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 VACANT UNITS BEFORE SETTLEMENT

CAN BE A PLUS

By: Donald Beck

I found a duplex for sale that had the first floor vacant. The second floor tenant was being evicted. (It was obvious after seeing the unit the seller knew nothing about screening techniques) The seller was motivated to sell having a mortgage payment to make and no income. He had tried to rent the first floor as is for $550. It was a quite a price considering the windows, carpet, kitchen tiles all needed to be replaced and the unit needed painting. He decided not to invest $3,000 to make the repairs because he "didn't think it would sell for $3,000 more so why do the improvements." He couldn't see the $3,000 of improvements would give him additional rent ( $700 a month) which would increase the value of his property. This was my offer to the Seller

The list price was $119,900 and I offered $115,000 which was accepted. I put 5% down with another 5% due at settlement. One clause I added said, "Seller will allow Buyer to rehab vacant unit(s) at Buyers expense before settlement as well as show unit to prospective tenants. If a tenant is found before settlement Seller will hold security deposit / rent and give as a credit to Buyer toward non-recurring closing costs." This was good for me as the rehab would be done before settlement. It was also good for the Seller because if I did not make settlement, all improvements and rent would be his to keep. Another clause stated, "Settlement will be 60 days from signing of the agreement unless tenant being evicted is not out in 60 days. If this occurs, settlement will be 15 days after they vacate." (This forced the Seller to get them out as quickly as possible but also gave me time to start the rehab in that unit before settlement.) I needed this time to do the rehab because I found a mortgage company that would allow a list of repairs to be completed before settlement. If completed, the loan would be on the improved value, not the sale price.

Everything worked perfectly. I rehabed the first floor in one week at a cost of $3,000 and had a tenant ready to move in the end of the second week for $700 a month. The sheriff evicted the tenants the day settlement was suppose to be so had an additional 15 days to rehab this unit. Another week and $3,000 in repairs and I was ready for the reappraisal. I was very pleased when the mortgage company called to say the appraised value was $150,000 so they would loan me $135,000. Here is how the numbers worked out. I paid $6,000 in improvements, $7,000 in settlement costs = $13,000. This subtracted from $135,000 leaves $122,000. Since I only paid $115,000 this deal became nothing down, no settlement costs and left settlement with $7,000!

I stand corrected. I had two months of rent and one month of security deposit for an additional $2,100 = $9,100

Thanks Barney for your vacant unit comments. Attending that weekend DIG seminar sure paid for itself many times over. Now I have another nothing down technique to add to my arsenal.

Don is author of Down to Earth Landlording and is a contributor to our "Tip-of-The-Week" segment.