REO with an occupant, 148k in and 228k out, nearly killed by the draw schedule

This was a bank-owned two bed plus a converted attic room in an inner-ring suburb, on the market 71 days with two price cuts. List was 164, I offered 141 with proof of funds and a nine day inspection period, we landed at 148. Comps supported 232 to 238 for a finished version and I underwrote 228 because two of the three closest sales were more than four months old and the newer listings were sitting.

What made it cheap was the occupant. Former owner's adult son, still there, utilities in someone else's name, the listing agent had never been past the kitchen. I priced 8k for getting him out and offered 5k cash for keys with 3k of it paid at the truck. He took it in the first conversation and was gone in eleven days, which is the single luckiest thing in this file. If he had said no I was looking at a formal process through the court, and the timeline for that depends entirely on local rules, which I confirmed with an attorney before I bid rather than after.

Rehab was budgeted 41 and came in at 52.4. The overage was a cast iron stack that had rotted at the basement joint, a sub panel that had to be replaced to pass, and drywall on a whole wall I thought I could patch.

The near miss was financing mechanics, not price. My bridge lender funded 80 of purchase and 100 of rehab, but rehab money came in arrears on inspected draws. I had modeled draws at two weeks and the first one took 24 days, which put me 19k out of pocket into month two with the plumber wanting progress money. I ended up putting 14k of my own reserve in for six weeks. If my reserve had been 10k instead of 25k I would have had to stop work and eat the extra holding.

Numbers at the end: 148 purchase, 6.1 closing and carry to the point of listing, 52.4 rehab, 5 cash for keys, 4 months of interest and taxes and insurance at 9.3, sold at 228 with 13.6 in commission and seller costs. That is 234.4 of cost against a 228 sale, so this one lost about 6. The 43 the closing table wired me is not profit: with the lender at 80 percent of purchase and 100 percent of rehab the payoff was 118.4 plus 52.4, so 228 less 13.6 of selling costs less 170.8 of payoff is 43.6 back against the 50 of my own cash that went in as down payment, closing, keys and carry. Returned capital is not a gain.

What I keep: proof of funds and a written term sheet in hand before I write any offer on an occupied REO, and the cash for keys number in the underwriting from the first pass instead of as a surprise. What I change: I ask the lender for the actual average days from draw request to wire in the last quarter, in writing, and I model that number rather than the one in the brochure.