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Paul Stern
  • Investor
  • Bettendorf, IA
9
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33
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My first REO, here we go

Paul Stern
  • Investor
  • Bettendorf, IA
Posted Feb 21 2015, 04:27

It has been an exciting week. My w-2 job takes 10 hours a day so I have the other 14 for family, investing, managing, etc. When a good deal shows up, the order for those other activities takes a different precedence. On Monday a 12-unit two building multi-family showed up on Loopnet. Its an REO, two 6-plexes with 40% vacancy, only 2 of 5 vacancies are rent ready (~$20k repairs needed for the other 3) and unknown operating expenses. There are a couple of gems hidden in all that uncertainty. Rents are below market, estimated expenses seem pretty high, per unit cost with repairs considered ($25k) are $10k below the next best deals I could find. To put it in perspective, my first deal closed last June (4-plex) per unit cost was $37.5k and cash flows $800/month.

Found out yesterday my offer was accepted. There was one offer already, so I offered $7k over asking price. When the bank came back and asked for my highest and best offer I added $212 (probably just overbid myself to get my lucky number (12) into the deal :). Due diligence starts now. I have quotes out to get vendors lined up and better handle on expenses.

I am going for conventional financing with my bank also financing 80% of repairs (back to me at closing). Total project cost is $300k, $70k cash needed. Current gross income $74k, Estimated Expense with 10% Vacancy $47K (monthly cash flow is $770). Gross income at market rate $82.1 with same expenses gives monthly cash flow of $1,500.  Cap rate goes from 10% (purchase estimate)  to 13% (proforma)

First things first, I will bring rents up to market (maybe turn over some undesirable tenants). Next will be closing vacancies in rent ready units. I work in a seasonal business and by closing some of my colleagues will be available to help me make repairs. I have lined up a carpenter. Monday I talk to a carpet layer. I still need to find a good handyman and someone for windows, so I am getting the word out to my friends at work and my REI network.

What are your thoughts? Been in a similar situation, do you have any suggestions on how you handled the deal?

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