Let’s review one of my property deals that is a great example of that.
Mobile Home Deal Background
In January 2013, we had a crazy month of rehabbing and finding tenant-buyers for two properties (properties 4 & 5) and buying two more properties (properties 6 & 7). By mid February 2013, we had tenant-buyers in place in all of our homes and we felt like we could breathe again.
We made an offer on this property at that time. Here’s the details:
‘99 2 bedroom doublewide (~1,100 sq ft) on a ½ acre lot
New area for us: Close to jobs but not in a very good school district.
The neighborhood consisted of similar mobile home and land properties in good shape overall.
Asking Price: $12,075
Repairs needed: Outside central A/C unit, roof repair, kitchen floor repair, and general clean up.
Expected cost: About $5k
For those who know our business model, our goal is to buy and rehab these mobile home and land properties for $20,000. So, with the asking price around $12k and putting about $5k into this property, we should be able to meet our goal; however, there were 2 big unknowns.
**Don’t get too focused on our numbers. If properties are more expensive, you can probably collect more monthly. Just make sure you know your numbers and are happy with your return.**
2 Bedroom Home – We had never bought a 2 bedroom home before and didn’t know how people would respond. Most families want at least a 3 bedroom home.
New Market – This was a new area for us. We were less than 10 minutes to the interstate and less than 25 minutes to the downtown city where many jobs are located. However, we knew that the area was a little poorer and that the schools were weaker than where we had invested before.
I know that I have said this many times, but the nice thing about these cheap properties is that it allows you to test new products and markets without risking too much.
However, looking back I wish we had just tested one of these concepts (2 bedroom home or new market) as a slow demand from tenants/buyers wouldn’t allow us to pinpoint the exact cause. Even better I should have ran a Craigslist ad for an imaginary home similar to this property and see how many calls I get.
Making An Offer & Closing The Property
We made our first offer around $8k cash for the property that got rejected pretty quickly. We made another offer around 10k and were informed that we were in a multiple bid situation. We then went to $12,125 or $50 over asking price, which the bank accepted.
Looking back, buying at the asking price was a great deal and we shouldn’t have gotten greedy in trying to go a little lower. However, at that point, we just weren’t sure about that market and didn’t know how good of a deal we had.
The property closed in about a month without a hitch.
At this point, we were completely hands-off without repairs, meaning that we weren’t performing the repairs but simply coordinating who we needed for the specific job.
Our handyman did most of the work, including the flooring, the roof work, and the general clean up. Our A/C guy installed the A/C when the tenant/buyers moved into the property.
I do want to mention quickly about the roof repair in that the main issue was caused by the skylight in the master bathroom. In my opinion, these skylights are like ticking time bombs where a leak seems to be inevitable. We took out the skylight and patched over the hole in the ceiling and roof.
Finding a Tenant-Buyer
The number of calls was definitely less than what we had experienced with our last couple of properties; however, we did get a few people to go by the home to check it out over a 2-3 week period.
One couple liked it and met our qualifications.
At this point, we had dropped our requirements to $550 per month and $1,200 down. With this property I had started offering that for a larger down payment, we would take an additional amount off of the principal. Again this wasn’t a requirement but was simply a bonus offer. The couple agreed to put $3,000 down and we reduced the principal by an additional $2,000.
Wouldn’t this large of a drop in price reduce our yield?
The answer is yes in the long run, but I have always found that collecting more upfront is much better than hoping that you will collect more in the long run. The fact is that even though we hope to sell the property to all of our tenant-buyers, most of the properties will turn over.
This lowered the term from about a 13-14 year term to an 11.5 year term. We will still make plenty of money on the deal if the tenant-buyers pay off the property.
If you look back to our first land/home deal (property #2), I thought we would be rich at the end of the 30 year term with our first tenant-buyer; however, that family left after a year.
Fast Forward To Today
Almost a year later in early 2014 and the same tenant-buyers are still with us. Occasionally, they will pay late, which is a nice bonus for us.