If you’ve missed some of the prior articles, basic guidelines on successful investing are in my book “Stairway to Wealth” available at LuLu.com. 

Continued from Part 21: A little small talk, then Emily put her printouts in front of Hiram. Her first question was simple: could he extend the depth of the house by 10 feet without too much trouble? If he said “no”, there would be no need for any other questions. If he thought it could be done without too much expense it would allow the four bedrooms on the second floor to each have their own bathroom. On the first floor, the additional space would allow for building a laundry room and a half-bath off the kitchen.

Hiram thought it could be done. “Happens all the time”, he said.

Emily then asked for a labor and materials bid. Labor costs were pretty standard: the cost to frame a four-cornered house of a given square footage was calculable. Hiram had the program on his home computer. Material costs, however, were highly variable. A fiberglass bathtub could be had for much less than a porcelain one. Plywood cabinets cost less than zebrawood. There were expensive windows and economical windows. Hiram did not expect her to have priced out all the materials, but he did want to know whether the overall quality was to be fair, average or good. Emily said, “Average”.

“You’ll provide the complete plans, but need me to modify them to add 10 feet to the depth of each floor, right? And the overall level of finish will be average?”

“Yes”, she said. “And I’ll need a schedule of completion, broken down by stages.” When Hiram heard that, he started to have a little confidence his time wasn’t wasted, because that’s how lenders pay: a certain percentage of the agreed cost at the completion of each stage of the construction. Usually the lender pays 10% for the first nine stages, and doesn’t pay the last 10% until the lien period has expired. No lender wants to totally pay off the general contractor only to learn that the contractor never paid the subcontractors and the subs have a lien on the entire project.

Hiram folded the papers and put them in his notebook. He stood up and said, “I’ll call you the day after tomorrow”. He went back to work and she returned to her property search. An agent had left a text message about an old house on a lot and asked Emily to get back to her as soon as possible.

Hiram called as he promised, late Thursday afternoon, quoting a labor and materials price of $225,000. That did not include land or city fees. She thanked him and said she’d get back to him when she had a prospective property.

Emily texted the agent, Trixie Dixie (#TrixieDixieSellsEverything), who called her immediately. She’d been working the expired listings and found one from 18 months ago that, she assured Emily, was exactly what she was looking for. 

Initial Inspection                                           

Trixie Dixie gave Emily an address over the phone, repeating it twice. The first time was slowly, the second time she just spat it out. Apparently she was one of those compulsive people who feel like they have to turn everything into a ritual: if it’s important, say it twice. Emily knew the area. The address was served by one of the good schools, not on a major street, and within walking distance of daily shopping. Those features weren’t all that unusual, they could describe most of the properties in the area, but she was pleased anyway. She agreed to meet Trixie Dixie in front of the property later that afternoon.

It was an old house with wood siding and a raised foundation on a 50 x 200 ft lot. There was a deep covered porch running across the front with a couple of planters on each side of the door. The plants had been dead for a long time.

Trixie Dixie was inside the house, looking out. The windows were dirty, so her face was indistinct. When she saw Emily approach she met her at the porch, between the dead planters.

“You’re gonna love it! It’s perfect! The best ever!” Trixie Dixie gushed, her repetitive compulsiveness showing. “Let me show you around!”

There was a gas heater against the living room wall. The floors were wood and some of the boards appeared termite ridden. Emily knew a good thing when she saw it. She went back outside. She bent over and examined the porch foundation and the bases of the vertical supports. What she saw she recognized as extensive termite or possibly dry rot damage. She couldn’t really tell the difference, but knew a negotiating lever when she saw it. And since she expected to do an extensive remodel there was no downside on her end, only upside if she could get the seller to agree to a cash allowance sufficient to cure the termite (or maybe dry rot) problem. Emily was excited, but tried not to show it. She turned to go back into the house and look for more cash allowance possibilities.

Trixie Dixie had been watching: she knew what Emily was looking at. She saw her frown. When Emily went back inside she noticed Trixie Dixie had lost her enthusiastic expression and was beginning to appear a little worried. “Let’s see the rest of the house”, Emily said, her face still solemn.

The right third of the living room was used as the formal dining room, complete with a built-in sideboard and china cabinet. Emily thought that was a nice touch. Behind the dining area on the right side of the house was the kitchen. It looked big enough to eat in, but had obviously never been remodeled. She noticed a gas outlet, but no appliances at all.

Behind the kitchen, at the back of the house, was a full bath. It was not indicated on the farm report, so Emily thought it might be unpermitted. Unpermitted improvements did not add value to an appraisal.

Across from the kitchen and bath, and behind the living room, there was the laundry room and the maid’s room. Apparently, back then, even the solidly middle class had domestic help. Maybe the unpermitted bathroom was for her.

The second floor consisted of a large master bedroom on the left side. The only permitted bathroom was at the back of the house behind the master bedroom. Emily tested the water pressure. She turned on all the faucets she could find before she flushed the toilet. She clocked the time it took the water tank to refill. If it was over 90 seconds or so there probably were pressure problems. Maybe the whole house needed to be replumbed, she hoped. Another cash allowance opportunity! It took two and one –half minutes for the water tank to refill. That was a bad sign. Emily called Trixie Dixie over, repeated the experiment while asking T/D to time the refill. Then she explained to T/D what it meant and what had to be done to restore healthy water pressures. Emily wasn’t sure of some of the details but she put on her serious face and pretended, figuring Trixie-Dixie didn’t know either. Emily emphasized, “Replumbing, maybe all the way to the street, is very expensive. I don’t want to buy the seller’s problem. Will they credit me for replumbing costs in escrow?”

There were two bedrooms on the right side. The bedrooms were adequately sized but their closets were smaller than what people expect today.

The ceilings were that dreadful sprayed acoustic popular in the 1960s.  Emily hoped the roof had leaked since the popcorn ceiling was sprayed on. She inspected the bedroom ceilings carefully. After repairing the roof, people often sprayed full-strength household bleach on the acoustic ceiling water stains and watched as they disappeared. The bleach would usually remove the stain but leave a light spot where it used to be. Emily was looking for light spots. She found some near the outside wall. She called Trixie Dixie over and pointed them out. Emily explained, carefully and slowly, how the ceiling got light spots. “First termites, then the plumbing, now the roof. I don’t know if the house is repairable. It’s probably a tear-down,” Emily said aloud. She could see Trixie Dixie’s heart drop.

She smiled.  Emily suggested they go out back and see what they could discover. The back of the house had an outside stairway to the second floor, probably as a potential fire escape. The shed at the rear of the property, near the paved alley, was falling down. Sheds didn’t make much difference in the value of the property, but maybe Trixie Dixie didn’t know that either. Emily was quick to point out the decay.

Emily asked about the living area. Trixie Dixie looked at her file and answered, “1,500 sq. ft.” Emily knew that small units (duplexes, tri’s and fourplexes) in the area never went over 900 sq. ft., but this was a Single Family Residence (SFR), not designed as a rental, so you would expect it to be larger.

Emily needed to get the agent away from the property. She said, “I don’t like teardowns.  They’re usually more trouble than they’re worth. I really don’t think this is my cup of tea. But why don’t you lock up and we’ll get coffee and pastry? My treat. We need to talk”

They drove separate cars, Emily a few cars behind Trixie Dixie. Emily wanted the agent to stew a little by herself: Emily says she doesn’t want the property, but then she softens the statement and says she “thinks” it’s not for her. Now she wants to talk to me over coffee. Why would she want to talk if she’s not interested in the house? Maybe I can still make some money here if I can get the sellers to be realistic.  In the meantime, Emily mentally computed the buildable area of the lot. She subtracted front and rear setbacks from the 200 foot depth, and then deducted side yard setbacks from the 50 foot width. She did it a couple of times just to make sure, and each time the answer was the same: she could build the second house on that lot.

Emily drove slowly, making sure she hit all the red lights she could. She wanted Trixie to arrive first and have to wait for her. A worried looking Trixie was at the door when Emily arrived. They entered the bakery and sat in the café portion.

 

This article is for informational purposes only and is not intended as professional advice. For specific circumstances, please contact an appropriately licensed professional. Klarise Yahya is a Commercial Mortgage Broker – Commercial Loan Broker, BRE: 00957107  MLO: 249261. If you are thinking of refinancing or purchasing real estate, Klarise Yahya can probably help. Find out how much loan the building will support. For a complimentary mortgage analysis, please call her at (818) 414-7830 or email Info@KlariseYahya.com