Subdivision Investment327 acresKona, Hawaii
1204N was acquired with a view of transforming it into a high end rental or my personal residence. This Bank of America REO 1 bed, 853 sf property was impacted by the fallout of the 2007-2009 Great Recession and as such was acquired all cash on an as-is basis. The building itself was struggling financially with many notices of defaults, making it hard to secure financing but this is often where value can be created.
Since the IRS had a lien on this land because the owner had a large inheritance tax bill that they were unable to pay, there was a possibility that the IRS might auction this 327 acres of land in Kona.
A public auction would enable us to buy the land for cheap and given the pro-growth council at that time, there was incredible potential in this deal.
The investment outlook was incredible, initially. The pro-growth council wanted us to entitle the land for high density, something that they were encouraging a lot of land owners to do at that time.
That would have resulted in significant residential and commercial real estate development on the land and yielded high returns in both cash flow and land value.
Since it was purchased on an as-is basis, the property’s characteristics at that time weren’t great but we sensed that there was value there to extract. This was a unique unit situated on the 12th floor with a great 180-degree view. It also had a balcony. The banks were assigning value to this unit compared to others but that wasn’t exactly a fair comparison owing to the dynamics at play here. We saw inherent value.
The property’s condition at purchase was less than ideal. There was mold, outdated Formica countertops, and floorings that had been laid on top of floorings over the years. The unit’s hallway was a waste of space that could have been better utilized as closet space (a desperately needed addition) or a small den. Everything was in need of updating but there was plenty of space to execute that plan.
Someone else initially won the IRS auction for this land. However, the IRS has a rule that allows owners who lose land in an auction to redeem it from the buyer within six months if they can pay the full price plus interest and the buyer has no option but to sell it back.
We bought the redeeming rights from the original owners and were thus able to acquire the land free and clear, even though the winner of the auction tried their best to prevent us from utilizing the redeeming rights.
We knew that with a pro-growth council backing development in the area, there was amazing upside potential in the deal. The land would be entitled for high density construction and subsequent deals would see the construction of new residential and commercial projects.
However, those plans hit a snag when a new no-growth council came in and essentially prevented any significant development on the land.
Despite the dilapidated condition of the property, we were confident that this was an up-and-coming neighborhood that was evolving into even a more vibrant community. The younger demographic would result in a spike in demand for modern homes.
We capitalized on that opportunity to build out the property and it has eventually proven to be a hidden gem – and honestly one we should have kept.
I was confident that we could buy the land at a very good price due to the lien on it, which is why it was acquired in cash. The land itself is located in a very attractive location, close to major retail centers and next to the school.
Even though the no-growth council has thwarted plans to utilize the full potential of this land, we will be able to get a return on our investment including profit with a considerable portion of the land still remaining in our ownership.
The property did have a lot going for it that subsequently made me consider it as an investment property. It’s located next to Beverly Hills with a mall being remodeled right next door. However, compared to others in the area, the building’s common areas and temporary financial and legal problems left a lot of potential buyers on the sidelines.
What made this such an incredible value proposition was the evolving demographic. Lots of young people were moving into the area and that brought an influx of new money and solid businesses. That inspired confidence about property values in the area climbing in the future. Also, unlike many of the other units in the building, the position of this unit within the property undoubtably gave it one of the most magnificent views.
Initially, it felt that the property’s marketability wasn’t good but we did our investigations and found lots of what we call “ingredients” that we like to see when a property has potential that is hard to see. We worked with Slater Development (slaterdevelopment1957.com) who subsequently connected me to WDA Architects (WhittenDunn.com). We drew up some pretty great plans to renovate the unit.
We opened up the walls to get every square inch of space in utility. We redesigned the hallway into a mini-den that eventually became my son’s room. More previously wasted space from the hallway was also utilized to increase the size of the bathroom. New grey tiles were added for a modern look. The kitchen got a thick Caesarstone counter with high-end appliances from JennAir, including a wine fridge, a steam oven, and an induction magnetic range. We gutted it completely, added tons of new cabinets, glass doors, and installed an entertainment system with speakers throughout.
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