I was remarried in 1972 to Doris Rosera
(Sharpe) who had two daughters 11 and 14. I had custody of my four sons 12, 14,
15 and 17. Doris worked for the county as a bookkeeper and I was a draftsman
for an Engineering firm. I owned a modest 3-bedroom home and a 3-bedroom rental
in another neighborhood. Soon after we married, Doris was rear ended by a truck
and had to take time off work, which ultimately led to her being terminated.
Meanwhile, an economic downturn caused me to be laid off also.
I had been working as a
"loaner", for nearly a year before I was laid off, so I decided that
if I could be "loaned out", I'd loan myself out. I started my own,
one-man drafting service. Billing for my services monthly, carrying my own
insurance and payroll. Thus I was able to offer a lower cost temp employee to
industrial clients who had a small project to do. Saving them lots of money and
actually paying myself higher wages than I had received at the Engineering
service. I had one problem, however.
I had to turn away work if I was already
working on a job. I just couldn't handle two at a time. This also meant that
when I finished one job, I had to start looking for the next one. One day,
while between jobs, a neighbor had a small fire in an attached garage. It
smoked up the house and he was going to have to move out temporarily while they
cleaned and painted the interior. I heard him say he was thinking about having
a house built, so I offered to take over his mortgage of about $10,000 and pay
the closing costs of $600, he could keep the insurance settlement of $3000 and
I would take it as-is. That would about equal the market value of his house. I
could assume his existing mortgage for $100. So I worked on that house until I
found the next drafting job. By that time it was habitable, so we rented it for
a little over the principle, taxes and interest payment, so it was
self-sustaining. I sold it after a year for about $22,000. Made about
$7,000....not bad!
During that year I bought two other
fixers, for about $10,000 each, finished them between drafting jobs and cleared
another $15,000.
I soon realized that I was making more
money doing fixers than drafting, so I simply quit looking for any more
drafting jobs. I had a couple repeat customers that would call me from time to
time, and I always took care of them. (You never know when you might need a
job, you know! )
So within three years we had several
rentals, some contracts payable and some working capitol.
I also was getting an education. My oldest
son, Bill was a student at the University of Oregon, studying for his degree in
Real Estate and Finance. I would read his text books and we would discuss his
latest lessons. In his senior year, he passed the Real estate license exam and
we would pour over the listings available. We learned about trading and
optioning, about financing and assumptions and other "creative"
financing ideas. Over the years Bill has been a great help to me with advice on
investments, ideas and financing. He operates his own Real Estate brokerage in
the Portland, Oregon area.
The real break-through was when I learned
how to combine the real estate option with rehabbing and cash offers. This
combination resulted in near 100% financing. However, I did have to risk my
option and rehab cost as well as my labor, and gamble that I would be able to
find financing in time to exercise the option before it expired.
I learned that there were three classes of
fixeruppers. The cosmetic, the major, and the near-tear-downer. The cosmetic is
invariably priced just below market so the fix-up cost and labor would equal
market price. That doesn't leave much incentive for me. The major fixer was
often over priced because the owner was convinced that it wasn't really that
bad and just needed a little work. It was in the near-tear-downer that I
discovered the power of the option and cash. Typically, the owner wants, or
needs cash. The properties will not qualify for financing, and thus, are nearly
impossible to sell. They are often involved in an estate or a partnership gone
sour. In short, they are motivated, if you can show them a way to cash! I
usually offer about what the land is worth, so even if the building is
unsalvageable, I can get my investment back. I have never had a fixer that I
couldn't bring back, however.
To illustrate, I bought a small house on
the corner of 16th and Pearl here in Eugene. It was zoned
commercial, but had always been rented as a residence. The little old lady who
was selling it, and her late husband had it built when they were both
professors at the U of O in the 1920s. It had been "managed " by
someone who had let it deteriorate to the point it became a hang out for
derelicts. All the fixtures had been stolen and the grounds were so overgrown
that I discovered windows not visible from the sidewalk 4 feet away! The house
was not in condition to finance, and the estate wanted a cash offer. It was a
mess. It was on an excellent location, though a small (60x60) lot. It had been
listed for several months at $24,000 all cash, as-is, with no offers. No bank
would loan anything on it in that condition. I offered $1,000 for a three-month
option at a price of $18,000 cash at closing. As-is. The option included the right
to repair the house at my expense. So I did the repairs. I changed the stairway
and bathroom to meet commercial code and converted the kitchen into a copy
room. Before I was half through, I had found a commercial tenant who offered to
lease it for about twice the payment. It appraised for $30,000, I borrowed 75%
of that, or $22,500, thus getting all my investment back, a loan that cost
about $250/MO including taxes and rent of about $600/mo. I also had equity of
$7,500.
I had fronted the option consideration,
the materials totaling about $3500 and had it all back at closing about four
months after starting. I sold it sometime later for $45,000. That strategy has
been replicated many times since. Another interesting development was that
lenders were willing to treat the option consideration (the amount paid for the
option) like earnest money, but considers the loan application as a refinance!
AND look at the value as indicated by the new appraisal. So, in this case,
although I paid $17,000 ($18,000 less $1,000) it now appraised for $30,000 and
they loaned me $21,500, so I received nearly $4,000 cash at closing! Not bad
for three months work, and I also had a $7,500 equity in a leased, commercial
building that was in top shape!
Here is what it looked like after cutting
away the brush. The small window on the left side of the house was not visible
from the sidewalk 4 feet away.
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Before |
After |
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This
is how it looked finished and occupied a few years later.
This
was a small, but well laid out home that turned into a nice rental.
I held it
for about 5 years and sold it for a nice profit.
Here
is how it looked nearly finished.
This
was the first time I used blacktop for the driveway and sidewalk. It worked
fine!
This
one was a real challenge. It was on a half-acre lot, but was so overgrown with
blackberries that it concealed three cars! I hauled several truckloads of trash
out of this little two-bedroom house. I paid about $24,000 for it and spent
about $7,000 on it and sold it for $98,000. One of the most profitable fixer
deals I ever had. This is what it looked like to start with. After hauling
trash, cleaning and hiring a tractor to clean out the briars, we replaced the
roof, installed new cabinets and counters in the kitchen, and new floor
coverings throughout. Then two small windows to lighten the interior. The final
touch was a sod lawn and ten yards of bark mulch. A Realtor brought a buyer
before we finished!
This
is how it looked with a nice sod lawn,
a new mailbox and some bark mulch.
This
is a typical absentee landlord fixer.
Except that a prominent property management company
owned it! Several large dogs and lots of trash occupied it. The pile in this
photo was from a previous tenant. The new one had all new trash! This was the
MLS photo! Can someone say Curb appeal?
This
is how it appears today. I still own this one.
The original question that I referred to
at the top was, can one make a good return on investing in distressed
properties in Oregon? The answer is, I believe, Yes. The challenge is to
accumulate a working fund, or " nest egg". Invariably, real estate
prices climb at the same rate or more, than our ability to save for a down
payment. I have observed the frustration of hundreds of people who say they
have been saving for years, but still don't have enough down payment because
houses cost more every year.
I have thought about that problem often. I
could have started investing at the age of 22 when I bought my first home. I
took the approach of buying in a poor area and a sub-standard house. It was in
a working class area and a very small 2-bedroom house. The bathroom was located
on the back porch and had a metal shower stall. The garage was at the back of
the lot and there was a leaky carport. I paid $2500 for it with $250 down and
$25/ month. That was in 1955. They don't sell houses that way any more! I
didn't realize that I could have rented it for enough to make the payments and
bought another one. I later moved and deeded it back to the owner. Live and
Learn!
Over the years I have learned that honest,
ethical dealing really pays off big in real estate. Not that real estate people
are likely to be unethical, but that when someone proves to be
"shady", word gets around and agents avoid working with them.
To illustrate, I used to do some maintenance
for property management companies. One assignment was to do some dry rot repair
on a duplex in a nice part of town. One partner was there to show me the
problem and when I was through, he came over and looked over the job. I told
him what my charges would be and he said" add $100 to your bill and when
my partner pays it, send me half of it, ok?" I was taken aback for a
second, but realized that if I did that, it was fraud. There goes the
reputation. The crooked partner would deny everything if it ever came to light,
and if it worked, he would always have "something on me", and, being
the kind of person he was, would probably never let me off that hook. It gave
me great pleasure to look him in the eye and say" no, but the next time
you have a job to do, do me a favor, call somebody else. And get out of this
business. I sent his partner my bill and never heard from (or of) him again. I
think the management service dropped his account.
I
enjoyed working with many real estate agents over the years. One of the first
was a veteran agent called Ed "the trader" Scott. Ed had been around
for many years and I became aquatinted with him after I had been operating
about five years or so. He called me one day to tell me of a 36-unit apartment
complex in Springfield. It was a little out of the main area of apartments, had
a landlord who was a local businessman who had sold his ladies wear store and
retired to Palm Springs. He had hired a management firm to operate the
apartments, but discovered that they had not done a very good job. So he listed
it with Ed to sell it. It needed lots of work, but was priced right. I had
enough equities and contracts to make a minimal down payment and he would carry
a contract. Loans on apartments were very hard to get unless you were in the
$1,000,000 range. The selling price was $425,000 and my down payment was 8,000
cash and 50,000 in receivables. That was getting full value for those notes
payable!
Here
it is after it was restored.. The first time!
Over the next two years, I carpeted,
painted, repaired and managed the complex. Then, when another Realtor presented
me with an offer for $700,000 I was very interested. The buyer was an attorney
who had had an exceptionally good year and needed a tax shelter. He didn't have
any cash to put down, but had equity in a commercial building in a nearby town.
A nice building, but it needed some updating. It was right in the center of the
business district and had eight apartments on the second floor. He valued it at
$200,000, and owed about $150,000 on it. He offered to pay the taxes owed on my
complex of about $20,000 and to assume the commission on my sale of $28,000.
That would give me a contract receivable of about $600,000 or equity of about
$360,000 I had spent about 40,000 of the income stream for repairs, so I was
very pleased. I knew that I had what we call a "skinny" deal, with
little cash and high risk. He had agreed to pay off my equity within two years,
so I decided that was not too long to wait, so I agreed. We would
"assume" each other's mortgages and proceed. Everything went fine for
about six months. After the tax year was over and he had taken advantage of the
shelter, he called me to ask if I would extend the pay off date by four years.
I said no that would discount the value of the contract too much. He then asked
it I was going to sell the contract. I said no, but I might want to trade it.
He hung up.
The next day, I received notice that he
was suing me! I learned that when a suit is filed, no one will buy a contract
or real estate involved in a dispute. My contract was un-saleable. He then
petitioned the court to let him pay only the underlying mortgage payment until
such time as our suit was settled. Slick, huh?
Well, he offered to rescind the contract,
or "trade back". I would still owe the commission on the sale. After
nearly four years of legal battle, I accepted. I had remodeled the commercial
building by then and the apartment complex had reverted back to a biker haven,
so I had to clean it up again. The big problem was that several months later,
the person who was carrying the mortgage on the commercial property that I no
longer owned called me. It seems that my name was still on the mortgage. I was
liable because the payments were in default and it was being foreclosed on!
Sure enough, it went to court and he was given a judgment against me for the
$150,000 balance and the back taxes and attorney fees. I later re-sold the
property for enough to pay the judgment, taxes and commissions and just about
broke even. This is the only "fixer" I didn't make money on. But I
learned a LOT.
Now here is where Ed Scott comes back in.
I had found two houses on commercial
property on a major corner in Eugene. The owner was a restaurant owner who
needed money to expand his business. He was asking $150,000 for the two large
bungalows. I offered him $110,000 on a 180-day option. He turned it down.
Here are the two on 6th and
Madison in Eugene, Oregon.
Meanwhile, I found another deal very
similar, on two smaller houses on a corner on the main highway through town.
They needed more work but I could buy them on a 90-day option with three
one-month extensions for $1,000 each. The option consideration was $3,000 and
the price would be $57,000. We signed the deal and I started work on them.
Here are the two at 7th and
Polk in Eugene, Oregon.
About two weeks later, the restaurant
owner called to ask if I would still like to buy his places. He would take my
offer. I decided to go for it. So I pulled off the other job to finish the two
big places and get them rented. Then back to the first one because I could
extend the options there. About the time I returned to the first job, the
interest rates began to climb and all the lenders I had worked with stopped
making loans. Big trouble for me! If I couldn't get mortgages, I would have to
give the properties back all fixed up.
Needless to say, I began praying in
earnest.
Well, I extended the option three times,
all the time looking high and low for mortgage money. No way! About a week
before time would run out, I was at the breakfast table. My wife and I had just
finished our morning devotional, and she told me she was going to women's
meeting. She asked me what I was going to do. I said, " well, I'm out if
money and materials, so I can't work. I guess I'll jus sit here and wait for
God to answer that prayer we just prayed." She left and after while I
thought of Ed Scott. He knew everyone in town and I thought that if anybody
knows a private lender he would. So I called him. I told him about my problem.
He said, "I don't know anyone making loans, but let me take a look at what
you have." We met at the property the next morning. After looking it over
he said what do you think it's worth? I said, about $100,000. He said,
"That sounds about right." Let me see what I can do. I said I could
only give you a week listing. I'll lose it by then. The next day he called me
to say, "I don't have a full price offer, but I'd like to present it
anyway. I met him Monday morning and he presented an offer for $97,500 with
$60,000 cash down and the balance in 30 days! Hallelujah!
Next, I called the option holder to ask if
I could have an extra day or two to get the papers ready and close the
transaction. His answer was " NO I want the money or the keys by midnight
on the last day of your option." So, we had until Friday at 3:00 PM to
record and disburse the closing. We closed Friday at 2:00 PM!
Because I now had some money and not so
many UN-rented investments, I now qualified for a mortgage on the larger
property. It was very high interest, but we were able to close that transaction
on time as well.
When I said" I'm going to wait here
for God to answer that prayer, I wasn't just talking. God has answered my
prayer many times. This isn't a Christian sales pitch, It's just how it is. For
heaven sake, I wouldn't want anybody to become a Christian in order to be
successful in real estate or anything else. But I found it to be an important
reason I could risk everything and remain confident of the future. The
restaurant owner who was in such dire straits called me some time after the
sale to ask me how I was able to get money when no one else could, and how I
could be so confident that I wasn't gong to lose everything. I was able to tell
him of my faith in God's supply and how, if I could trust that God would give
me eternal life, I could face loss here in this life without panic. He asked me
to pray with him for his situation. He later opened another establishment here
in Eugene.
Faith in God has always been important to
me. From my Christian upbringing to the present, I have always had the feeling
that He would take care of me. My wife and I have proven that. When we started,
we had no job, no retirement and eight kids to educate and care for. Teen-agers
yet! So when we bought our first fixer, she made a secret vow that if we made a
profit, she would tithe on her half of the profit. Well, she was still scared.
When we finished the project, we sold it in less than a week! She couldn't wait
to take her tithe to the church. As it turned out, I was all for it too, so we
have tithed ever since.
As I said, this is not about Christianity,
but I want to make one more reference to my faith.
As I read my son's textbooks, I also took
a course from a prominent real estate school. Their slogan was that they would
guarantee that you would pass the real estate exam if you took their course.
Well, I took it, then promptly flunked. Twice! Of course, I was making a living
in real estate at the time, but it brought home to me how dependent I am to
God's help. I'm not
smart enough to do this by myself.
As we were starting out, we were
also working at other things. I worked with real estate agents all over town,
so one day I was in an office when the rental department manager came in and
asked me if I could repair some stairs. Someone had fallen through the rotted
outside stairway to an apartment, and they were afraid of being sued if they
didn't get them fixed immediately! So I agreed to do it right then. They were
very grateful and started calling on me more and more. I appreciated the
business too, as they were willing to pay for a dependable trustworthy service.
One day they had a house rented but couldn't find anyone to clean it in time. I
told them" my wife was a world class housecleaner", so they called
her. They liked her work so well we began working almost full time for them.
That continued until we had so many rentals, we couldn't spare the time. God
prospered us in so many ways. But we also worked hard, charged fairly and
always dealt honestly with everyone. Like I said, I'm not smart enough to get
away with anything, so I don't even try.
Another comment on real estate agents.
Early on I learned that not all agents understand anything but the simple
"Pay a full down payment and get a loan-deals." Because I used
options and leases, notes secured on other real estate and other
"creative" ways to structure deals, It took me a while to find an
agent who could represent me and explain my offers. I found one in Karen
Howard, and agent with one of the larger agencies in town. Karen thought it was
a kick to see how many different ways a deal could be structured and we did a
LOT of business over the years. I must say that she wore out a lot of shoe
leather and tires too. A good agent, like Karen, is a great asset to someone
like me because she always knows what I am looking for, and calls me when
something like that turns up. Likewise, when I have something she has a buyer
for, she knows if she brings an acceptable offer, I will pay a commission. It
not only helps me find properties, but keep informed about the market.
There are many theories about how to
profit from fixers. My approach is to "mine" the local territory. I
have seen properties that I have restored in the past, come on the market as
fixers, AGAIN! I keep informed of the current market so that I will know a good
buy when I see it. I seek input from real estate people too, but I have to know
what a property will be worth, "fixed up" as I look at it "run
down". That is a skill called "spatial aptitude "or the ability
to visualize something as it would be if certain things are done to it, or how
would a house look with shutters and a new roof, etc?
There are many ways to enhance profits,
but the first step in profiting in real estate, is to buy right. I must say
though, that in an inflationary period, time works in your favor. I would
sometimes pay too much for a property, knowing that in three months the values
would raise to that level anyway. But generally if you pay too much, you will
not make it up no matter what you do. If you overbuild, you may make it too
expensive for it's neighborhood. I have found that if I restore a property to
it's original look, I generally have the best value and not too much
investment. I try not to create a masterpiece, just a nice, sound house with
its original charm.
Here is an example. This house was on a
nice big corner lot in the village of Coburg. It also had a 20x50 shop, a well
and irrigation system. The house was built about 1900 and was of box frame
construction. Coburg was a sawmill town, so lumber was cheap. The mill would
sell rough 1x12 and 2x8 very cheap. In those days the quality was excellent, so
the houses stood up very well. The interesting thing about box frame houses is
that they have no studs. The walls are solid wood! That makes it hard to
conceal plumbing or wiring in the walls, and impossible to insulate, but boy,
are they strong! Anyway, the house was originally built in a "T"
shape, with a classic porch with 2 rounded columns. Centered on the top of the
T. The wing extending in back had porches added to each side, built with
sloping floors to drain water away from the house. Some time later each porch
was included into the house. That made for a strange feeling as you walked
through the house by simply sawing the wall of flush with the floor. The
pictures here can't convey the challenge that this house presented. But it sold
for about $45,000 profit. Even after a new foundation, new plumbing and all the
restoration work. I wish I had kept that one...oh well..
Here it is when we started.
And here it is finished. We put it
on the market and sold it within two weeks by being flexible. The buyers had
sold a home in California, but would not receive payment on it for several
months. I agreed to take a small down payment with pay off in a year. It worked
out very well for both of us.
The strip mall
This brings me to the largest Fixer. Over
the years I have always wanted commercial properties. About three years ago I
acquired a large commercial property on River road. It was built over the span
of almost 100 years. The original farmhouse was another box frame, built about
1900. About 1940, an addition was built on the north side to house a florist
shop. It was built with the 1x12 and rough lumber of the era, but with 2x6 stud
framing. Then, about 1960, a 2x6 framed addition was built on the southwest
side. Also about that time a metal clad building was built in the back of the
lot. It had 16-ft ceiling and a slab floor; two roll-up doors and was used for
some sort of assembly work. The main building was a "junk shop" when
I bought it. The seller had foreclosed on it including the junk. I made it a
contingency that I take possession with it EMPTY! Bob Voas was the agent who
put this deal together for me. The sellers were very hard to work with, but Bob
made the deal work. GOOD MAN!
Here is what it looked like when I bought
it.
Paving
makes a big difference! (so does siding.)
Here it is with a tenant (Domino's
Pizza), and Autism training associates occupying the Main building. The large
building in back houses the Hosanna school of the Dance.
Phase 2 was the restoration of an historic
barn/ automotive shop Next door.
As
it was about 1940 (YES, IT SNOWS
HERE SOMETIMES)
And
here it is AFTER restoration, with River Road
Automotive
in operation.
Meet
the crew
As you can see, I am still learning about
real estate. This is a crude attempt to create a
record of some of my ideas on real estate investing, for the non-professional,
average person.
I hope you have enjoyed reading this. If
you have questions about anything you have read here or just want to "talk
shop" contact us.
