Real Estate Investing Using My Credit Card

I just love investing in real estate. Each and every investment project is always unique in it's own way.

My very first rule of real estate investing is to always have a plan. When I find a piece of property, my first question to myself is: what do I want to do with this particular investment? Do I want to keep it for a short term, long term, rent it, or sell it? The answer for me has always depended on the circumstances surrounding the investment and also what my CPA may suggest. From that point, I try to structure the deal to be the most beneficial for my investment strategy.

I remember a time back in the '90's when I was driving through a neighborhood and spotted a piece of property that was in really bad shape. I had seen some bad ones before, but this one was really an eyesore. It had all kinds of junk and garbage lying around in the yard. I could see why most of the people who drove by would turn their heads away and not want anything to do with it.

This one I would sell immediately

With this property looking like a garbage dump, who in the world would touch this with a ten foot pole? I would! This is one of my favorite kinds of investments... a 'fixer upper'. I had spent most of my working life in the construction field and most repairs for me are generally not a problem. I wasn't greatly concerned with all of the junk in the yard, that can be removed, but instead, I was more interested in the physical condition of the house.

Doing a bit of preliminary research, I drove a few more blocks around the neighborhood and found that the rest of the area was well maintained. Just what I was hoping for. I went back to the property and pulled into the driveway. I noticed that there was a 'For Sale' sign that a local real estate agency had placed in the yard.

I'm a big believer in leverage and despite the terrible conditions of this property, I figured that it was going to require some kind of cash just to pay for the realtor's commission. I had a little bit of cash on hand, but probably not enough to make this deal work...whatever it might be. Most Realtor's want their cash now and many are reluctant to 'carry back' their commissions over a particular amount of time. Can't blame them really, they have families to support to.

I made a quick call to the real estate office (listing office) inquiring about the availability and price.

I took a walk around the outside to size up the exterior condition. My second rule is that I will always stay clear of properties that have either structural or foundation discrepancies. Those can become very costly and are a can of worms.

As I continued my inspection, I noticed that there were a few pieces of siding that needed replacing, two broken windows, a broken down back door and the usual need of sanding, caulking and painting. I estimated that the composition roof was still good for another 5 years or so.

I went back to my truck, put on my overalls and with flashlight in hand, I crawled under the house looking for water stains, bug infestations, or anything out of the ordinary.

I did discover a fairly large water stain near one of the outside walls, but other than that, the rest of the under side appeared dry and solid. I made notes of all these problems and being that the back door was wide open and in pieces, I went inside to inspect the interior.

It was as bad as the outside, in fact, even worse. Junk and garbage was strewn all over the house and it stunk really bad. There were holes in the ceiling, walls and a few of the doors. The carpet was torn and stained with oil throughout the entire house.

The linoleum in the bathroom and kitchen were torn up as well. The water stain that I had found from under the house had been caused from a water leak in the kitchen that had been ongoing for a long time and it had caused some damage to the flooring. But nothing major.

It was a total disaster inside and I could see why most investors would not be interested in this property at all. It was way to much work. Or so it appeared.

Even as bad as the condition was of this property, it didn't scare me. I knew that it was going to take some time and money to restore it back to it's 'original' condition. I was seeing right through it and in my mind, I saw only the renovated, finished product.

I made a quick 'ballpark' assessment of what the amount of repairs would be and based upon the overall condition of the property, I knew that the profit margin had to be very good or I would pass on it.

The Plan

I made a call to the local lumber company and got the prices for all of the materials needed for repairs and then added on another 20% for incidentals. Based on my previous investments, I estimated that it would take me 30-60 days to make the repairs.

I knew what the fair market value of the home was and I also knew the average market time that it took to sell this property.

I also knew that there were only 2 other similar type homes for sale in the area and what their condition and asking prices were.

Although homes with 3 bedrooms, 2 baths, 2 car garages(3/2/2) are overall better sellers, I knew that this was an average 'working man's' neighborhood and that 3 bedroom, 1 bath, 1 car garage(3/1/1) homes in this particular area were affordable and sold quite well. It was also a corner lot and that really appeals to some people.

I felt very comfortable with all of my research and estimates.

Now for the right numbers.

The Call to the Realtor

When I inquire about listed properties, I always make it a point to speak directly to the 'listing' agent. Although they have a responsibility to the seller, they also have a much better idea of the sellers' needs and motivation.

Despite the extremely high asking price for a dilapidated piece of property, I soon learned that the seller was asking an unrealistic $85,000 for the property. It had a fully assumable FHA loan with a balance of around $40,000. That of course was worth something, but not $85,000.

I also discovered that the seller was 3 months in arrears on their mortgage payments and to further their dilemma, was currently being tried on drug charges.

After spending a fair amount of time on the phone with the agent, we both agreed that the seller was indeed in a peculiar predicament and that they wouldn't get their asking price. We discussed many options and I decided that I would make an offer on the property that would target the sellers needs and perhaps be of some benefit to him. It would be a one time offer only.

That evening I put an offer together and personally gave it to the agent the very next morning.

I really have no idea as to how much longer the property would be on the market, but based on the condition of the house, the mortgage being in arrears and with the sellers inability to bring the payments current, they stood a very good chance of losing the property entirely, possibly through a foreclosure or a legal ruling.

This is the offer that I proposed. I had it in my mind that this is the best that I could do based on my cost's and time to rehab the property.

(A) Purchase price of $48000 and I would assume the existing FHA loan of $40,000
(B) From the sellers proceeds they would pay the realtors commission of $2880
(C) The mortgage would be brought up current (approx $1800)
(D) Buyer and seller would split the closing costs 50/50
(E) All remaining money would be paid to seller (approx $2-3000)

A few days later the agent called to say that the seller had accepted the offer. Because of this transaction being an assumable loan, I drew the required money from my credit card, placed it into escrow and we closed about a week later.

After the initial acceptance of the offer, I immediately ordered the largest dumpster to be placed on the property. My second day there a neighbor from across the street stopped by to ask me what was going on and what was I planning to do with all of the junk. I told him that it was all going to the dump. He made me a proposition that was hard to refuse.

He said that if I were to let him have anything that he wanted, that he would completely clean up the entire yard and house. Of course I said yes and the next day he brought over a few friends and within a few weeks they had everything all cleaned up. Spotless!

Within 30 days I had completely rehabed the entire house. I had put in a bit of landscaping with plants and flowers and it really made everything very nice. I had several neighbors stop by thanking me for cleaning up that old eyesore and they were amazed at how much nicer the property looked.

On about day 28, I was walking around the outside of the house with my paint brush in hand doing the last final exterior touch ups.

Earlier that morning I had placed a 'For Sale By Owner' sign in the yard and was thinking that I would finish the interior touch ups tomorrow and then I would be done.

As I was touching up the door casing, a young couple stopped by to inquire about the house.

I let them inside to look around and answered all of their questions. They said that they were looking for a house in this area and that they were very interested in this one.

They asked what the next step would be in order to see if they could buy the house and I suggested to them that they speak with a lender to see if they would qualify for the amount that I was asking for the house.

I gave them the name of a lender that I had been working with for quite some time and they said that they would call him.

I had really liked this lender because he was a straight shooter and would always call me immediately after the clients' appointment to let me know what their buying status was. Plus their rates were always very good and fee's were kept to a minimum.

In this particular instance, the young couple met all of the lenders requirements and we got together the next day and we wrote up an offer that was fair and satisfactory to all of us.

I ordered an appraisal and they did everything that the lender required of them and we closed escrow 30 days later.

They were very happy with the house and as far as I know, they're still living there today.

Conclusion

I found a property that was in dire need of attention and with the use of 'borrowed money' as in my credit card, I was able to use it to finance this whole transaction.

In summary:

All within a 50 day period of first locating a 'fixer upper', I made all of the repairs, had it appraised at $95,000, sold it and closed escrow to new buyers.

For the seller:

(A) I purchased the property for $48,000 assuming an existing FHA loan of $40,000.
(B) The realtor received their commission
(C) The mortgage payments were brought current
(D) The seller was able to put several thousand dollars into their pocket and they got a liability off of their shoulders
(E) Seller was able to restore their credit

For the investor:

(A) By using my credit card to create funds:
(B) $8000 cash to the existing loan to the seller
(C) $8000 for rehab & 2 months mortgage payments
(D) $16,000 + fee total for use of credit card to complete the transaction (for the cost of $1-2000 it made me many thousands)
(E) $95,000 new appraisal and sales price
(F) $56,000 total cost to cash out old loan, closing costs and repairs
(G) $39,000 profit in 50 days

I have used this very same concept of real estate investing using credit cards on several other investments.