The Deal and the Road to it

I've been thinking about real estate as an investment for about 10 years now.  Before the bubble burst in 2007, I had heard from people who were basically getting paid to buy places.  One of my best friends walked away from his closing with over $20k so I knew this had to be for me.  Good thing it never worked out because I knew nothing at the time and would have lost my shirt.  All these years, I still thought about real estate.

3 years ago I had a little money and decided it was a good time to revisit this real estate thing.  I had no idea what i wanted to do, I just thought I could get rich somehow.  They make it look easy on those flipping shows, right?  I started buying books and reading up on real estate investing and being a landlord.  After a few books I thought I was an expert (boy was I dumb) and I was ready to start looking.

I first started looking in areas close to me.  My plan was to buy a place as cheaply as I could so that if all the tenants moved out I could still afford the mortgage for a few months without going bankrupt.  I live in Westchester County, NY which has some expensive real estate markets.  I quickly figured out that I couldn't possibly afford anything around here.  So, I started looking north.  I looked in Newburgh (always on the list of the 10 most dangerous cities), Albany, and Kingston, NY.  I settled on Kingston because I thought it was attractive to weekenders from Manhattan.  I went out and found a realtor and set to work.

The first property I offered on was a 3 family in Kingston.  The guy who owned the place had inherited several properties and refinanced them over and over until there was nothing left.  He then used the remaining equity as collateral to secure a loan from a private lender. He fixed up 2 of the units and had gutted a partially rehabbed the third when he ran out of cash.  He needed to sell off all his properties to satisfy all the lenders.  I had a 203k mortgage approval and I offered $140K.  Since this was a short sale I needed both the bank and this private lender to agree.  The bank agreed to the price, the private lender did not.  I later figured out that the private lender's only leverage was to hold up the sale of the properties until the seller started to sell off all the toys he bought, (motorcycles, boats, cars) with the lender's loan.  This private lender wanted blood money.  He was pissed!  The deal never worked out and I'm now glad it didn't.  At the time I thought that all you needed to make a deal profitable was to be positive every month after you've paid the mortgage.  After all expenses, I probably would have been negative a few hundred dollars every month.  This was 3 years ago and the building is still for sale.  

I made a few other offers, but we could never agree on price.  I finally had an offer accepted on a 4 unit in Kingston.  $150K.  By this time I had found Bigger Pockets, listened to all the podcasts and found their analysis calculators.  I was prepared!

During the inspection we found a ton of problems.  The seller bought the place in 2008 for $10K and used a 203K loan to rehab it.  Just like the previous seller, she used the building as an ATM machine and kept refinancing and pulling money out.  She never invested anything back into the property.  The quality of the tenants kept getting worse and worse over the years and by the time I showed up she was having to evict and re-rent units every few months.  I walked around the street and talked to a few neighbors I saw.  I was told I was buying the worst house on the street and there might be drug dealing going on.  This was an otherwise nice street.  I would live there.

Armed with the inspection, I went to the seller and said I couldn't buy the property for $150K and because of the amount of repairs needed just to bring the property up to livable conditions I would need to pay $120K.  I had quotes for $30K in rehab cost and by my calculations the ARV should be about $220K.  Then the appraisal came back.  The max ARV would be $170K.  Ouch!  Then the seller came back and said that she actually owes more on the property than she thought (huh?) and she owes $160k.  That's her bottom number.  This deal was dead.

After 2 failures I sat on the sidelines for a few months.  Then I started reading about Scranton, PA.  They have 2 universities, a courthouse, and a hospital.  After visiting one afternoon I found they have a great brewery that makes a fantastic cheeseburger.  Yum!  I had my loan pre-approval in order, my 20% downpayment and I was ready to go.  Before I met with any realtor I drove around and looked at a few properties on my own.  Some where scary, some weren't.  I saw a for sales sign pinned to a tree in front of this one particular building and decided to give them a call.  It turns out that the family who owns the property has 2 in the city that they want to sell.  The son had been managing the properties throughout high school and college, but now that he was off to grad school he couldn't do it anymore.  The parents didn't want to do it either so they wanted out.  The properties had been for sale for 2 years with no buyers.  I could see why.  In that everything started to go downhill.  No one was paying attention to the place or maintaining it.  Evictions and things needing repairs were adding up.

I arranged to view one of the properties.  One units was re-habbed rather poorly, but still ok, one unit was in ok condition, and the third is a wreck.  The wreck unit had hoarders living there paying way below market rent.  After talking to the son for a while, I decided to just try something.  I asked if they would be willing to carry a mortgage on the property and to my surprise he said yes.  Really?  We settled on a price of $69K with 10% down and 7% mortgage for 5 years.  We closed on September 10.

I did my due diligence.  The inspector said the building was in great shape other than a few deferred maintenance items that need to be taken care of.  It needs a new roof, new appliances, paint, and new appliances.  Oh, and that wreck unit needs everything.  I talked to contractors, worked out a budget and I'm ready to go.  I plan to spend $20K on the rehab with a reserve of $5k more.  The ARV should be $120K and this time I consulted a few local investors to confirm the number.  I can rent the entire building for about $2200 per month and I plan to refinance into a 15 - 30 year mortgage once it's fixed.  After all expenses and monthly accruals, I should net a $250 per month.  The best part is that I should be able to cash out and get all my money back after refinancing.  So, I will have $0 of my own money invested and I can move onto the next project.  That's the plan anyway, we'll see how it works out.

This weekend I get to work and next week I'm looking for a property manager.  I'll keep you posted.