Posted By: Sean Terry | December 5, 2008
I’m going to break down the anatomy of a Fortress real estate deal using a real live case study of Mike Faulds. Mike is a 50 year old business man that has worked for IBM over 18+ years, he’s has excellent credit and strong income documentation and is very conservative investor. He was looking for a way to capitalize on this market down turn and create write offs against his taxable income.
After studying the Fortress Investor website and reading Fortress Gold Getting Started Package he decided to get prequalified with Katie at State Mortgage. The prequalification took about 10 minutes and then he was off and running.
He liked one of the properties we had released located at 3626 W Villa Maria Dr. Glendale AZ 85308.We bought this property at the court house steps for roughly $90,000 on a drive by. When we buy houses at the court house steps here in Phoenix we have to post a $10,000 non refundable deposit and pay cash the next day by 5pm. We don’t have the ability to do the traditional home inspections and repair requests, we literally have to make a decision very quickly and on a simple drive by.
We estimated the value at around $215,000 so we should be OK bidding in the $90,000 range. After successfully winning the bid for $90,000 and closing on the property the next day by 5pm, we went to take possession. What we found was unbelievable….
Check these pictures:
We found the water had not been turned on for 6 years do to a slab leak in the
hall bathroom and the place as you can see was an absolute disaster.
Most of the homes we purchase are not this bad, they usually need $15,000
to $20,000 of work and that’s it. Well, this topped the list as one of the worst condition house we have ever purchased.
We dug right in and started the renovation, we ordered a 40 yard roll off container and our crews started gutting the place. We took 4-40 yard roll offs off the site. We found the slab leak buy breaking the slab in the bathroom and digging down 5 feet to locate the leak. We repaired the broken water line and was able to get the water back on again and continue the remodel. We then replace the carpet, tile, painted the kitchen, added French doors to the master bedroom and renovated both bathrooms. The house got fresh paint inside and out. We also rebuilt the sun shades in the front entry and back patio and reclaimed the pool by hiring an excavator to dig out the dirt and take it off site. We then re-plastered the pool and replaced the equipment.
All this cost roughly $38,000 and 2 weeks to complete.
Here is the end result:
Now that the renovation was done we lined up a tenant on a 12 month lease paying $1250/mo. Mike then purchased the property from us for $173,000(new loan $165,500 and $7,500 cash) This is on of the last properties that we were able to finance at 80% of the appraised value. Fannie Mae and Freddie Mac recently change from 80% to 75% LTV.
Here is the Fortress break down:
Appraised Value: $215,000
New Loan 80%: $165,500
Down Payment: $7,500
Rental Amount: $1,250
Total Equity: $49,500
Total Cash Flow: $150/mo
Total Out of Pocket: $7,500
Now let’s compare this to a traditional purchase if Mike did it himself, remember
this house did not qualify for a conventional loan due to the condition. The only way to purchase this property is using cash or hard money.
Here is the Traditional break down:
Appraised Value: $215,000
Purchase Price: $90,000 (if they can buy cash in 24 hours and want to take the “no inspection” risk)
Down Payment 25% Cash: $21,500
Closing Cost: $4,500
Renovation: $38,000 (we are able to get this price from our contractors because we give them volume, most investors won’t get this price)
Holding cost: $5,000
Refinance Cost to pay off hard money: $5,000
Total Cost: $165,000
Total Out of Pocket: $75,000
Remember you can not do a “cash out refinance” for a minimum of 1 year so
the investor will have the $75,000 tied up for that one year seasoning time.
You can do a “rate & term refinance” to pay off the high interest
hard money loan at the $68,500. ($90K-$21,500 down payment).
So as you can see, buying a property from Fortress Investments makes way more
sense than going down the traditional purchase route.
Mike is happy collecting his cash flow and has instant $49,500 of equity, he is
also able to depreciate the property over 28 years which will create an
approximate $4,500 write off on his taxes.
- Anticipation – One Key to Real Estate Investment Success Post written by Sean Terry. Follow me on Twitter. “A...