The Tycoon Report

How To Buy a Home for a Third of the Original Price! Friday, November 7, 2008 | Ethan Roberts

About four months ago, I wrote an article for The Tycoon Report called, Would you journey 300 miles to buy an investment property? After the closing, I spent about a week doing the necessary things to put the property into excellent condition, and shortly thereafter was able to secure a tenant. 

Since then I have been interested in acquiring another property in that same area, but at an even lower price, due to the large number of foreclosures that remain on the active market.

I have been keeping an Excel spread sheet on all of the foreclosure properties in my area of interest. I list the address, current price, new price (if it changes), year built, square footage, number of bed rooms, location, listing brokerage, and miscellaneous comments about the home. I update it as things change. 

I use several Real Estate web sites to track the properties, including www.trulia.com, www.bidselect.com, and www.realtor.com.  In addition, I have one local area Realtor who sends me listings that meet my criteria. 

About two weeks ago I received a listing from this Realtor for a property that really grabbed my attention.  It was a 3/2, 1762 square feet with a bonus room that could be used as a dining room, office, or even a bedroom by adding a closet.  The home, a bank foreclosure built in 2005, also had a two car garage, screened porch, and inside laundry room.  Here is a picture of it:



Are you ready for the bank's asking price?  Only $74,900!  

I immediately called the agent to ask what she knew about the property. She told me it does need some work, was "a little beaten up" by the former owner, but there are already three offers on the house. So I asked:

"What's 'a little beaten up'?" "Well, some cabinet doors and the walls, and the carpet is pretty well shot. And oh yeah, it needs appliances too."

Well, that didn't sound too bad. I knew I can handle all that. But now I had a decision to make. I was 300 miles away from this property and the bank's deadline for all offers was just a few hours away. It sounded like a great deal, but I have never bought a property sight unseen in my life. So what do I do? How do I make this decision?


There are times when an investor has to dig deep to analyze a situation. Let's see what information that I had to help me:

1)  I had six pictures of the house, including the one above, all of which looked very good.
2)  If there were multiple offers on the home, then other people must be seeing the value in it.
3)  At that price, there was so much upside potential, it seemed to be worth the risk.

Suddenly it hit me. I could just make an offer, and if I won the bid, I would leave the next morning to see the property. If it was pretty much as the agent described, then there would be no problem. But if the property was really a disaster and more than I wanted to deal with, I could simply withdraw the offer. The binder deposit was not due until 24 hours after the written acceptance of the offer by all parties.

So I decided to make a bid. Now I want to share with you the general process I use when deciding what to offer on a property. I take into consideration the following factors:

1)  How long has the property been on the market?
2)  Are there any other offers on the property?
3)  What is the price, relative to the amount of rent that can be charged?
4)  What is the price, relative to the value of the home?

The first answer was only two days. As for factor two, there were three other offers on the property. Both of these are negatives for the buyer. It means that the best chance of overcoming the competition to win the bid is to offer cash and make a very strong offer. 
However, the answer to factor three was "excellent". 

I want a minimum of 12% annual rent collection to sales price. That is before expenses such as taxes, insurance, or vacancy.   My feeling was (and the agent confirmed it) that this house will rent for $925 a month fairly easily. That's $11,100 gross potential rent per year, and when divided by the asking price, yields a 14.8% return. 

But what about factor four?

So I checked the estimated value given on www.zillow.com, and it was $148,000. While Zillow's values are sometimes open to question, I usually find them to be at least in the ball park, perhaps within 5% of the true value, as an appraiser would determine. Zillow's weakness is that unlike a real appraisal, it uses many homes for comparison that are different ages, size, and price. This tends to reduce the accuracy of their estimate. However, with nothing else to go by, except my own knowledge of the prices in that area, and the agent's confirmation, it was some consolation to have the Zillow figure. But what I discovered next was too stunning to disregard.

The house had originally sold for $234,900 in February 2006!

Now say what you will about houses being way overpriced during that period of time, and the values versus area income being out of whack, that's all true, well and good.  But at $74,900, that means that the price to income standard of 3.1 had just become $24,161! At $42 per square foot, this asking price was just too good to pass up.

Summing up, the property was new on the market and there were other offers, but the rent and value of the home definitely justified the price. I wanted to win the bid, and knew I was going to have to make a strong offer, even to go above the asking price. So I bid $77,000 cash ($2100 above asking price), with closing to take place in 14 days.

I won the bid. 

The bank accepted my offer, with the only stipulation being that my binder deposit would have to be 10% of the sales price. I swallowed hard on that one, but again, my plan was to view the property and only if I was satisfied with it, would I complete the transaction. 

So the next morning, I once again journeyed 300 miles to buy a home. I met the agent at the property, and took pictures of the other parts of the home. And yes, they did beat up the walls pretty good. Who is the little cutie that wrote, "In case of emergency bang head here" on the wall below? My first thought was I'd like to wring his neck, but then again, if he didn't do what he did, I'd have to pay a lot more for this home!

But all in all, for me it was a no-brainer. I will soon be closing on the property. By my calculation, about $6000 will be needed to put this house into pristine condition. That brings my real cost up to around $83,000. However, when this house is finished, I will have a pristine palace with a 13.3% gross rental return, and about $65,000 of equity!

Ethan Roberts Contributing Editor The Tycoon Report