Dealmakers Blog – Ramblings of a Real Estate Mogul

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

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