Realtor Messes Up

The electrician showed up at the property this morning at 7 AM to start working. The sellers had no knowledge he was coming and were on their way to work. As a result, we have to reschedule. This pisses me off because I spoke with the seller's agent twice last week - the last time was Friday afternoon - and told them about this. I was assured the sellers would be told, but apparently that didn't happen.

I did get to speak with the electrician though - Rocky is his name. I can't say I've ever met anyone named Rocky before. Anyway, I spoke with him briefly about aluminum wiring. If I want to replace all the outlets and pigtail the connections to use copper wires, it will be about a 2 day job and will run about $10/outlet for parts, plus labor. Based on the square footage of the house, he guesstimated the whole job would cost about $1,500. I think I will get this done. It's a safety issue and will help when it comes to selling the house, I think. This still leaves me $1,000 in my budget for other repairs. To save some money, I may end up just cleaning the carpet instead of replacing it.

So, I think I'm just going to wait until escrow closes and the sellers have moved out before having the electrician back. He said it'd be easier with all the furniture gone anyway. I just got off the phone with the escrow agent and they are still waiting for the title report to come back. He expects it today. If we get that today, we should be able to close tomorrow or Wednesday, the sellers will be out two days after that, and then I can get people working on the property full time.

House 11 Exit Strategy

This is in response to a question in the comments on the previous entry - what is my exit strategy and how did I pick this property, given that I have investors in this.

The deal with my LLC is that I get 15% of the profits and the investors get the remaining amount. This is actually less than the 25% the manager of other LLCs that do similar things charge.

When I started looking for properties, I started with the standard rule of buying at <= 75% of fair market value. None of my offers were being accepted and I quickly realized that the Phoenix market is too hot right now for there to be many of those deals. I changed my strategy and started looking for properties that I could get for $20,000 or more under FMV. Those were more plentiful, but I still wasn't getting many. I had decided to lower my limit to about $10,000 plus repair and resale costs under FMV. In other words, I wanted properties where I could get at least $10,000 profit when all was said and done. House 11 I actually originally had at $25,000 under FMV, but then that damn second offer came in at the last minute and I had to raise my price by $8,000. Still, I'm getting the house at $17,000 under FMV. I think I can sell it a bit over FMV once I have it repaired (due to the hot market here), and, as I mentioned in a previous comment, I think I can make about $12,000 on this.

Note that I said "I can make..." In actuality, it's my investors and I making this amount. The fact that I have other investors doesn't really change how I approach deals.

I have just recently started thinking about another possibility to make some extra money on this deal: a seller carry-back. The house will be completely paid for, so when I sell, I might be able to offer seller financing for all or part of the purchase price. Of course, I don't want to carry a 30 mortgage note, even though it would provide good cash flow. The purpose of my LLC is to flip houses, not create monthly cashflows. But, if I simultaneously sell the house with seller financing and then sell that note at closing to another investor, I might be able to get some extra money out of this.

This is due to the time value of money. If I carry a 30 year mortgage for $150,000 at 7% interest, that note is worth more than $150,000 today because the buyer would get interest payments for 30 years. I need to do a lot more research into this, but it's something worth checking out.

House 11 Picture

House 11

Aluminum Wiring and Waiting For Title Report

Yesterday I was faxed my copy of the receipt for the my earnest money deposit. I just spoke with the title company this morning and they are still waiting for the title report to come back. It was ordered Friday and they say they are taking about 5 days to process, so it should be here soon. Once that is in, if the title is clean, we are free to close. They are also going to fax me a list of my charges today so I know exactly how much money I need to bring to the table.

As I mentioned earlier, the property is old and has aluminum wiring. Back in the late 60s and early 70s, the price of copper rose quite high and houses were built using aluminum wiring to save money. But aluminum has since been found to have some problems - namely, it is more susceptible to thermal expansion and contraction than copper. What this means is, as the wires heat and cool, they tend to come loose from their connections, which of course, creates a fire hazard. There are several options to dealing with this. From what I've read, there are pigtail connectors that can be installed at all outlets and switches to transition from aluminum to copper wiring before connecting to the switch or outlet. Aluminum wiring also presents some corrosion issues where it is joined to other metals (like at the grounding point), so antioxidant paste needs to be used. I've got a licensed electrician scheduled to work on the property Monday morning and I expect him to spend most of the day working on this place. His rate is $58/hour plus parts.

I'm going to try to post a picture of the property here. Right now, the only one I have is the shot from the MLS listing.

I am also having a second phone line installed in my home today. This will be a dedicated fax line. Right now, I am using my work fax number. This is actually pretty nice since our system converts all incoming faxes to PDF files and emails them, but I obviously can't continue using this forever. I'm currently looking for some fax software for a home PC that can do the same thing. If anyone knows of any, please let me know.

House 11 Inspection Reports In

The property was inspected yesterday and I received the reports today. No termites were found, although there were a couple places where wood siding was touching the ground, which is conducive to termites. I'll get that cleared away.

The house itself has what I consider to be standard repair issues with a 34 year old house:

• Loose bricks in block fence
• Windows and doors need to be sealed
• Some wall shifting / displacement is evident
• Aluminum wiring (instead of copper - typical for the year the house was built)
• Outlets at kitchen, bathroom, and outside are not GFCI outlets
  

There are some other issues which are basic maintenance issues:

• Dishwasher racks are rusty
  
• Kitchen faucet leaks
• Bathroom faucet leaks
• Garbage disposal noisy and vibrating
  

There are also signs that seem to show the owners were do-it-yourself type people:

• A workshop / shed was added and the sink in it uses pipes that are too small and don't have supply values
• The plumbing vent in the workshop doesn't extend to the exterior and vents into the room
  
• Ceiling fans are installed below 7 foot blade height

There was signs of water damage in the attic, but the SPDS (seller property disclosure statement) states there was hail damage to the roof. This was repaired by the seller's insurance in May, 2003 and I am receiving proof that this was done - including the cost, the company that repaired it, etc. I'm glad this was professionally repaired and not done by the homeowner. I requested this information not so much for myself, but for the person I sell the house to. I know their inspection will note the water damage and I want to be able to provide concrete proof of what caused it and that it was repaired.

There were also various other miscellaneous items, but when all is said and done, it's not in horribly bad shape. I'll probably replace the dishwasher and garbage disposal. All in all, it looks like I'm set to close escrow! My insurance coverage on the property doesn't start until Friday, so that's the earliest I can close. I called the escrow agent to get an update but he was away from his desk and I had to leave voicemail.