Another House 11 Update

I stopped by the house during my lunch hour today to check out how it was coming along. The new carpet looks nice and it really gives the house a better feel. The death star chandelier has been replaced, as has the front door. The new screening on the patio and the screen door look nice. The whole inside has been painted. I see what the handyman was talking about with the old varnish on the doors seeping through. A couple of the doors look white with spots of yellow. I am a bit concerned about the bathrooms though. I did not plan on replacing the linoleum in them, but there is paint overspray all over them. I hope that can be cleaned. If not, I'm going to have the handyman replace it at no charge. The black soot streaks on the ceiling from the A/C ducts were painted over successfully. There is still some work to be done - the bathroom tub faucet was taken apart in the process of stopping it from leaking and the fan in the master bath needs to be replaced. Then just some general cleanup work remains. I think the handyman said he was out of town this week, but I need to call and verify that. I haven't paid him anything yet, so I would think he's got some strong incentive to get finished.

The new cabinets and countertops are scheduled to go in this Thursday or Friday.

I must say, with the new carpet and paint, the house looks much nicer. I'm getting eager for everything to be done so I can sell the place.

Creating Money From Nothing

Hard money lending is an area of investing I have wanted to get into for some time now. The general rule of thumb to determine if you can do it is that you need an amount of cash equal to the purchase price of two average houses in your area. I'm not close to that yet, but I did have an opportunity arise recently that was more in my financial range.

I was contacted by someone who was looking for a hard money loan of $1,200 and they wanted to know if I was interested. The money was needed to purchase some vacant land that a family member was selling to this person, but the offer was for a limited time because the family member needed some money in a hurry and if this person didn't buy it, the family member would sell the land to the general public. The borrower offered me their primary residence as collateral.

Now, this was intriguing because it was a relatively small amount and, if what the person told me was true, there was over $100,000 in equity in their primary residence. Why couldn't this person draw on that equity? I was told they recently refinanced and couldn't do it again so soon. Why couldn't a credit card cash advance be used? Don't know. What I did know was that this person was willing to pay up to $500 to borrow this amount provided I could offer an interest-only loan for 3 months. This person claimed to be a real estate agent, but was having difficult selling right now because snowy weather had slowed things down and, therefore, commissions were slow in coming.

Hmm. Time to do some research. Real estate agents are licensed, so I looked up the licensing authority in this person's state and confirmed they were in fact a licensed agent in good standing. I also verified the home address given had this person's name on the title and that the estimated value given appeared to be in line with what I could check (of course, I have no idea of the condition of the property). The amount requested was relatively small (to me, anyway) and the loan period was short, so I figured I'd go ahead and give it a try. I doubt I'd get another chance to break into hard money lending on such a small scale.

So I made an offer: $1,200 loan at 18% interest for 3 months with a $200 loan origination fee and 10 points. Payments are interest only, paid monthly in advance and the entire amount is due in full in 3 months. The points ($120) and origination fee are rolled into the loan and can be paid after 3 months. This means the monthly payments are $22.80 and after 3 months, I will be repaid $1,520. The terms were accepted and I drew up a short one and a half page promissory note and faxed it over. My borrower got it signed and notarized and mailed it back to me, along with the first month's interest payment. Once I got that, I got a cashier's check for $1,200 made out to the person's name and sent it.

A lot of people would think I am crazy to do this deal. They can't get past the fact that this person couldn't come up with $1,200 through some other means. I made the decision that, although it's not how I would handle it if I were in this position, if the person wants to get a hard money loan for such a small amount, that's ok with me. Of course there is risk in this and I may very well lose this money. If I do, I'll consider it the cost of obtaining lending experience. (And if I have to, I can mitigate the loss somewhat by writing off the bad loan on my income taxes.) In addition, my ROI is more than the 18% interest I am charging. The interest I will receive isn't even really worth the risk and hassle of setting this up - $22.80 a month for 3 months is only $68.40. The real money is made from the points and origination fee. That extra $320 boosts my total return to $388.40, or 32.2% in three months. That's an annualized return of 129.4%. Pretty good! And since it's less than the $500 the borrower was willing to spend, it's a win-win situation.

In looking at the big picture, the points and origination fee allowed me to create money where none existed before. I created $320 from the 45 minutes of my time I spent putting this deal together. In other words, I made money from nothing.

Here Come The Deals!

Last November, I wrote about the increase in foreclosures that I believed was coming down the line and how this represents an upcoming investment opportunity. Sure enough, on MSNBC.com today, this story appeared: Home foreclosure listings surged in March. I happen to think the analyst interviewed at the end of the article is all wet and that this is the start of a trend, especially if the Fed keeps raising rates, which it seems like they will.

On another note, I heard from my handyman this morning. He still has some work left to do and he's having trouble painting some of the doors. One door has 8 coats of paint and the old varnish still is showing through. I originally suggested he replace the doors instead of repainting, but oh well. He apologized for taking longer than he said he would take, but I knew his time estimate was over-optimistic and, based on past experience, I knew he'd run longer. I'm not too concerned though, because I'm still waiting for the cabinets to be replaced and that will be another week or two, so his delay is not keeping me from listing the property. And the carpet actually was completely installed yesterday. Apparently the power came back on while the installers were still there, so they did not need to make a return trip today. And my handyman noted that the house smells much better now :-)

One Thing After Another

Last night, my daughter threw up a couple times and stayed up the whole night coughing. She (and I) got about 1 hour of sleep. Tomorrow she goes in for minor surgery to get tubes put in her ears. So today, just to keep things interesting, the Powers That Be decided to make it three straight days of unusual activity by having the power go out in the neighborhood where House 11 is. Ordinarily, this wouldn't be a big deal, since no one is living in it right now, but today happens to be the day the new carpet is being installed.

So I got a call from the carpet company asking if I knew why there was no power at the house. They said they tried the circuit breakers and still no power. My first thought was to call my handyman, who should have finished there yesterday, and see if he had any problems. Then I discovered I did not have his phone number with me and I had no way to contact him. So I next called the power company, thinking there was a mix up in my billing and they stopped service for some reason. (I haven't received a power bill yet.) It turns out they are having an outage in the entire area and they expect service to be restored in an hour. They offered to call me when it comes back on, an offer I accepted. When that happens, I'll have to call the carpet installers back. Thankfully, it looks like it will be a short outage and the installers can keep working for a bit until they need power. Nevertheless, I've got enough going on right now and didn't really need this.

Marketing Postcards

In my post How To Get Started In REI For Under $400, step 10 talks about creating postcards to mail out to preforeclosure leads. Many people were having problems with the links to view my sample postcards, so I have uploaded the pictures here.


Front of postcard


Back of Postcard for Foreclosures

I should point out that preforeclosures are not the only source of motivated sellers. People going through divorces, probates, legal problems, etc. may also have motivation to sell quickly. I use this image to send to those people.


Back of Postcard for All Hardships