Thursday, August 19, 2010

Buying a House for Pennies on the Dollar

Can you really buy a house for Pennies on the Dollar?

Yes, you really can, and I have. And yes, there is a catch!

Recently a partner and I purchased a home that is worth about $300,000 for just $140,000. In case you don't have a calculator handy, that is 46 cents on the dollar.

This is a nice house in a nice neighborhood. So, what is the catch? Well, actually there is more than one.


When you find a house that you can buy at a price significantly below the market value you must have access to a large sum of money that is available immediately. We had to close in less than three weeks from the time we found this deal.

Three weeks isn't enough time for traditional lenders to even finish determining if they think you will pay them back. Then they need to spend several more weeks scheduling and evaluating the house you want to buy. The bottom line is, a fast close for a traditional lender is six weeks and most won't get done in less than twelve weeks.

So, if you cannot get the money fast, then the deal will get away from you.

Catch #2) Lenders Will Only Consider the Purchase Price

When you find a deal like ours, most lenders will look at the contract price of the property and will only lend a portion of that value. This will still leave you with the need to come up with anywhere from 5% to 20% of the contract price in order to make the deal happen.

Catch #3) Lenders Will Decrease the Loan Based on the Property Condition

When you find a house at a great price, in most cases it is going to require some repairs. If the repairs are too significant, the bank won't lend you anything, regardless of how low the purchase price is. They don't want to end up owning it in case you walk away with their money. If the repairs are within reason, they will decrease the stated value of the home by the amount of the repairs and lend you a portion of the decreased value.

Catch #4) Fixing the Property Requires More Cash

With very few exceptions any house you can buy for 46 cents on the dollar is going to need some repairs and some updating. To do the repairs and updating will require more money.

Our deal was no exception. We had to put on a new roof within days of closing to make sure we didn't have the inside get damaged from rain that would have come through the old roof. Then we had to clean out the house and make several other repairs. Lastly, we had to update the tiny kitchen by expanding it and improving it.

All of this requires a lot more cash, in addition to what we paid for the house at closing.

Catch #5) You Have to Pay While You Wait

When you get a loan to buy and fix a house, you have to keep making payments on the loan even though you aren't living in the house. If you get a loan that doesn't require payments, then you are just deferring payments while the interest is piling up. That is what is known as the cost of capital.

Catch #6) If the Repairs Aren't Done Right It is Still Your Problem

When you are doing it yourself or even having others do it for you, if the repair or upgrade is messed up, you are still on the hook. You will suffer more for it than anyone else in terms of money, time, and frustration.


Every week my team and I find and buy homes for pennies on the dollar. We work with a group of investors who make money with us by lending us the money to buy and fix these homes. We pay cash and close quickly. Then we fix up these homes and make sure they are done up right. When we are done, we want to sell them fast, so we put them on the market at a discount price. That way you save m0ney even while we make money.

While it is true that you can find and buy houses for pennies on the dollar, there are a lot of hidden downsides to doing this for yourself. We know and understand the problems with doing this. We do it every week.

If you buy a home from us, you will save yourself the time and frustration of trying to find one of these deals and you will save yourself the aggravation and disappointment of trying to buy and fix up one of these homes.

Why bother when instead you can let us to all the dirty work and you still get a discount on a beautiful home?

    Tom ~

    Why Buy Retail?

    See my latest blog about what we do at The Gold Seal Homes Group: