As many investors are focused on straight REO deals, a unique opportunity is emerging that almost nobody is attempting.  Due to the tight capital markets, home rehabilitation loans are nearly impossible to find, and quite frankly, I don’t think there is a single rehab loan product for anything other than your primary home, and even THEY are tough to find.

We were analyzing the local Lee County, FL market, and from what we saw, of the 800+ homes sold last month, maybe 15 of them looked like an investor purchased them to rehabilitate.  Why?  Because nobody wants to come up with the cash to pay for the rehab work.

Last week, we purchased a 2500 square foot home in (my opinion) the best area of Fort Myers.  The asking price from Deutsche Bank was $200,000.  We offered $160,000 and settled at $180,000….good enough for me and little did they know I would have been very willing to pay $200,000!

The home is an easement away from being “on the water”.  The water is not just an ordinary canal.  This is the open bay…panoramic views of water and real estate.  Beautiful.  A home in this neighborhood currently commands $145 per square foot if it is updated.  Our As-Is price per square foot was $72.  I had my bids done on the home and for my specifications that I wanted, it would cost $80,000 for remodel / repair.

The roof needed about a 25% replacement, I wanted to install 18 inch tile throughout the house, move some walls, enhance the front of the house, paint/wallpaper, gut kitchens and bathrooms, install a swimming pool, and my favorite was to add a rooftop deck which would provide breathtaking water views of the open bay…so close that you could throw a rock to the water.

At a total of $260,000, I financed 80% of the REO and paid cash for the rehab.  My out of pocket commitment was $132,000, a big nut, but worth it.  At $260,000 my cost square foot breakdown is now $104 per square foot, still over $40 per square foot under market value. 

Once the loan closes, I immediately intend on putting the home on the market during the remodel process to allow any potential buyers to customize any unfinished work.  I will list the home for $30 per square foot higher than what I am invested.  My asking price of $134 per square foot equates to $335,000 list price. 

What I am essentially doing here is inviting a bidding war on the property.  I would be at that point the lowest price per square foot in one of the nicest and high end areas in the county.  If I settle for my list price of $335,000, my profit will be $75,000, a perfect opportunity to 1031 exchange into another similar deal.  My out of pocket investment of $132,000 has now brought me a cash on cash return of over 50%.  After paying my mortgage and debt service for lets call it 6 months, I am right at about 50% ROI.

These deals are out there.  If you have the cash capabilities, I highly recommend pursuing this concept of REO investing.

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