Tear Down Nets Tax-Free Profit
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The lead for this property came from someone my handyman brought with him on a landscaping job at one of our
rental properties in Kissimmee. Because he knows I buy property, he has called me with a couple of leads over the past few years. Last June when I was dumping some tile from a renovation job at the concrete crushing plant where Charles works, he asked me if I would be interested in a nearby property owned by some of his relatives. He said the owners had listed it for sale online for $10,500 but did not get any responses. He thought he could probably get the deal for me for $6,500.
It was a 2 bedroom 1 bath 832 square foot wood frame home in Kissimmee with a couple of “six pack additions”.
(These are additions put on a house over the weekend by a bunch of beer drinking buddies). The property appraiser lists it as being a 4 bed, 1 bath.
Charles took me over to do a walk-through of the property, which was a little scary. The house needed to be knocked down. My guess was that the property would sell for $80-90,000 if the existing dwelling was torn down and I put a mobile home in its place.
I did some research and found the lot was irregular in size and would need to be rezoned to put a MH [multi-family]on it. In addition to that, Osceola County has a moratorium in effect until May and is not issuing any building permits until the moratorium is lifted. I told Charles I would pay $4,000 cash for a quick sale. The sellers agreed.
We closed on it December 5th. There was a small delay because one of the sellers was out of town, and another needed a special mobile closing agent since he was almost blind.
I used funds from my Roth IRA to buy the property which influenced me on what my exit strategy was going to be. I like to be hands on, but could not do that on this project due to my IRA owning it.
My exit strategy for the property was to either resell it right away or scrape the dwelling on the property and go
through rezoning and put a mobile home on it and resell. If I added a mobile home, I would need to fund it with the same IRA that bought it(no personal funds) or bring in a partner to fund all the additional expenses and split the profits.
I decided to post a for sale ad on Craigslist in mid-December asking $12,000, $2,500 down and $150 per month, interest only. I didn’t receive any solid offers which I think was due to the upcoming holidays.
I visited the owner of a neighboring property and offered it to him for $12,000. He told me he had offered the original seller $4,500 and they declined it. He made the same offer to me and that he would pay an additional $1,000 if I removed the house before closing.
I also spoke to a neighbor on the other side of this property which was a previous resident of ours. He was not in a position to purchase it.
At the end of January I posted the property for sale on Zillow with the same terms as before. I used my Google Voice number in the ad so I could respond to everyone with a text if needed. This helped tremendously when I was on a cruise in February.
One of the many offers I received while on the cruise was from a ®realtor that included an escalation clause that said the buyer would increase their offer by $1,000 over my highest offer up to $16,000.
I asked all interested parties to submit their highest and best offer by Saturday February 17th.That next Wednesday
I received an offer for $17,000. Then the ®Realtor who submitted the offer with the escalation clause followed up with me. I told her that we had an offer above her escalation amount. She quickly responded that her buyer would go to $20,000. I told her if her buyer removed their contingencies that we would accept their offer and proceed to closing.
She quickly resent a new purchase and sale agreement and proof of funds for $20,000. I had my trustee sign
and accept the offer. I accepted their offer very quickly due to the language they included in the contract:
“Value is in the land only. Buyer accepts the property AS-IS and will assume the responsibility to clear any code violations, open permits and accept the property with any expired permits.”
I received a higher offer for $23,000 the day after signing the contract. I texted a response saying, “Thank you for your interest, but we have already accepted an offer.”
He then offered to pay $26,000, which I did not respond to. We also had a few other offers that came in above the $20,000 after we went under contract. The sale closed on February 28th.
I sent a check from my IRA to the trustee for his services and reimbursement for liability insurance he had paid on the property for the time my IRA owned it. The proceeds from the sale were wired directly to my Roth IRA account at Equity Trust.
After closing costs and commissions, my IRA made $12,722 in tax free profit for about 10 hours of my time.
One thing I think I may have done differently would be to list the property on MLS with a realtor to let them handle the calls and offers in addition to getting more exposure for the property.
We were shocked that very few owner financing offers came in, and that anybody was willing to pay $20,000 for such a junky house on land that was assessed for $6,500.
Reprinted courtesy of Central Florida Realty Investors. Source: April 2018 CFRI newsletterVisit www.cfri.net or call (407) 328-7773