Today’s Investment story comes from Jared Kott. Investor and property manager, Jared Kott, lives and breathes the Southeast neighborhoods of Chicago. After leaving corporate America on a Friday in 2013, Jared enrolled in a property management class, with CIC, the following Monday to get his feet wet doing whatever took. This experience was the springboard that led to Jared owning over 100 properties, predominantly in the Southeast neighborhood of Chicago.
Pre-close
Even after buying 100+ properties on the South Side of Chicago, Jared has never dealt with an experience like the one in this post. Jared found the subject property on the Southeast side of Chicago through a judicial sale at the courthouse steps for just $5,000. Unfortunately, he wasn’t able to get keys for the property, and wasn’t able to view it before the purchase. He made sure to look for signs of occupancy such as, door knocking, notices, looking for A/C units in the windows or cars in the driveway; he found that both cars and A/C units were nonexistent, so the property was assumed to be vacant. His team put tape on the front door (but not any notices to vacate).
This type of property is typically Jared’s bread and butter. Preferably, he likes them to be vacant so his team can tear the house down to the studs and rebuild. Typically, he buys, rehabs, rents, and refinances (BRRRR) his properties in packages of roughly 10 properties - he has only sold a small percentage of the portfolio, his belief is long term wealth comes from buy and holding real estate. The properties are typically in C-class areas, and can be rented to quality tenants after they are rehabbed. The large rehabs also give him fewer issues later on when dealing with capital expenditures.
Execution
During the process of pulling Easy Permits from the city, Jared’s team noticed that the backdoor was open. Once they purchased the property, the contractors walked the site and changed the locks and set up a lockbox. Given that the contractors didn’t know that the property was expected to be vacant, they didn’t think much of the fact that there were some personal belongings and a lot of beer bottles in the property. Eventually, the team connected the dots and realized that there were people living in or at least spending a lot of time in the property.
Once Jared’s team realized there were squatters in the house, they put up notices to vacate in hopes that whoever was there would soon vacate. Several days later, Jared’s team went to the property with fluorescent vests and hardhats, implying that they were a bit more official than simply investors/contractors. To their astonishment, the squatters were waiting there for them, looking even more surprised than Jared’s team. Jared’s team notified the squatters that the house was going to be demolished the next week. The squatters took full advantage of the next few days, as there was a large party thrown in the house that weekend. Thankfully, this party turned out to be a final celebration - the house was vacant that next Monday.
After taking control of the property, Jared’s team set up special doors to protect the property and began the demolition. It was quickly apparent that the property was neglected as the utilities were off, paint was peeling, and it was losing its general appeal; however, they were able to salvage the hardwood floor.
Final Result
Thanks to the protective doors and relatively quick demolition, Jared’s team was able to rehab the property on schedule. Despite the moderately increased costs (several thousand dollars) for additional trash pick-up during the demolition, the project was completed on track and on budget. After the 5k purchase price and 70k rehab, the property appraised for 150k, giving Jared 75k of equity. This is definitely not a bad outcome for such a rocky start.
Lessons Learned
To determine whether a courthouse/auction/foreclosure property is vacant, look for signs of people living there. This could include A/C units in the windows, uncollected mail, cars in front, or footsteps in the snow (in the winter). Fresh trash in trash cans. Always ask the neighbors, good neighbors are gold with information.
As soon as you take over a potentially vacant property that you haven’t seen inside, it would be prudent to consider putting up a notice to vacate so that potential squatters or previous renters know to leave.
If someone is squatting in a property that doesn’t have working utilities, they are probably going through some hard times. It is best for both parties to figure out what their situation is like, and to help provide them resources. Sometimes cash-for-keys might be the best option, other times it may be a completely different alternative. It is important to use solid communication skills and to listen intently.
If the occupancy of a property is unknown, it would be advisable to include an estimated cash-for-keys balance in the property’s pro-forma financial analysis.
There are various types of protective doors that can work for vacant properties. Do your due diligence, and consider the effectiveness for each. For example, cameras may be helpful for detecting what is happening at a property, but how likely are you to be able to follow up and catch the suspect? Then to ultimately receive a sufficient payout from them in court? Depending on the area, it may be best to just use fake cameras instead of real ones. Frequently check the building, and consider a home sitter or equivalent.
How to best contact Jared
Office - 312.447.2349
Website www.mpghousing.com
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