little bit of painting, there might be a window or two that needs replaced as seal broken, we can just replace the glass, and then there’s some area where there’s an entertainment system in the basement where the speakers are gone. We might replace those speakers to make the house really nice.
Basically, the numbers look like $535 purchase price, $22,200 to pay her. I probably have $5,000 in lawyer’s costs, maybe less than that. but I am assuming it is going to be that much based on how much time I spent with him, about $45,000 in loan cost after getting her rent, paying all the fees. $20,000 repairs, probably $28,000 selling cost, paying an agent and title and insurance and then $10,000 in costs for maintenance, utilities, insurance and a few other things that might pop up.
So I’ll basically have about $130,000 of cost into these house. It needs almost no work but if I sell it for $845 which is right where I think it’s going to sell for, that would be a $180,000 profit assuming I get it sold in November. I am hoping I get it sold before that but that’s kind of worst case scenario. So in the end, I mean it was a risky deal. Obviously there’s a lot going on but it should be an awesome flip. It should blow the profit margin on any of my other flips out in the water. I haven’t had much my own money invested in it at all, which is really nice and it’s been a learning experience and exciting experience and a lot of fun and stressful other times too.
So my plans now are to hopefully get it fixed up, repaired in the next two weeks and get everything done. Get it on the market, get it sold and take that money, reinvest it into more flips, rental properties see what we can do with it. I really like doing this high end flip. It was a lot of fun and exciting but that does not mean I’m going to keep doing a lot of high end flips, keep going that route for the reasons I’ve mentioned before. It’s very rare to find a really good deal that you can flip in my market.
Now I know I’ve had a podcast with Will Bernard. When I first did my podcast, he flips million dollar houses in California all the time. There’s a lot of people who flip million dollar houses there. That’s a completely different market, there’s a lot of million dollar houses there and most houses are million dollars there so it’s much different in here. There’s a lot more inventory, a lot more of those homes, a lot easier to sell them. Now this house I have is actually close to Boulder, Colorado which makes it lot easier to sell in that price range than if it were in Greeley.
If I were to buy a million dollar house — now this isn’t quite a million dollar house but it’s close to it. If I were to buy a million dollar house in Greeley, I would be really scared, really worried about getting it sold because there aren’t just as many people looking to buy a million dollar houses here. Even if it was a good deal, it might take six months to sell. However, for those of you who know Colorado well, the median price in Boulder is close to or over a $1 million right now.
It’s crazy what prices in Boulder are and this house is not in Boulder, but it’s very close to it which gave me more confidence in doing a deal this size. That is one reason why I did this flip and just the profit margins you have to have on these flips is crazy. So if you read my stuff, listen to my stuff about how I come up with the numbers for flipping a house, my strategy is really close to the 70% rule. The 70% rule states that you should pay 70% of the ARV minus repairs.
The ARV is the “after repaired value”. So you figure out on this house I bought, on this high end flip I bought it for 535, I figure the ARV is $845, the after repaired value. So you take $845,000 you multiply it by 70% and you get $591,500. That’s what she should pay minus the repairs. So then you have to take the repairs off that. So I’m saying $20,000 in repairs, I should pay $571,500 for that house based on a 70% rule.
However, this was a unique situation where I knew I would have a lot of holding costs and cash for keys agreement, eviction costs based on the tenant situation. So I basically had another $20 to $40,000 in cost I knew I would have getting her out. So if you subtract that off of it then you’re getting to the $550, $540 range, you should pay for this house. So even though this seems like a completely smoking home run deal, really, it’s pretty close to the 70% rule when you look at the numbers. That’s why it’s so hard to make a lot of money flipping houses in that high end because the numbers have to be so good, the discount is so high to be safe and make your profit margins.
Now, if we’re to take the 70% rule and look at one of my typical purchases, I just bought a flip for $130,000. I think it’s worth $185. So if I take $185,000, multiply it by 70%, I get $129,500. So that says I should buy it for $129,500, if there’s no repairs needed, this house is in pretty decent shape, it probably only needs $10,000 repairs. So I’ll subtract $10,000 from that and I come up with $120,000 is what I should pay for that flip based on $10,000 repairs needed and $185,000 ARV. So that makes it look like I paid too much for this flip but however, since I’m a real estate agent, I get to save a commission on the purchase price.
So I made 3% when I bought it and I’ll also save 3% when I sell it because I don’t have to pay a listing agent. So that kind of makes up for that difference in the profit margin. That’s one other thing I forgot to mention about that flip I bought the high end flip when I bought it for $535,000, I was paid a 3% commission on that when I bought it. So that was another $535,000 times 3% is $16,000, I was paid $16,000 at closing for buying that house. I didn’t really have any money invested into it at all because of the private financing. So my actual profit margin when I get this sold is going to be close to $200,000, once I add in that commission I made when I bought the property.
So that’s my story on a high end flip, we will see how everything goes. Hopefully we get it repaired quickly, it sells for as much as I think it will sell for, even if it sells for less than that, I’m still going to make money, I had very little of my own money invested into it. Obviously there’s some stress but it was exciting, it was really fun to go through this process. I had a really good time doing it and I would not be scared to do it again if a similar situation arose. I wouldn’t be afraid to do a high end flip again, but they’re just so hard to find with the right numbers.
Again, it seems like a crazy situation, having to deal with a tenant, having to go through this whole mess but at the same time there’s no way I would have ever gotten this deal if it was vacant and easy to buy, it would have sold for $700,000 to an owner occupant or more, $750. So really, having this crazy situation with a tenant is what allowed me to get this deal, to have a really good high profit margin and a lot of potential.
All right, that’s all I’ve got for this week’s episode. Like I said, be sure to leave a review on my paperback books. The first 30 people who do that will be getting an autographed copy of one of my books for free. I pay for shipping, everything, I’ll send it to you. So be sure to hop on that and yup, as always, check out the blog and I’ll talk to you guys later.