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Another SMALL DEAL = Another HUGE RETURN!

By
Commercial Real Estate Agent with Keller Williams Realty Southwest 0576394

Here we go again! I'll get straight to the deal instead of my philosophy because I know my investors are excited to read about this one.

We found a single family property priced at $64,000. Tax value is $109,000. So there is about $45,000 instant equity. The home needs a roof $5,000 and some sheetrock repair and paint $2,000. Property was negotiated down to $55,000. With repairs that puts the total investment to $62,000.

I cant believe this thing was sitting on the market for over 90 days! I kept second guessing this investment deal because of how long it sat on the market, but the numbers kept telling me it was a great deal.

The home is well maintained and upgraded. It's about 1700sf, and the previous owner installed gorgeous laminate wood floors, upgraded tiles, designer paint colors, and took great care of the interior of the home. We put a tenant in place immediately for $1150 per month.

Breaking down the deal:

$55,000 Cost of Property
$ 7,000  Cost of Repairs
----------
$62,000 Total Investment

$109,000 CAD Appraisal Value - $62,000 Investment = $47,000 Instant Equity 

$47,000 Instant Equity = 75% Instant Gain. Wait, wait, wait. Say we can't immediately flip this property in today's current housing market because of the difficulty in lending. Since this price point is attactive to first time buyers lending could be a bigger issue.

So we are of course going to just rent it for 3 years until the housing market recovers to normal.
(3 Years = 36 Months)
36 Months x $1150 = $41,400 total gross rent collected

Simply put we spent $62,000 to make $41,400 in 3 years = 67% Return On Investment (ROI) on just the rent collected.

So looking forward 3 years to 2012 we predict the local housing market will be fully recovered and this home should sell for current tax value $109,000. However being the conservative I am, lets say it can only sell for $95,000 without factoring in any annual compounding appreciation to keep this simple and makes a measley $33,000.

$33,000 Sold Equity
$41,400 Gross Rent Collected
----------
$74,400 Gross Profit
 

Ladies and Gentlemen. We spent $62,000 and expect to made $74,400 in 3 years!
Check my math, that is 120% Return on Investment in 3 Years!

Here is my challenge. Im pegging this deal on my board in my office and charting it. In 3 years I will follow up with an updated article with the actual returns. Here is the beauty, this is just one investment.

I can't count how many stock tips and next big hit picks Im told about everyday. Just pick a handful of 5 of those stocks and track them for 3 years. Even more challenging pick only 1, track it for 3 years and hope for a 120% return. I picked only this 1 property. I'll report early if I can get 120% in just 2 years, but Im confident I can make more than that goal in 3 years.  

How many investments have you made 3 years ago that are now double their value?

 

 

 

Comments (4)

Carolyn Shipp
Source 1 Real Estate - Mineral Wells, TX
Mineral Wells Texas Real Estate

That is pretty interesting.  Once a home is purchased in our county, the county appraiser collects the data on what it sold for and changes the "market" value of the home.  They also ask for a copy of the HUD-I to show what it sold for.  Then they change the "market" value of the home to reflect the sales price.  There would not be the "instant" equity for the home here.  I've seen people move into homes and have an increase in taxes and move into homes and get a decrease because the sales price was less than what the assessor had previously assessed the home at.  Sometimes it is good for the buyer, sometimes not.

Aug 11, 2009 03:54 PM
Mike Wong
Keller Williams Realty Southwest - Sugar Land, TX
Realtor: Commercial, Residential, Leasing, Invest

That's interesting Carolyn. Our county appraisers collect the sold data as well, but they will never adjust the property value down based on a low sales price. That would mean a tax revenue loss for  them, and would eliminate the "convenient and pleasant" tax protest proceedure for many.

I agree this is sometimes good and sometimes bad. For my investors this would handicap them. For my home buyers this would help minimize thier taxes until it was time to sell and move on. If the house is under appraised it will definitely hurt in negotiations.

Aug 11, 2009 04:27 PM
Carolyn Shipp
Source 1 Real Estate - Mineral Wells, TX
Mineral Wells Texas Real Estate

Hi Mike,

They have only recently begun doing this within the last couple of years that I have been watching.  I started to really notice it in 2007.  We even have Jack County (north of us) that will tell homeowners and buyers that the assessed value of their property is the market value of their property.  We lost a good home due to that fact.   The home was for sale for $176,000.  The buyers asked what the taxes on the property were yearly and what the assessed value was.  The assessed value was only $105,000.  I explained that sometimes the assessed value was different than what the market value could be but they called the tax office and the clerk there told my buyers that since that is what the assessor had valued the property at, then that was all the home could sell for.  My buyers decided not to purchase the house because the sellers had it priced too high.  As it turned out, the home appraised for more and sold for a lot more and my buyers lost out on a great home because of information incorrectly given out by people not qualified to talk about the value of the home.  There had been several upgrades done to the property and of course they were not reflected in the assessed value of the home by the tax assessor because the assessor had never been to the home or of course inside.  The home has a higher assessment on the tax rolls since it sold.  I was never able to help my buyers understand the difference between an actual appraisal and a tax assessors value.  I've had it go the other way as well though.  Each sale is a unique situation and I always try to explain why tax assessments may be different than the "market" or appraised value.  If a purchaser buys a home that is valued at less than the assessed value, they always take their information to the tax office and "appeal" the higher assessment.  As long as the homeowner can show the value is lower than the assessed value, the tax assessor has always lowered the value on the home.

Aug 12, 2009 02:23 AM
Mike Wong
Keller Williams Realty Southwest - Sugar Land, TX
Realtor: Commercial, Residential, Leasing, Invest

Carolyn that just proves the point about how important it is to work with a local specialist. We all know that every market is different. Its amazing that another county in Texas is so different.

I think you gave some great examples and information. Fortunately Im able to do so in my market as well, and have these kinds of opportunities for my investors.

Aug 12, 2009 04:56 AM