Category Archives: risk

case study on 4800 Spring Meadow Cove, Austin TX 78744

A case study on 4800 Spring Meadow Cove, Austin TX 78744

                        The Spring Meadow Cove property was purchased on April 22, 2003 from HUD for $54,603.   The property was built in 1984.   The house was a 3 bedroom, 2 bathroom, 2 living areas, a dining area, and a 2 car garage.   The house was immediately rehabbed and listed for sale at $115,000.   It was sold for sale for $116,000.   The repairs were complete by Remar Ministries.   It required approximately $7,500 in repairs.   The list of repairs included:  

  Drywall repair, Paint entire interior of house, Carpet, Rebuilding the kitchen countertops, rebuilding the master bathroom tub surround, new window screens, new ceiling fans, new garage door, new door knobs, and new rain gutters.

 The repairs took approximately 2.5 weeks to complete.   The tax appraisal on the home before the repairs was approximately $94,748.   The after repair value per the appraisal dated April 19, 2003 was $113,000.   The initial loan to value, based upon the appraisal value, was 56% (65K/113K).   Below is a financial break down of the transaction.   There were $2,612 in closing costs associated with the purchase of this property.   Also there were holding costs of $975 per month for 5 months.   The  house was purchased using a “hard money” loan.   The interest rate was 18% the total amount borrowed was $65,000


.The Maximum purchase price was determined by using the formula previously outlined   The contingency factor should be added to the profit for this transaction because it is for emergencies or unforeseen repairs.  


            $Maximum Retail Value $                     $115,000

            (subtract the following) 


            – Purchase Costs                      -$1,000

            – Rehab Costs                          -$7,500

            – Holding Costs                        -$5,000

            – Sales Costs                            -$6,500

            – Contingency Factor                -$5,000

            – Profit                                     -$35,000

            $Maximum Purchase Price   =  $55,000



If the house was going to be held as a rental then it would need to be refinanced.   If an 80% loan to value loan was used after closing costs and escrows TSG would have received a check for approximately $20,000 after paying off the hard money loan and closing costs.   This property would probably be held for 5 – 7 years and then sold.   If the market appreciates 3% – 5% per year (very reasonable appreciation rates) then this property will be worth between 132,000 to 144,000.


If this house were put on the Fast Sell Strategy track instead of the Rehab Strategy track it could have been sold to a rehab investor for $5,000 to $10,000 and the rehab investor would have used a similar formula to determine their profit potential.


Pictures before repairs:















 Pictures after the repairs





 We sold the house for 115K to an owner occupant with a 1st and a 2nd to us for 20K.   They ended up losing the house in foreclosure on the 1st and my 20K second was wiped out!   ((That SUCKS)).   We made good profit and learned a good lesson about taking a 2nd behind an institutional 1st.   Don't do it unless the profit that you get from the payoff of the 1st is good and you dont care about the 2nd.   We could have reinstated the 1st but after they were 3k behind then it was not worth our while any longer so we just passed on it and moved on to bigger and better deals.

This was the only deal (1st and last deal) that I ever used hard money on and it was a learning experience as well.   There was a tremendous lesson on who hard money really works in doing the transaction!    For those interested please send me an email and I will lay it out for you.

As an aside the agent who I had worked with to buy the house ended up buying the house from the bank and went out and did the same type of transaction as I did!  Funny how we even recycle houses in Austin!

Post your questions to the REICA board and I will answer some of them if any or send me a private email at

1404 EM Franklin Ave – SOLD

1404 E M Franklin Austin TX 78721

Sales Price $125,000 

Property Description:

    The Property is close to the Mueller redevelopment.   This property is a 2 bedroom 1 bathroom small house with only 632 square feet.   It has been a rental property for the entire time that the current owner has owned it.   The rental amount is $550 per month and the lease expires in Dec 2007.   The house comes with a stove, refrigerator, 2 window A/C's and 1 wall mounted heater.   The house is just a small rental house the value is in the lot.   The lot is 75' X 252' and can be subdivided into two duplex size lots.   The property is not in the 100 year flood plain.   The old survey has a fence that has been moved in 2006.   Please click all of the links and review the attached letters concerning the fence and driveway.

    My original plans included dividing the lot into two separate parcels and building 4-plexes on both of the lots.   Unfortunately; after have discussions with the City of Austin's Development Assistance Center Help Desk, I discovered that the most that I could do easily (administratively without a zoning change and public hearing) was to divide the lots and build duplexes on each lot.  Please contact the Development Assistance Center to verify the information.   Based upon conversations with city staff at the development assistance center a drawing was developed to subdivide the lot into two lots.   One approximately 7,500 square feet and the other 11,250 square feet.   Please click the following link for a New Drawing of Lot Layout.   

   Then I planned on selling the individual units as condo's.   There are currently about 20 townhouse condo's for sale around the corner from the property on 12th street listed for $225K to $250K each.   There are two other duplex size parcels for sale on the same street for $109K and 99K.   Please click the following link for information on those lots.   When subdivided the purchase price for each of the two lots created out of the original parcel would be equal to $62,500 each. 

    In 2006 the lot was cleared and about 3 loads of debris was removed.   The fence was constructed on the property line and about 30 small saplings were cut down.   There are several mature oak trees toward the back of the lot and they would provide a huge amount of shade for the back yard of the rear duplex.       

Please click the following link to see more pictures of the property.    

Please click the link for the Sellers Disclosure form.

Analysis of the potential for this property:

    This property should allow the new owner to build two duplexes or four condo's.   Those properties if they are 3/2 should rent for about $1,250 each unit.  $1,250 X 2 = $2,500.   If the units were sold for a low price of $175K each as condo's then to total gross sales price could equal $700K.   I estimate that the total cost to build the units would equal $82K per unit plus the land cost of $32K per unit for a total of $114K per unit.  The gross profit could equal $61K per unit before any sales expenses and holding costs.   The other condo / town home properties in the neighborhood sell for anywhere from $183K to $250K each.   Please click the following links to see some info on those properties.

   Below are pictures of examples of the style of townhouses that I was thinking about building.  This is a single unit that can be combined in multiple units to form a duplex.

Click the line to see the floor plans.   This same design is in another neighborhood that is both further away from downtown, and further away from the Mueller redevelopment is selling with prices starting in the upper $200's.   This fact points to a conclusion that a price of $175K per unit is easily achievable.

    If the property was held for cash flow as a rental property and a reasonable 80.0% loan was put on the property for about $360K.   The cash on cash return should be about 12% in the first year using a 7.5% vacancy rate and a 6.0% management fee.   The average cash on cash return is 14.0%.   If the property was sold at the end of a 5 year holding period the total return per year would jump to a 32.0% return!   See the attached financial analysis of the property.

   The area is expected to grow tremendously over the next 5 years.   The Mueller redevelopment is within 1 mile of the property, but that growth has not even been factored into the demographics study currently available.    From 2000 to 2006 household in the area have grown at a high rate and the median income of the area has also grown tremendously.   Please click the link to see the Demographic study.   

Syndication Potential

   An analysis was also completed to evaluate the syndication potential of the property.   If The Seay Group were to act as the syndicate sponsor we would raise $100K in equity to fund the purchase, construction, and holding period of the property.   The desired plan would be essentially the same as outlined above.   Build condo's and then sell them individually.   The time line would probably be condensed and this project should be completed within 1.5 to 2.5 years.

   The overall returns to the syndicate equity investors would be slightly lower to compensate for the management of the syndicate.    The average cash on cash return would most likely go down to 10% and the total return would likely be reduced to 24% if held for a full five years.     The primary reason for the reduced returns is the reduced management risk, construction risk, and liability risk.   Those risks would be reduced because as the sponsor The Seay Group would take those risk in exchange for its 25% equity share.    

   The equity investors would receive a preferred return of 10% per year and would first in line to receive any equity distribution until they have received their initial capital back.   After their initial capital has been returned they would also receive 75% of any remaining  cash and the sponsor will receive 25%.   The debt structure would initially only be $25K for the land loan at 8%.   This loan would be paid off with the proceeds of the initial draw on the construction loan.   The construction loan total loan amount would go up to a maximum of $360K.   

   If the property was built on budget and on time then the sales proceeds of $700K would be reduced by the $360K loan, $40K in sales costs, $100K initial investment, $20K preferred return to equity investors,  leaving $180K % before taxes to be distributed according to the 75% / 25% split.   $135k to equity $45K to the sponsor.   The exit timing is of utmost importance!   If the property could be sold in under 2.5 years the annual returns skyrocket upward.    If the market turns softer and more time is needed for the property to sell then the annual returns drop down to the one's outlined above.   The total returns change very little but the timing of those returns could make the difference between a 24% annual return and a 70% annual return!

 For more information and examples of other syndications please visit .

Fence Issue 

   When the property was originally purchased the neighbor's had erected a fence that enclosed part of the property.   This is shown as a fence on the original survey.  Click the link for the Old Survey of the property.   To address this issue a letter was written to the owner of the fence asking them to move the fence or participate with us to facilitate the moving of the fence.   Unfortunately the fence was not moved and the owner "Cameron Smith" passed away and her heirs now live in the property.

    In 2006 they were asked to get a new survey of their property to conclusively resolve any issues about where the fence should be but unfortunately they did not.   After several attempts to resolve the issue with them we were not able to reach any type of resolution so using the original survey the fence was moved to the property line.   The reason that I believe that no resolution could be reached was because they knew that the fence was in the wrong place and did not want to remove any of their things and did not want to lose access to the back yard by moving the fence.   

   The property is now fenced completely.   The neighbors have a gate installed from their back yard to access the driveway.   The arrangement that has been agreed to is that at any time that there becomes a problem access across my property can be cut off,  additionally the new buyer is not bound by my past agreement with them to allow them to access their property across my property.   

   Please click the link for the second Letter #2  about the fence shown on the old survey, and click the link for the third Letter #3 about the fence shown on the old survey before I moved the fence.   Since the new fence was erected in September of 2006 we have not had any more problems from the neighbors concerning the use of the driveway and the access to the back yard.   The new fence goes from the front all the way to the back of the property about 252 feet.   As they say, "Good fences make good neighbors!"


If you have any questions about the property please email me at

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Have you begun to evaluate the performance of your real estate investments this year?

This is a great time to do a little homework concerning your investments and whether they are meeting the return guidelines that you have determined are appropriate for them.

Why do you need to evaluate real estate investments?

When you are evaluating real estate investments what type of questions should you be asking?

Have you taken on some type of unstated risk and previously undisclosed risks? Continue reading Have you begun to evaluate the performance of your real estate investments this year?

My first eviction saga…….

(Normally evictions are a pain but not a SAGA) It all started when a tenant did not pay and performed what I call a Midnight move out. That is when they move at midnight so no one would see what was happening. Well this tenant did not take everything. So I called her and said hey do you want this stuff?

Yes I will get it in a couple of days.

NO you can come get it from the front porch b/c I am setting it out as we speak.    Continue reading My first eviction saga…….


over the holidays I had to deal with a fire in one of the apartments that I own.   I am relieved that the resident was not killed and thankful that the damage was not to the entire building!   Fires can wreck a real estate investment luckily this one is insured so the damage will not be as large as it could have been, but nevertheless it is a big distraction when you want to start the new year on a positive note.  Check out some of the pictures of the fire

after the fire  Continue reading FIRE!!!

Buy from pessimists and sell to optimists

Ron’s sayings and things # 2,857 to make you a better real estate investor.

This is one of the fundamental real estate investment concepts that most people seem to misunderstand or to miss apply to themselves.   Buy low and sell high plays a part in this concept.    It sounds easy enough but the application of this wisdom contained in the instructions is a complex concept.    To do this you must understand market fundamentals and take your time to study who the pessimists are and who the optimists are.    When the market is ugly and no one wants to be a real estate investor, foreclosures are everywhere, and everyone who has something to sell and there are no buyers or very few who want to buy real estate because of the general state of the economy.    In this market the pessimists are ruling.   The trick is to buy something that you can fix or that is in need of the specific skills that you can easily provide.    Continue reading Buy from pessimists and sell to optimists

how are your returns?

Why Many Investors Keep Fooling Themselves
by Jason Zweig
Tuesday, January 19, 2010 of the wall street journal penned a great article about How high most investors returns are. You can check it out at

To summarize the article says that most investors cant earn over 5% or so on thier investments.

Continue reading how are your returns?

An example of a multi-leg real estate exchange

Please see the file entitled multi-leg real estate exchange. This is courtesy of The Society of Exchange Counselors (SEC). You can find thier website at

Here is the link or click the follwing link:

you can also download the pdf file from the mybox section on the righthand side of my blog. Just look for multi-leg transaction.

What is a multi leg real estate exchange?

What is a mulit-leg real estate exchange? It is a series of exchanges that allow you to take your real estate from where you are to where you want to go. How do you make something like that happen? With lots of flexibility and patience. You need to be able to move into assets that may not exactly fit your needs at this current time. They may not be the best fit for your long term financial plan. They may not even be in this country! They are simply a way to go from where you are to where you want to be. You need to be able to answer the question, “What else can it look like?” Have you heard the story about 1 red paper clip?

Continue reading What is a multi leg real estate exchange?