Diary of a Bulk Buy

[Brie Schmidt]

I am looking to do another bulk buy and wanted to document my experiences here. I already have a commercial lender in place who did our previous loan.  The challenge is that I am looking to buy 6 - 10 properties that for the most part are 2-4 units, so valued as residential.  But my loan is commercial and valued on Cap Rate and DSCR so I need to look at them both ways and make sure the numbers work all around.  

I used www.rentometer.com to determine the market rents based on the bedroom make up and location.

I saw all these properties about 2 weeks ago:

The first one is a good property. It is a 4 bedroom top unit and a 2 bedroom basement unit. The basement unit has mold on the drywall and the bathroom layout requires you to squeeze by the sink to get to the toilet. The numbers work on this with just the top unit so I made an offer. This is a short sale and they are negotiating with the bank right now on the price, so technically they are not accepting offers, so I made an open ended offer at $28k assuming $10k of work.

The second one is in a great area and the units are rentable, but there is a huge foundation crack along the side wall and the top floor unit in back has a bad slope (but not the unit below, weird) I offered $45k because of the amount of work and they countered at $60k and I walked.

The third one my PM said was in a bad area so we did not see it.

The fourth one was in good condition. It is a 5 bedroom front building and a 2 bedroom (easily converted to a 3) back cottage. It does not need any immediate work and we are under contract for $59k with a 1 year home warranty. I have a $10k reno budget to add laminate when the tenants move out and create the third bedroom in the coach house.

The fifth one had a huge updated upper unit but the lower is what they call a "Polish Flat" where the bottom of the window sills are right at grade and cause water to constantly come in. My PM had actually seen the property a few months ago and said there was mold everywhere. They had just painted right over it. Yikes! Between that and the fact that the basement unit had the furnace in the middle of the living room, we passed.

The sixth one was in a great area. It had a duplex front and coach house in the back. Apparently the previous owner illegally converted the attic to a unit and it is currently condemned. The property is bank owned so they have little information but after talking to the inspector it seems it was condemned because the only form of egress is a staircase that is not built to code. We did make an offer and plan to move the staircase and duplex it up, but I either need to get it at a low price or see the attic unit so I know how much the rehab will cost. My reno budget right now is $15k without seeing the unit and we are awaiting word from the bank.

The seventh property I did not get to see as the agent had the wrong lockbox code and it took a few days for him to get it. But I trust his judgement to look at it without me. This was a big 4 unit in front with a back cottage. It needs a lot of work and I think I can make the numbers work... but I am looking to buy 6-10 properties right now and don't think I can handle it all with a major rehab included, so I might come back to this one later.

The eighth property went under contract that day so we did not get to see it.

The ninth property was an ok duplex. The units needed paint and carpet but it is fully occupied right now so we can do that later. The front wall in the basement had some cracks between the cinder blocks. We did go under contract for this one at $31k and are waiting on the inspection and contractor bids to do the work on it. I have a $15k reno budget on it.

The tenth one is a duplex, then a shared parking lot for 14 cars, then a large property with 2 vacant commercial units on the first floor and four 1 bedroom units above. The duplex was in pretty good condition and the one 1 bedroom we saw was in good condition, but the outside was a disaster. In Milwaukee when you transfer title you pay for a mandatory code inspection. Having already been through this before I know they will hit is for missing siding, the whole said of the front building needs to be re-graded, the roof needed replacement and is causing water damage. I estimated at least $70k of work so I offered $30k and they rejected it, so I walked

Here is where I am at with the four I am hoping to get (2 under contract and 2 pending)

I have identified some more properties but the cap rates are nothing too exciting so I have decided to do a Direct Mail campaign first to see if I get any good leads. Our loan is a commercial loan and they prefer to do multiple properties at one time so we set a closing date 6 weeks out so I have time to find more properties and add them to the loan.  So I am going to give it a week or two before scheduling showings for these if nothing comes from the direct mail campaign.

[Robert Taylor]

For the illegal attic unit, I'm assuming you mean a city inspector told you that's why it is condemned, correct? What were your plans for that as for the rehab you mentioned? If it is to keep it as a separate unit, DEFINITELY check with them on that one, I know from personal experience that at least on the east side where those attic units popped up everywhere maybe during the 70s and 80s the city's been doing everything they can to eliminate those 3rd units, they either can be combined with upper unit for a "super unit" or must be abandoned. They'll let the existing ones stay but even then I've heard at least second hand that even then they'll sometimes use various reasons to shut down the separate unit even if its not sold or anything. That's in the priciest part of town but I'm not sure if they're doing it citywide, but I doubt anyone now can add a 3rd attic unit anywhere in the city from scratch. 

If its already condemned, you'll need a code compliance cert before you can rent it so I'm curious if they'll allow you to rehab it and rent out the attic as a separate unit there, I know they wont on the east side. 

Also, what is the zoning there for that property? Its probably RT4 or RT2, which means a maximum of four units or two units per property respectively, but of course all sorts of other rules come into play too like setbacks, etc.

Definitely be careful when buying this bulk purchase as far as taking on properties with code violations, which nearly any REO at least in the city will have because they inspect them all and meeting exterior code to the letter is essentially a like new house. The part to be careful about is that you're buying a bunch at once, which even in a city that size will certainly pop up on someone's radar at the inspector's office. They've done it before more than once where someone gets a, for lack of a better term, bug up their butt about the new landlord making a big purchase and they'll want to let them know that even if the rest of the block isnt the greatest, that they want you to know they still enforce the codes and being from out of town, Chicago none the less, makes it even more likely. Not trying to scare you, things should work out just fine, but letting the inspectors know you take them very seriously is a very good idea because with the banks, they adopted a new policy the last few years where they enforce the codes to the letter on any bank owned house anywhere in the city rigorously. I know a bunch of contractors personally who have picked up work sometimes a lot of work, where they'll end up doing 15 or 20 thousand dollars worth of work just on the exterior, of a house in a neighborhood where even the nicest house would be lucky to sell for more than 60 grand. I forget what the maximum fine per day per violation is but even if it's only 10 dollars multiply that by the number of violations by the number of units or properties actually then multiply that by each day, you'll end up with quite a big number! They've already sunk a few people who are pretty big, including an old friend of mine, who was not a slumlord by any means!