Sarita Is Sold and Closed!

There are lots of ways to get free advertising. Doing a great job like Dana Wissink, the Realtor® who handled the transaction for us, is the most reliable way.

My mom always said, “Everything always works out for the best.” Even the flooded pasture I used for the background of this meme.

This post originally appeared on the Hermit Haus Redevelopment website on 2019-12-05 and on the Hearts, Homes, and Hands blog on 2019-12-04.

We have learned a lot from the Sarita project. It feels like almost everything that could have gone wrong did…but that’s not really how it was. We had one major pain in the ass, and that was the buyer’s lender. Even the buyer’s agent said she will never use that lender again. Here is a brief rundown of what we learned.

You never know where you’ll find a deal.

I never expected to find a good deal on a property in my own family, but my brother and his wife just wanted out from under a house they could no longer maintain.

People first.

We ended up making a little money outright for handling the sale and taking over the debt, but most of the profits are going into a fund to help take care of my brother and sister-in-law going forward. As I said, they would have been happy to let us take it all, but that’s not how we roll. They actually objected to taking a promissory note to cover their future care, but we insisted on taking care of them.

You need a local team.

Redevelopment is a team sport. You can’t do it all yourself. You need good contractors, which we didn’t have in the Brazosport area.

Since this house is well outside our area of operations, we decided on the prehab exit strategy. We cleaned up the house and maintained the laws to keep the HOA happy. But we did not go looking for contractors. Instead, we offered the house at a substantial discount to its after repair value (ARV).

We offered the listing to an old Realtor friend, but she had also moved out of the area. (I may have mentioned, I grew up there but left as soon as I could.) While we were trying to find a Realtor, we were approached by an investor who found the house while driving for dollars. We couldn’t find a place where the numbers worked for both of us, but we did list the house with her. She turned out to be a great person to work with, and I hope we can do stuff together in the future.

There is a new type of FHA loan.

FHA now offers a loan—the FHA 203(k) Rehab—for homeowners wanting to renovate, either to make the home more affordable or to participate in a homestead flip. I don’t believe the loan is available for investors since it is an FHA vehicle.

Because FHA allows for up to 100% financing, FHA lenders are notoriously hard to deal with. So, we usually don’t accept offers with FHA financing, but we were intrigued with helping someone obtain a family home for renovation, instead of just turning the project over to another investor.

It’s not closed until it’s closed.

We learned that this type of financing doesn’t make the FHA any easier to deal with. In fact, the lender arbitrarily delayed closing now fewer than five times. One of these times caused me to miss a trip to Hilton Head we had planned for more than a year. The next one, move closing out of that trip window and came the day after going on the trip became impossible for me to arrange.

They also refused to authorize closing until seconds before it was schedule for the penultimate time, knowing I had to travel four hours to close. We thanked them very much, and I drove down the next day anyway.

Okay. We’ve already talked about most of that, but it never hurts to go over lessons learned. And as of now, the deal is done. The money is in the bank. We have helped a homeowner get a (soon-to-be very) nice home. We have helped and can continue to help my brother’s family. And we have additional resources to start hiring staff to help others stay in their homes.

If It Were Easy….

Even when you have an established relationship, just getting contractors to show up in a hot market can be a challenge.

Weather has a way of overcoming your systems. It has been one of our biggest uncontrollable expenses this year.

When squatters, vandals, or thieves break into a project, the best you can hope for is to replace a broken window or two. When you’re working to turn a neighborhood around, break-ins will happen.

The discovery of knob and tube wiring at St. John’s cost us more than 100% of our contingency to rewire the house and bring it up to code.

Brody reminds us that the first rule of investing is vigilance. Keep an eye on everything.

This post originally appeared on the Hermit Haus blog on 2016-08-20.

If it was easy everyone would do it

If it was easy everyone would be in Clover

If it was easy I'd be the first to do it

If it was easy I'd gladly go back through it

—Lynn Anderson, Ed Bruce

This year, most of our redevelopment projects have run way over schedule. Running long is a bad thing because it always involves extra costs that eat into your schedule—if nothing else, your holding costs mount up. So I wanted to take a look at the reasons why we’re taking longer to complete projects than we thought we would. I also wanted to figure out what, if anything we could do about them. Here’s some of what I found:

Contractor Work Load

The projects that have run longest have all been in hot markets. When a market is hot, it can afford more redevelopment/remodeling work than softer, cooler markets. Contractors, even those with whom you have established long-term relationships, have more work than they can handle, and they often prioritize higher paying retail jobs over maintaining a close relationship with investors, who typically negotiate lower prices than retail customers. Even if you enforce schedule penalties in your contracts, your contractors may decide paying them—or walking off a project—is better for their short-term financial picture than meeting your deadlines.

Unfortunately, the only alternative I see is simply to plan for longer projects up front. If you plan for a six month project that completes in five, you are in much better shape than if you plan for a three month project that completes in five. The net result of your projections being tighter is that you will probably do fewer projects because you have to buy them at lower prices.

Weather

I’m not going to complain about all the rain delays we’ve had this year—not after the drought and wildfires of previous years. But we’ve had plumbing inspections on the Villa Park project delayed by months and leveling St. John’s house put delayed by weeks because of standing water. So far this year, I estimate the rain delays have cost us more than $10,000.

As Charles Dudley Warner famously said, “Everybody talks about the weather, but nobody does anything about it.” All you can hope is that you have large enough reserves to survive the short term so you can reap the long term benefit. You also need to insure your projects with builders’ risk policies that cover any storm damage that may occur, especially if your project is in a flood zone.

Vandalism and Theft

When a redevelopment site sits vacant, unsavory people eventually notice, especially if you’re working on a property that has been vacant for a while before you start your project. We’ve encountered vandalism on the St. John’s house where people broke into the house to party and sleep it off over a holiday weekend. I also mentioned the dumpster full of engine oil there. And finally, one of our contractors had all of their tools and 30 gallons of paint stolen from the Villa Park project back in February. All of these events took time and money to repair.

The good news is that our insurance covered at least part of the costs we incurred here. Our contractor’s insurance replaced most of their tools. The jury is still out on whether the insurance will cover any of the oil disposal costs. When you encounter vandalism and theft (and you will if you’re in this business long enough), insurance can be the difference between making an losing money.

Unplanned Repairs

“You never know what you’ll find when you open a wall” is a truism in this business. Here are some of the things we’ve found in walls, in ceilings, and under floors this year:

• Knob and tube electrical wiring 
• Illegal electrical splices 
• Undisclosed WDI damage 
• Broken pipes 
• Inadequate sewer ventilation 
• Inadequate engineering

Luckily, with all of that we haven’t found mold or asbestos.

But these things are why we always have a contingency built into every reconstruction budget. Our contingency is usually about 10-15% of the overall reconstruction budget. On houses built before 1970, we can include as much as 10% of the purchase price. So far, we have never failed to use at least 100% of our contingency on any project.

The Bottom Line

The bottom line for all of this is that redeveloping, renovating, or whatever the scope of your project is a risky business. Like farming, many of the factors that affect your economic survival are far beyond your control. You can’t even know about a lot of them when you commit to a project, but we have a duty to provide a safe home for our buyers. We place people first (above profits), and so should you. If all you want is the money, you’ll develop a reputation that will make it unattainable.

Dumpsters: Lessons Learned #2

Yes, there is an uncovered dumpster in front of St. John’s house again—and another lesson learned.

A covered dumpster can pay for the difference in price over the cost of an uncovered dumpster by deterring theft of services. If you own an uncovered dumpster, DumpsterGard can help. Photo source: Dumpstergard

This post originally appeared on the Hermit Haus Redevelopment website on 2016-08-18.

I haven’t written much about St. John’s house, primarily because we are fairly passive in that deal. Our friend Larry is managing that project through his San Antonio GC, Abigail. Overall, I am very satisfied with the progress, even though we are now way behind schedule, but that is the topic for another post. Today I want to talk about a lesson we learned the hard way.

Back in January, I talked about the value of using a dumpster to organize a construction site, keeping it neater and safer. We learned another valuable lesson about dumpsters thanks to the St. John’s project.

There are two basic varieties of metal roll-off dumpster: covered and uncovered. Dumpster covers can be hard shell or tarp. Either way, covering the dumpster securely can make it harder to get into when left on an empty job site.

Why is that important?

A covered dumpster can pay for the difference in price over the cost of an uncovered dumpster by deterring theft of services. If you own an uncovered dumpster, DumpsterGard can help.

Even though we are beyond demolition on St. John’s project, there was enough landscaping debris and scrap from an unplanned upgrade to the house that we decided to bring in another dumpster as we wound down. The waste removal company delivered the dumpster near the end of the shift, and the construction crew had them place it where it would be accessible then left for the day.

Overnight, someone came by and completely filled the dumpster with paint cans and other containers full of used motor oil. My guess, based on the volume of oil, is that someone had been paid to cleanup another site and dispose of the oil legally. But when they saw a convenient empty dumpster, they decided their profit margin would be considerably enhanced by not paying for a legal disposal. They simply filled our dumpster with their hazardous waste and called the job done. Even though theft of services is a crime—in this case a felony because of the economic value of the theft—there were no witnesses to the crime and not enough clues for the police to investigate. The problem is made worse because motor oil can’t legally be disposed of in a dumpster. Duh!

Now the burden and expense of legal disposal falls on us.

Would covering the dumpster have absolutely prevented this kind of theft? No, but it would have made the process more difficult and slower. Criminals tend to look for easy prey, like an uncovered, unattended dumpster. The more difficult you make committing a crime, the less likely you are to be victim of one.

In short, rent a covered dumpster and make sure your crews secure it every night before leaving the site.