A Solid Network Pays
For One Investor

The Property: An 1890 farmhouse on a 10,000-square-foot lot in downtown Gloucester, Mass., a fishing town of about 25,000 people located an hour northeast of Boston that also was the setting of Sebastian Junger's nonfiction bestseller, "The Perfect Storm." The 4,700-square-foot home, which was subdivided into two units during the 1950s, sits slightly above street level and features a large front porch. The first-floor unit is 1,018 square feet, with one bedroom and one bathroom. The second-floor unit, slightly larger at 1,124 square feet, also has one bedroom and one bathroom, as well as access to an 860-square-foot attic which could be made into a second bedroom. Though "tired," the home had not been excessively modernized, so renovation could restore its historic charms.

Purchase price: $309,000.

Additional amount invested: $129,000. This amount includes "soft costs" of $35,000 for recording, legal and permitting fees and $94,000 in "hard costs" for renovation work, including $26,000 for interior and exterior painting, $21,000 for plumbing and $15,000 for electrical work.

Sold for: The top-floor unit sold for $294,000 in April 2004; the other unit is listed at $259,000.

The Investor: Dierdre Savage, age 42, earned a master's degree in architectural preservation from Boston University and worked in residential real-estate development and as a real-estate lender in the Boston area for 13 years before she moved to Gloucester in 1998. After serving for two years as executive director at The Perfect Storm Foundation, an organization that helps children of fishing-industry workers, Ms. Savage decided to return to self-employment in 2000 and try her hand at real-estate investing. Though she didn't intend to invest in residential property, she realized Gloucester's housing market presented some opportunities.

Armed with the proceeds from the sale of her home in Cambridge, Mass., and experience in real-estate development and banking, she felt confident she could buy, restore and resell property for a profit. In particular, her work in a bank that loaned money to developers taught her how to approach lenders and finance such a project.

"This took the fear factor out of finance, because I learned backwards how a bank finances real estate," says Ms. Savage.

It also taught her how to apply for a commercial-mortgage loan rather than a conventional mortgage to finance her project and how to present her assets and business plans to lenders. Because she was self-employed, a job status that often prevents buyers from securing mortgage loans, Ms. Savage leveraged personal connections to secure the financing from a bank.

The Deal: Ms. Savage decided the former farmhouse on Maplewood Ave. was a good bet because she could convert it into two condominium units at a time when a wave of new condominium construction had begun in Gloucester. The units would offer more charm than newly constructed units elsewhere in town and with only two the building, residents would have more privacy than in a large complex. They also would have access to the large front porch and yard and be able to walk to downtown shopping and a commuter-train station.

The purchase wasn't a slam-dunk. The home's sellers -- children of the deceased former owner -- initially listed the property for $375,000. Ms. Savage decided the price was too high and that she would watch and wait. Finally, in August 2003, after eight months on the market, the price dropped to $309,000. That's when Ms. Savage bit. To push the deal through, she made an offer that excluded common contingencies such as a home inspection.

Ms. Savage's bid also differed from other buyers' offers in one fundamental way: It didn't include plans to convert the top floor into a third unit. Ms. Savage had learned that other offers on the house failed in part because they included plans to create a third unit, a maneuver that would have required establishing additional emergency exits to comply with local codes. Rather than convert the building into three units, Ms. Savage reasoned that significant improvements to the upper unit -- a second bedroom, a "loft" attic space with skylights and some plumbing -- would still let her profit on the resale.

Profits: If Ms. Savage gets the list price for the second unit, she will make a profit of close to $100,000 after factoring in renovation costs, real-estate agent commissions on the purchase and resale of the properties, and mortgage-carrying costs incurred prior to the units' sales.

Unexpected Expenses: Deed-recording fees for the state of Massachusetts amounted to about $4,000, or 1% to 2% of the costs to purchase and re-sell the units, says Ms. Savage. Additional fees arose to set up a condominium association, which was required because the owners of the two units will have to share the expense of maintaining "common elements" such as the yard, front porch and roof. Further, had Ms. Savage not serendipitously found a crew of painters from a nearby area seeking work, she would have had to pay $15,000 more for exterior painting than she did, since she began this phase of the project during late summer -- prime season for house painters in her region.

Advice from the Investor:

1. Practice self-restraint during renovation, keeping in mind that if the most difficult work is complete, a buyer will hire contractors to finish or customize some rooms. Ms. Savage followed this advice when working on the upper unit's attic space. This will help keep you from overinvesting in the property.

2. Be patient and make sure you have a financial cushion so you can wait for the right buyer. Though Ms. Savage listed her units for sale on Halloween 2003, she didn't sell the first until April 2004; the second she listed, removed from the market, and re-listed. Because of her reserve, she didn't have to sell the units at below-market prices and was able to finance the property during the winter season when the Gloucester real-estate market slows.

3. Have a network of local contractors, a local banker and a local real-estate professional who will partner with you for the entire buying, renovation and resale process. Previous experience in the real-estate and banking fields gave Ms. Savage an advantage.

-- Ms. Doherty is a free-lance writer in Seattle.

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