Found more repairs than expected during inspection - Fresno, CA

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Found more repairs than expected during inspection - Fresno, CA

Justin Yurong
Investor · Clovis, CA · Member since 2018 · 28 posts · 13 votes

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.

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Tom S.
Real Estate Investor · Burlington, VT · Member since 2010 · 2k+ posts · 1k+ votes
8y

@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.  

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  • Jason Pritchard
    Investor · Clovis, CA · Member since 2015 · 92 posts · 84 votes
    8y

    @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.  

    2Reply
  • Tom S.
    Real Estate Investor · Burlington, VT · Member since 2010 · 2k+ posts · 1k+ votes
    8y

    @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.  

    3Reply
  • Brandon N.
    United States · Member since 2018 · 4 posts · 2 votes
    8y

    Total property income MINUS yearly expenses Equals either positive or negative cash flow.

    1Reply
  • Justin Yurong
    OP
    Investor · Clovis, CA · Member since 2018 · 28 posts · 13 votes
    8y

    @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.

    1Reply
  • Justin Yurong
    OP
    Investor · Clovis, CA · Member since 2018 · 28 posts · 13 votes
    8y

    @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.

    0Reply
  • Caleb Heimsoth
    Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes
    8y
    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
    1Reply
  • Justin Yurong
    OP
    Investor · Clovis, CA · Member since 2018 · 28 posts · 13 votes
    8y

    @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.

    0Reply
  • Caleb Heimsoth
    Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes
    8y

    @Justin Yurong what’s it worth fixed up?

    0Reply
  • Justin Yurong
    OP
    Investor · Clovis, CA · Member since 2018 · 28 posts · 13 votes
    8y

    @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.

    0Reply
  • Caleb Heimsoth
    Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes
    8y

    @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. 

    3Reply
  • Justin Yurong
    OP
    Investor · Clovis, CA · Member since 2018 · 28 posts · 13 votes
    8y

    @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.

    0Reply
  • Caleb Heimsoth
    Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes
    8y
    Sure if he drops it 30k or does these repairs before hand go for it, otherwise I’d walk away
    0Reply
  • Leon Li
    Rental Property Investor · Bothell, WA · Member since 2018 · 76 posts · 37 votes
    8y
    I would back out of the deal if you can. You got all the worse of the worse nightmares. Foundation issue can be way more than the estimated, knob and tube wiring is the worst, electricians wont know the cost until they start ripping them out. For rehabs those things usually always go wrong. Just my 2 cent.
    1Reply
  • Brandon N.
    United States · Member since 2018 · 4 posts · 2 votes
    8y

    Thats not a bad price for the property.

    0Reply
  • Brandon N.
    United States · Member since 2018 · 4 posts · 2 votes
    8y

     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.  

    0Reply
  • Jason Pritchard
    Investor · Clovis, CA · Member since 2015 · 92 posts · 84 votes
    8y

    @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

    3Reply
  • Justin Yurong
    OP
    Investor · Clovis, CA · Member since 2018 · 28 posts · 13 votes
    8y

    @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.

    2Reply
  • Justin Yurong
    OP
    Investor · Clovis, CA · Member since 2018 · 28 posts · 13 votes
    8y

    @Leon Li Thank you for that insight. I appreciate your help, and it helped me make my final decision.

    0Reply
  • Account Closed
    Youngsville, LA · Member since 2017 · 74 posts · 10 votes
    8y

    This was an interesting post. I'm dealing with something similar in Louisiana. Knob and Tube wiring and shootouts occurring during the inspection period. 

    0Reply
  • Justin Yurong
    OP
    Investor · Clovis, CA · Member since 2018 · 28 posts · 13 votes
    8y

    @Account Closed 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!

    0Reply
  • Roxie Kim
    Los Angeles, CA · Member since 2018 · 29 posts · 5 votes
    8y

    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.

    0Reply
  • Sanjeev Advani
    Investor · Bakersfield, CA · Member since 2015 · 483 posts · 234 votes
    8y

    @Roxie Kim was there room in the deal for repairs to be made and still return well? 

    0Reply
  • Roxie Kim
    Los Angeles, CA · Member since 2018 · 29 posts · 5 votes
    8y
    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.

    0Reply
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