I am currently near the end of escrow for a triplex in Fresno, CA (Oleander Ave and Trinity St). The plan is to fix it up, live in one of the units, and rent out the other two. Through inspections, I found that it needs much more repairs than I had originally expected.
Current Purchase Price: $188,000
Total Expected Monthly Rent: $2,100
It is a 1925 triplex that needs (to name a few):
- Foundation work (post and pier, $11k worth of work)
- Roof replacement ($11k worth of work)
- Electric that needs to be brought up to code (still has knob and tube wiring, etc.)
- Termite treatment
- 1 dysfunctional water heater
According to contractor bids, there is at least $45k worth of repairs. I have a $20k budget for repairs. My lender would allow me to use an FHA 203k loan, instead of the normal FHA loan I originally planned on using. I still can renegotiate with the seller, as my offer is contingent on the inspection and appraisal.
Does anyone have advice that could help me decide whether I should go through with this deal, or back out of the deal and wait for something that needs less repairs? Any feedback is helpful.
@Justin Yurong What other repairs do you have to do besides the ones that you've listed in your OP? How familiar are you with this area? I own a few rentals in that neighborhood, one that it literally around the corner from this property and it can get pretty sketchy over there.
@Justin Yurong You mentioned you're near the end of escrow, but typically inspection is usually the first contingency released. You haven't released it? If not, you can still go back to the seller and request those items be repaired, or more likely, a credit at closing for the repairs.
If the seller won't offer a credit or repair it, certainly consider backing out.
Total property income MINUS yearly expenses Equals either positive or negative cash flow.
@Tom S. Thank you so much for the advice! I requested an extension for the inspection and appraisal contingency due to a slow appraisal and contractor bids. I am thinking about either asking the seller to repair the big issues first, lowering the purchase price, ask for a credit at closing, or a combination of those.
@Brandon N. Thank you for the information.
@Jason Pritchard Thank you for the word of caution! Other than the repairs in my OP, it needs replacements for kitchen cabinets, laminate countertops, sinks & the plumbing that comes with them, and drywall/plaster. It also has loose/damaged siding, security bars on windows that need to be removed, earth-to-wood contact in the foundation and siding, leaks in sinks, windows that don't stay open, loose toilets. And two of the units don't have carbon monoxide or smoke detectors. That's the scope of work as quickly as I could put it. I've never lived in the area, but have a friend who has lived there his whole life. The plan is to live there for at least a year and then move out to make it a pure rental. Is there anything you have experienced with that neighborhood that is worth knowing to someone looking to buy there? Any information helps - vacancy, crime you've seen, tenant issues, etc.
That’s a massive undertaking for a first deal. 45k can be 60-70k real quick when dealing with foundation and other stuff like this
@Caleb Heimsoth I appreciate your input. Thank you! That's what I'm worried about - the 45k turning into 70k. I know there's a way to make this deal happen, but I'm starting to wonder if it would even be worth it because of all the unknowns associated with this property.
@Justin Yurong what’s it worth fixed up?
@Caleb Heimsoth Being conservative, around 216k. I expected a quarter of the repairs when I went into this deal. It's the roof, foundation, and electrical issues that were the big unexpected repairs, along with all the little items that add up.
@Justin Yurong so you’re paying 188k and 45k in repairs for something worth 216k? You know that’s negative equity right ? I think it’s time to walk away.
@Caleb Heimsoth Thank you for the advice. Initially, I had expected 10-15k in repairs. I just got the contractor bids to find out how much everything would cost. I still considered renegotiating with the seller, but I would need a steep drop in the price.
Sure if he drops it 30k or does these repairs before hand go for it, otherwise I’d walk away
Thats not a bad price for the property.
Get at least three different estimates from different contractors that way you can compare their prices. So at least your getting your moneys worth. You can ask the seller to have those discrepancies fixed or ask to drop the price.
@Justin Yurong I'm not going to sugar coat anything, it's a bad neighborhood. There's drug/crime issues along with a lot of homeless people constantly walking around. That being said I own multiple properties in this area and know exactly what I am getting into and really don't have that many issues as long as I have a tenant in place. If/when your units go vacant you have to get someone in there ASAP otherwise you'll be dealing with squatters and break in's.
All of this would be less of a concern if you weren't planning on living there but, since you're going to owner occupy one unit for at least a year you need to take all of the issues that come along with this neighborhood into consideration. In this area, I'm normally purchasing properties around 30-40% of the ARV so, in my opinion, you're overpaying for this place.
I do see the value in being able to use FHA financing to acquire and potentially fix cover your rehab costs but based on the necessary repairs I would ask for either a significant reduction, the current owner to complete all major repairs, or just move on. I'm also surprised that your lender will even underwrite an FHA loan on a property that needs this much work. Let me know if you have any other questions
@Jason Pritchard I really appreciate the honesty. It's what I needed to hear. Thank you. I'm going to walk away from the deal after considering the repairs, purchase price, and neighborhood.
Thank you all for your helpful feedback.
@Leon Li Thank you for that insight. I appreciate your help, and it helped me make my final decision.
This was an interesting post. I'm dealing with something similar in Louisiana. Knob and Tube wiring and shootouts occurring during the inspection period.
@Rema W. My best recommendation is to make a post about your situation on Bigger Pockets. There are many experienced investors out there who are willing to offer advice that can help you make a decision. When deciding if a property is worth it to you, I feel like it always comes back to the numbers, the location, and your comfort level. Best of luck to you!
I recently backed out of a multi-unit in Bakersfield due to issues similar to what you are going through. After getting a closer look at each unit, I was appalled by just how messy the tenants' places were and how much deferred maintenance there was. But to be honest, I believe the main issue was the fact that we weren't local and we would be relying on a PM to maintain the place. If were were planning to live on or near the property, we probably would have gone ahead with the purchase and fixed each problem one by one and managed the property just the way we would have wanted.
@Roxie Kim was there room in the deal for repairs to be made and still return well?
Originally posted by @Sanjeev Advani :
@Roxie Kim was there room in the deal for repairs to be made and still return well?
Margins were pretty slim since this was an MLS listing. Adding the rehab costs would have brought down my cap rate to just under 5% using an expense ratio of 55.6%. Not terrible......but not worth the trouble, IMO. Someone with good local connections might be able to make it work. But then again, someone with good local connections could also probably find a better deal to begin with.
Free eBook from BiggerPockets!
Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks and techniques delivered straight to your inbox twice weekly!
- Actionable advice for getting started,
- Discover the 10 Most Lucrative Real Estate Niches,
- Learn how to get started with or without money,
- Explore Real-Life Strategies for Building Wealth,
- And a LOT more.
Sign up below to download the eBook for FREE today!
We hate spam just as much as you
Create Lasting Wealth Through Real Estate
Join the millions of people achieving financial freedom through the power of real estate investing