NPN Story: Good ‘Ol Enid, OK
One of the first things we do when evaluating loans is to get a good look at the property that serves as the underlying collateral. The property for this note intrigued us as it was an old parcel with an old home right next to a tract with newer, expensive mansions, right across from a golf course and country club. We had lots of options to liquidate for a profit and we ultimately took the easiest route with a great profit and the lowest risk. Enid, Oklahoma treated us well!
Google Maps is Your Friend
Google Maps makes it very easy to quickly evaluate a property’s location and attractiveness. If Google Maps doesn’t have a street level view of the property, it usually is because the property is very remote, which we wouldn’t be interested in anyway. (See our general criteria for NPN selection. Scroll down to “Buying the Right Type of Product.”)
In this instance, we actually couldn’t see much of this property because the house was set back from the street and there were overgrown trees preventing a straight-line view. Further exploration on Google Maps revealed that this house was nestled between two newer tracts of homes, including houses in the $400k-$500k range with 3500–5500 square feet. The house was also directly across from a golf course. Even though the house appeared to be a lot smaller than the mansions, the lot size was about the same and fit in perfectly with the lots in the surrounding area. We thought that it would a great opportunity for a tear down followed by the build of a brand new spec home.
Borrower is in the Wind
The loan seller’s value of the home was $140,000 and the total debt on the loan stood at about $115,000. The borrower had filed bankruptcy several years prior and had given up several homes and property, including an airplane. The home was vacant. Fantastic! The borrower had given up and wouldn’t fight.
Local Governments, please Upgrade to Computers, You’re Killing Me!
We purchased the loan and got everything back on track for foreclosure. Although Oklahoma has non-judicial foreclosure, in practice, almost all foreclosures go through the judicial foreclosure process. The main difference I found between Oklahoma and other judicial foreclosure states was that OK’s systems were stuck in the 1950s. Nothing was online. Everything had to be sent by mail or hand carried. You had to wait until some offices were open or a certain person was available to process your paperwork. The delays could have been cut in half if the judicial system and processes were modernized like most other states.
The borrower didn’t show up and never contested the foreclosure. We set the opening bid at the Sheriff’s sale at $85,000, which would have given us a great return and provided an excellent opportunity for a local real estate investor that knew what they were doing. No one bid at the sale so it reverted to us as an REO.
Maybe because Enid was a smaller community, it didn’t have enough real estate investors around that might be interested. Every real estate market is different and the sheriff sale or trustee sale markets reflect that difference as well. In another market, this same type of situation might have resulted in a bidding war, in which the property sold to a third party bidder.
We took possession of the property and, yes, it was in poor shape. It didn’t necessarily need to be torn down because of an unsafe structure. But it was clear that the highest and best use of the property would be to tear it down and build a big house on it.
It’s an REO, What Do We Do Now?
My business partner and I looked into the idea of doing the tear down and spec home build but decided against it. First, it would require more capital. We bought the loan as part of portfolio that our first Fund purchased. We would either have to raise more capital from our investors or get a construction loan. Either scenario would require a lot of effort, risk, and capital calls are just annoying to investors.
Secondly, it would take more time. How long would it take to find the right builder, get the proper permits, and navigate the specific local problems that this project would entail?
Third, it would take a lot more effort and local expertise than we had or were willing to put in. It’s difficult enough to run normal rehabs long distance but this would have taken it to a much higher level. If we had plans to do more projects in Enid, it might have been worth the time and effort. For our business model and the geographically spread out nature of our assets, it wasn’t worth it.
Path of Least Resistance
The house was filled with junk and the landscaping was overgrown. Taking out all the trash and getting a gardener to trim the trees and shrubs and cut the grass isn’t “putting lipstick on a pig.” It’s more like hosing down a dirty pig and to getting him reasonably clean. The trashout and landscaping cost us a couple of thousand bucks but made the place look ten times better. (The costs were lower than we expected in Enid compared to other areas of the country.)
(Another example: although we did a full rehab on our Savannah REO , there was a HUGE difference when we spent a few bucks on the trash out and landscaping.)
Make it a Mansion For Me!
We priced the home for $115,000 and got multiple offers from local real estate investors. We sold it to one of them and walked away with a nice chunk of cash with minimal effort. The investor got a great opportunity but it would have been even better if he could have purchased it for $85,000 at the Sheriff’s sale three months prior! I googled the property address but I didn’t see any changes to the property except for its value, which has gone up for the area. I’d like to see a mansion the next time I check!
Things I learned:
Use Google Maps to get a good look at the property before buying. Use that information to find value that others are not seeing. In this case, the property’s highest and best use was not a consideration in the seller’s valuation.
Careful evaluation is key when deciding on the best liquidation strategy. Although we could have made a lot more money by doing a tear down and spec home build, it would have taken a lot more resources, time, and risk to get there.
If you decide not to do a full rehab, at least make sure the place is clear inside and out. Spending some money to haul away trash and do a bare minimum of landscaping adds value and makes it easier to sell the property.
Buying in states or counties that haven’t upgraded their systems will add to your timelines. Make sure you account for these delays in your projections.
Purchase Price: $65,000
Total Cost Basis: $70,894
Net Sales Price: $109,225
Net Profit: $38,331
Days Held: 260
Return on Investment (ROI): 54.1%
Annualized ROI: 75.9%