How We Bought a House for Free

Our first free house

While we have been on this journey of buying houses in San Antonio that need some love, we have learned a lot of lessons.  We want to share what we have learned with those who would like to do the same.  Today we will talk about how we bought a house for free and how you can too!  If I were to have my own midnight infomercial prompting you to pay me $299.99 right this second, for a pack of audio tapes, I mean DVDs, er….downloads; this would be the story I would lead with.  

How we found it

Whenever we are renovating a home we go to meet all of the neighbors to introduce ourselves.  We hand them business cards and let them know that we are trying to improve the neighborhood and that they can contact us should they have any concerns about the tenants we select.  We assure them that we do thorough background checks and that we take pride in the houses we renovate.  This also gives us more eyes on our property by those who care the most about the neighborhood.  We also ask them to let us know if they hear of anyone looking to sell because we really like their neighborhood and we’d like to improve other houses like we are doing to the one we are renovating currently.

One neighbor across the street, who we had spoken to, called us and asked if we would like to see their house; that they were considering selling.  We said sure and set up a time to see it.  The problem was that it was beautiful.  Beautiful houses normally are not considered a problem, I understand, but his was a problem because we likely won’t be able to buy a perfect home at a discount.  We generally buy houses that need some work due to deferred maintenance or abandonment.  These are the houses that we can add value to.

After seeing the entire house, I wasn’t optimistic.  This house was cared for and looked like my own grandmother had lived there.  The yard was perfect.  It was a small 2 bedroom, 1 bath house that had a converted garage that was ducted for central air conditioning and had an AC that was correctly sized for the house.  It had a new roof and recent vinyl siding.  I worked my numbers and stuck to them and made a verbal offer over the phone.  I also explained that I could not make a full-price offer and that they would be better served selling the house for full retail value using a realtor.  They were grateful for the offer and advice and said they would think it over.  I didn’t really think we would hear from them again.

After a couple of months, we got a call from them asking if we were still interested in their home.  I said that we certainly were and referred to my notebook for the price we had offered them.  They said that sounded good but that they would like to stay in the house and rent it back from us.  What?!?! That means no vacancy at all between buying and renting it!  To tenants who already have showed their pride in the home by the way it was maintained.

They basically wanted their equity out, a fixed monthly rent, and no surprise repairs.  We said we would be happy to rent back to them and we knew the going rental rate because we owned the house across the street.  We met them once more, with our kids in tow, to sign the contract.  They said they had no heirs to leave the house to and would like to enjoy the equity now.  We wrote in a provision to the lease that would allow for only minimal rent increases due to rising taxes.  We could already see that they lovingly cared for the house so that wouldn’t be a problem.  And they were about to both be on a fixed retirement income so we knew they would have the income for the rent. 

We make cash offers

We made a cash offer using private money and immediately began receiving rent payments which more than covered the high interest rate loan.  After six months, we knew, we could do a cash-out refinance on the property.  This would allow us to receive 75% of the appraised value at that time.  When it was appraised, it appraised slightly above what we had estimated, and we got a full cash-out refinance which paid for closing costs, paid off our private lender in full and we even walked away from closing with a few hundred dollars that had been credited to us.  

Why they sold to us

By this time we already had been renting the house back to the sellers for six months and we had only repaired a door knob.  Everything was going well and we were on to the next project.  I asked the sellers why they chose to sell to us and they said it was because they trusted us.  This is one of my biggest lessons in this business; and in life.  Be trustworthy and you will be ahead of so many others.  I want a business I can be proud of.  I never want to try to convince a seller that I am their best option if I am not.  This is likely the biggest investment they have and they need to know their options.  If others make more money than me because they exploit others in desperate situations, then so be it.  Life is more than just the financial bottom line.  Think of how you would feel if your family member was on the other side of that negotiation.  We have to improve the image of the real estate investor by being ethical and honest.  We do this by being problem solvers.  It this situation, we were not the option offering the largest dollar amount but we were the option that solved the seller’s problem.  They could access their equity, stay in the home, and have no responsibility for unforeseen repairs.  

When I spoke to the sellers recently they had just returned from a cruise and the last time I went by they had a new car.  It made me happy to know that they were able to use that equity to enjoy their retirement years in the home that they already love.  While I don’t think this type of deal is normal, it is an example of how finding win/win solutions can work.  You have to be active in the market for these deals to happen.  I’m sure there are thousands of more miraculous deals created every day.  This just happens to be one of our best deals.  I hope this offers some motivation from a true story.  Our ROI (return on investment) is considered “infinite” on this deal because we don’t have any money invested.  This would sound too good to be true if we hadn’t experienced it for ourselves.  And we wouldn’t have experienced it for ourselves if we weren’t out doing this business making mistakes and learning as we went.  This was our first true “BRRRR” property.  If this term is unfamiliar, fear not, we will be discussing it in great detail in the next post.  Go out and make something happen and as always, “keep the main thing the main thing”.