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October 20, 2010
You Can't Win if You Don't Roll the Dice
I know, I blog is a couple days late this week. My apologies - have had a few too many things on the ol' plate lately.

I wanted to share the details of a phone conversation I had with a Realtor in Florida last week. He was the listing agent on a property that had been placed into a bulk sale by the bank that owned it. Initially reluctant to even discuss the property, the agent suddenly opened the floodgates and gave me more information than I could have ever hoped for.

Turns out the property is located across the street from a "drug house". This particular house has been raided by the police no less than a dozen times in the past year. Because the jails are full in this area, the offenders are simply released back into society to resume their drug dealing and terrorizing of the neighbors.

The agent spoke of a young couple who had signed a purchase contract on the bank-owned property. One Saturday, they came over and started to clean up the yard. At one point, they left some of their clothing outside while they went in for a drink. The occupants of the drug house stole the clothing, and when confronted by the soon-to-be new homeowners, threatened them with their lives. No surprise, the sale was cancelled.

The agent himself had been threatened with bodily injury several times by the drug dealers. He blew it off until the last bust, in which the police found a 13-year-old and a 15-year-old with semi-automatic weapons safeguarding the house. Knowing that a juvenile won't face any long-term punishment for doing something stupid, the agent excused himself from the listing and said he wanted nothing to do with the property.

Knowing all this, I cautioned my investor and informed him of the multitude of red flags on this property. Despite all my warnings, I learned two days later he won the bulk bid and was the proud owner of 20 new properties, including this Florida gem.

Now, at first blush this looks like a rash decision to buy a bulk REO package with warts and all. In a way, that's what it is. However, allocating one's cost basis across a portfolio like this is how one can justify the purchase and still make money on it. Case in point: The last listing price on this house was $50,000. The agent had a $65,000 offer in hand, but it required about $10,000 of repairs to the property in order for the lender to approve the loan. Worst case scenario - the agent said we could get $40,000 from a cash buyer who was willing to tolerate the bad mojo across the street.

Our cost? $2,000. Yep - the lender knew the property's issues, and figured $2,000 was good enough for them to flush their problem down the line to someone else. Why would the bank do this? Well, consider they also sold 19 other properties that weren't selling as quickly as they would have liked.

So...yes, we have a challenge on our hands. Yes, we have the opportunity to make some good money on the resale of this property. Yes, it takes a strong stomach to play in this arena. It will be interesting to see how this one plays out!

Make it a great week.


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