May 17, 2012

Omaha Landlord Newbie

This Post and subsequent Posts will be my experiences in becoming a Landlord.    "Landlord". There is something about that word that has a kind of "predatory" connotation. I guess it is my experiences in years past, it's the tenants that did not turn out so well and led me to have that word feeling.  I remember having been treated somewhat unfairly by one or two rental landlords in my college and young married life years. If I do become a landlord, I will not be like “them”. 

The "deal" seemed pretty good while sitting at the dining table.  It was one of those conversations that led up to finding out about a rental house a friend of mine from high school wanted to get out from under owning.   We discussed the home, the location and the numbers seemed to make sense.   I was interested.  It was an older two bedroom home in North Omaha that needed fixing up. It has been vacant for two years because the seller had moved and was unable to keep up with the repairs, clean up and maintenance needed to maintain tenants.  He had gone through a divorce and bankruptcy so the motivation needed to maintain a rental home investment disappeared for him.  While passing the mashed potatoes, he said he would let it go for under $20,000.   Hmmmm.    I thought about it that night and decided to go online and check it out.     The home is assessed at $31,500 currently. My friend had purchased the home in 2000 for $18,000.   The picture on the website was not that good, but it looked OK. The Assessors webpage gave me all the basic information about the home that I needed, such as square feet; type of home, age; and the materials used in the construction of the home. Everything so far seemed  to be checking out.  It was time to run the idea by my significant other. The reaction I received was not what I would call encouraging. She was completely against the idea of me purchasing a home and spending all my time and money getting it rent ready. This did not discourage me, but I listened to her thoughts and keep them in mind. I figured at this point, I have nothing to lose. So I decided to drive by the address and check out the home.         

Well “fixer upper” is a relative term. Yes, it did need to be fixed up, starting with the soccer ball sized hole in the roof over the kitchen area; a hole big enough that a raccoon could easily find a way inside.  Since the home has not been lived in for two years, it hds a musky, wet smell.  Humidity was high due to the hole in the roof. Rain had damaged some cabinets in the kitchen area.   Mold was visible on much of the wood molding in the home. Copper thieves had broken into the home at some point stole all the copper plumbing. The bathroom was pretty much wrecked with the shower head wall being torn out to remove the copper.    Overlooking these flaws however, the home had some character!   Wood floors throughout, walls, windows and doors, all looked to be in decent shape. The foundation was solid. The home also has a two car garage which was a nice feature in this part of town.  The house needed painting badly.  In summary, after looking things over, I believed the potential upside offsets the investment outlay.   Am I crazy! I don't know. I guess I just see things differently, viewing the flaws as being fixable.  

I decided that professional advice from the Pros is needed.   My employer is a property manager and he owns and manages several rentals in the Omaha. I work on new construction projects, so my personal experience is not sufficient regarding rental housing investment decisions. When I mentioned the home to him and gave him the address, he immediately knew the address, the neighborhood and was somewhat familiar with the home values in the area. I told him the details of my home visit, the problems and the cool stuff about the home.  Surprisingly he said that based on what I told him, and the neighborhood he would not offer more than $3,000! Wow I thought, that was cheap! But he was serious!   Well, at this point I was convinced my friend was not going to accept anything close to this low of an offer.  The deal was pretty much not going to happen in my mind.  Nevertheless I emailed my friend and told him I had it checked out and the highest I would offer on the home was $3,000. Two days later he wrote back and agreed and was willing to accept it.       WOW!  Now I was really getting nervous.

It was the point where a decision needed to be made. Was I going to go through with this “idea” of purchasing a rental home or was I going to let it slip away?   While my girlfriend had her opinion of the investment, I was beginning to get comfortable with the title of being a big city landlord. Was it really going to be this simple, just purchase a house for as little as $3,000? I knew something was not going to be quite right with this perfect rental purchase.   I suspected there were back taxes owed to the county treasurer.     I was right. The Treasurer told me there were over $6,000 in past due taxes and special assessments against the property. Whew!  A good deal can evaporate in a hurry, that much is certain. When you add $6,300 to the $3,000 asking price for the home, this good deal was becoming complicated. I like the way my property manager boss put it,   “This deal is beginning to grow some hair on it.”

I really wanted to walk at this point. If the Pro thinks the house is worth about $3,000- $5,000,  then this good deal is no longer a good deal with an investment outlay of nearly $10,000.  

Oh I forgot to mention,  I don’t have any cash to buy this house!  That means whatever I would decide to do I would have to get a loan from my bank.  A loan I was confidant I could get, but still a loan at most likely higher short term rate.  

My property manager boss did a drive by of the property and walk around the property, called me and said this home is worth more than he first stated.  It had potential as a good rental, being in a relatively nice part of north Omaha.   He thought the home would have no trouble renting for $550 or $600 a month.  Keeping it rented would be the key factor in making it work.   He encouraged me to contact the seller again.  

The seller, my friend, was under the impression he could sell the home and pay off the back taxes.  This turned out to not quite be the case.  The tax certificates had already been purchased by an investor.  This meant a third party was involved.   My friend was not in a position to pay off the investor and then sell to me. Neither was I inclined to pay $10,000 to buy it from him.   

In contacting the investor, it was determined he only wanted to get out of the property without losing money.  He was willing to sell for the amount of money he had in the property.   The seller and the investor spoke and then the Seller called me to propose another deal. He would sell me the home for a $1, through a quit claim deed.  Then I would or could work directly with the investor to pay him off.    This deal would move my friend out of the picture completely. 

Something about this did not sound right or safe.  I have to admit I did not understand exactly what was being proposed.  When I don’t understand it completely, then I don’t like it.   It seemed risky to me.     I was concerned I would be exposed to some unknown liability with the home.   My  boss, the property manager, did not think this was a good option for me.   Instead he directed me to pursue this purchase through a title company.  The title company would do the background research and determine all the outstanding liabilities against the property.  

The seller and I signed a purchase agreement to sell the home for $5.00.   All the paperwork was provided by the title company.   The completed agreement and other support paperwork was returned to the title company.  About ten days later, I received a call from the title company asking me when I wanted to close on the home. They forwarded to me a Purchaser’s Closing Statement. This was informative!  There are indeed a few liabilities and surprises. All total, including back taxes, current tax, title company fees, state stamps/ tax on deed, title insurance, plus a couple special “assessments” to the City of Omaha, the closing statement's grand total was $7,700.   

It had all come down to this step, to this decision.  The original deal of $3,000 has more than doubled to a $7,700 dollar deal. If I go for it, I will own the home with clear title. My boss, the property manager, thinks it is still a good deal. I have not quite made up my mind yet. I will post this blog now. Stay tuned. I will be posting another blog in the coming days. 

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