The negotiations were successful with the lender and we achieved a 'short sale' at about 69 cents on the dollar, including new loan origination costs, $5K to the seller at closing and payoff of the original loan.

Second violation, a new bank loan.

I was unable to buy the property 'subject-to' because the seller was not comfortable with that. In addition, I did not want to assume the existing debt, although I probably could have, because there were provisions in the underlying 'subsidized' financing that had a "prevailing market value clause".

This component of the financing stated that in order to sell the house - and pay off the loan - it would require a payoff at current market value. In other words, if I kept the house for 5 years, for example, and the value went up $20,000, I would have to pay the original loan amount - plus the $20,000 to the lender.

To get around this, I convinced the lender to sell on a short sale and bring cash to closing.

At the time, I was unable to find private money to buy the property in the first place.

So a new loan.

The process took longer than anticipated - and from first contact to closing it was about 6 months. I was pushing for the deal because I was having a particular dry spell in locating deals and I had sustained a physical injury in September 2003 that really set me back.

Instead of flipping the house and making $25-35K, which I could have probably done because of the low market entry price, I decided to renovate the house, refinance it to pull out the cash and then either sell it on a lease option or simply lease it out.

I based the assumption to do this on the fact that I felt the true market value of the property in renovated condition would be right around $140K.

We took a 3 bedroom, 1 bath rambler with an unfinished basement and converted it to a 5 bedroom, 2 bath with an office and laundry room.

The finished product is really quite nice. It is spacious and the finished floor plan of the basement works very well. It is comfortable space.

The thought was framing in a few walls, running some new wiring, cutting in egress windows and putting in a bathroom would be no big deal. We have experience in these things, and it made good financial sense based on the estimated final market value.

The process - overall - was not that difficult.

But in retrospect, there were quite a few glitches.

We called in a back hoe company to expose the foundation walls for the purposes of putting in 'legal egress windows' in the basement for fire insurance and safety.

They were to dig on a Thursday so the concrete saw man could cut the window openings on Friday. They didn't show up on Thursday but I did.

When they got there, the field manager said he had forgotten to call the power company to locate the underground power lines.

Next the location of the underground power forced a change in plans of locating the new bedrooms because a legal egress window is required for each additional bedroom and the power was way too close the spot where I had planned to put in a window.

Meanwhile the concrete saw guy is on the way and there is no hole dug yet. In the nick of time, the operator got the first egress hole dug and the concrete sawing began on the first egress. The concrete guy was awesome and very reasonable.

The backhoe guys were another story. They have lots of ways to make money that I was not aware of. Long story short, I had to put in a new sewer line to accommodate clearance for the new egress window on one side of the house.

Not only did this add an additional $1400 to the backhoe cost, it ended up taking another 5 working days - all said and done.

Mistake # 3 - and this is only the first 10 days.

The next aspect of the puzzle was getting an electrical permit and getting the electrical signed off - before we could sheetrock.

There were some general misunderstandings but it turned out that the state inspector was not affiliated with the local building permits in any way - silly me.

This set the sheetrock back an additional week - or so we thought. Mistake #4.

As it turned out, it took three visits from the L&I inspector before we got that signed off.

Have you ever heard of an 'arc fault breaker' - me neither. But they are current code now for any baseboard plugs in bedrooms.

That aside, coupled with some severe and unexpected home front issues and the delays, it was almost a month before the rock was installed.

I relied on a guy who "was a remodeler for 10 years" to handle a small crew of very enthusiastic local youngsters. Mistake 5.

The thought was this guy could measure and cut and the kids could hang and screw the rock.

So much for thoughts...

I called after a week to see how the work went the preceding week and my contact told me that they had not started the rock yet. The remodeler was busy and did not start on Tuesday as he had said he would (this was Sunday) and that he would probably be able to get started in the next few days.

It turned out that it only took me and another experienced contractor 2 full days to correct the sheetrock errors - overseen by the 10 year remodeler - before I could tape and texture.

This obviously led to additional delays including - missing the deadline on a Friday inspection of the 'sheetrock nail pattern' so that we could tape and texture that weekend. Mistake 6.

The bathroom installation turned out to be the bathroom from hell.

That is we ended up sawing out the concrete floor to install drains and vents, had three failed inspections and multiple changes to the venting because of the need to install an 'ejection pump'. Mistake 7.

As a result, we missed the targeted deadline to get the final appraisal done by almost three weeks.

This was because of the holidays and a series of other compounding issues - including cash flow and firing incompetent help. Mistake 8.

The mortgage broker, as it turned out could not deliver on the financing as originally described and planned on. Mistake 9.

In addition, after having been told he had the whole thing handled and that he had 'submitted the package to the underwriters using a subject to appraisal' so that we could fire the paperwork though as soon as the 442 (final inspection) came in from the appraiser. It wasn't. After the 442 was complete, I called the broker and he told me that he hadn't submitted the package to the underwriters because his bank contact told him not to without the 442. News to me. Mistake 10.

In addition, he had told me that the title transfer with a quit claim deed to my sister, for refi purposes, would be a snap. It wasn't and required an additional $1000 just in transfer taxes. Mistake 11.

With a follow up call to the mortgage broker to find out the timeframe on the closing (after he had assured me that it would fly through as soon as the 442 came through), he told me that it would be another two weeks because he hadn't received the record of the quit claim deed recording until that morning.

Even though we had had a very distinct discussion about how difficult it was to get the quit claim deed recorded the day of the recording.

He was by the way, out of the office the Friday afternoon that I did the recording and he had made a big deal of getting the deed recorded 'right away'. Mistake 12.

As it turns out, the appraiser insists that a 3 bedroom, 1 bath rambler with a finished basement will not comp with a 5 bedroom, 2 bath rambler. The differential is about $20K in this case which means that about $16K in refi money is not accessible at closing. Mistake 13.

I did some homework about market values to verify my ideas going into the project and I am a lot closer to market value - according to some very savvy real estate agents in the local market - than is my appraiser.

What it boils down to is this:

It is a title seasoning issue in a sense and the banks don't like to see the value of a house go from $81K to $140 in six months. Their assumption is that there must have been some kind of fraud going into the deal.

This is rooted in unscrupulous activity by real estate investors in recent history who worked in tandem with crooked appraisers to defraud banks with phony appraisals.

As a result, I think the appraiser is gun-shy of the banks. I could fight the value and prove my position legitimately, but it will result in an additional month before closing which will knock a subsequent deal sideways which is contingent on the closing of this escrow.

Knowing market value and knowing how appraisers will interpret it are two different animals. Don't make assumptions about market values if you are relying on the cash from the proceeds. Mistake 15.

This whole process had a significant impact on my 14 year relationship with my lady. It seems as if it may be the straw that broke the camel's back. The cost of that result is immeasurable and will potentially impact the rest of my life.

Complexity seems to compound itself.

In retrospect, if I had to do it over again, I would probably flip this property without renovating it.

On the other hand, I learned a great deal from the experience. Who knows what the real costs are in my life associated with this. Perhaps there is a greater value - in the long run - in my experience gained compared to the short term costs.

Regardless, keep it simple.

Follow the rules and stick to the basics. That's it for now...

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See you next time.

Best regards,

Michael Barrett