Before I begin discussing the details of this deal I want to thank @Brandon Turner and the BP community for educating me on how to execute the BRRRR strategy.
Although I have been involved in other aspects of real estate investing this was my first time attempting the BRRRR strategy and after doing plenty of due diligence it actually worked out as I had planned (with a couple setbacks).
About the deal...
This property is located about 2 1/2 hours from where I live (Stroudsburg PA) and was a Fannie Mae home path foreclosure. It was a vacant side by side 3 bed 1 bath duplex, originally listed for $124K. After a little back and fourth I was able to take it down for an all cash offer of $100k. Using private money @ 8% for acquisition and my own capital to complete a $28,884 rehab, I was all in at $132,509 including closing cost. I estimated the ARV to be between $180k and $200k, but was a little unsure do to the fact that there were not many "rehabbed" multi unit comps. I hired a local general contractor who was highly recommended by my property manger to handle all the renovations and I also spent a 1 1/2 days adding some "sweat equity". The rehab took a little over 3 weeks, which included all new windows, water heaters, new laminate flooring on first floor and wall to wall carpet on second, refaced kitchen cabinets, new counter tops, new appliances, bathroom vanity and toilet bowls, all new fixtures and of course complete paint job of all interior surfaces. Once the apartments were rent ready we had them leased up within a month at $1175 per unit. In late September I began the refinance process with a large well known bank and because the property was under my personal name I was offered a 30 year amortized loan at 4.875%. To back track a little, the reason the property was under my name and not my LLC was because I made the offer to the sellers agent in that format. While working with the title company I did make them aware that it was to be under my LLC and sent them the operations agreement and other docs need to do so. It was not till I got to the closing table that I realized the error, and at that point for a multitude of reasons it was too late to change the contract. I had a few options, refuse to sign (potentially forfeit my deposit), pay an extra transfer tax to switch to an LLC or roll the dice and leave it under my personal name, obviously I chose the latter.
Anyone who has gone through the mortgage or refinance process with larger banks knows exactly how tedious this can be but its the fourth "R" in this strategy and one if not the most critical step. When the initial appraisal came back at $118k my heart sank, I thought how could I have screwed this up, how could I have been so off, How am I going to payback my lender!?!?! Fear overtook me for a short while and my confidence was fading quickly. After reviewing the entire report I noticed a few discrepancy and immediately called the bank to let them know that the appraisal was inaccurate and wanted to dispute it, they understood my frustration and asked for me to put it in writing. Thats when I turned to BP and searched how to dispute an appraisal report, I found an incredible template and structured my letter accordingly. I challenged all of the comps and provided a few new ones I had found after doing a search with my agent. I included an itemized list of all the renovations, I also included current housing market data to show the appreciation trend in that area. The bank agreed to hire another appraiser at their expense and after a week of nervous anticipation the value came in at $185K! HALLELUJAH...It took almost 90 days to get this done but it was well worth the battle.
So the numbers look like this.
- Purchase price $100k
- Rehab costs $28,884
- closing cost $3,625
- Total investment $132,509
- Appraised value $185,00
- Cash out refi $129,500
- Cash left in deal $8,009
- Approx monthly cash flow $1,038 (not including 5% vac and main)
What I have learned along the way...
- Make sure your agent and title company are on the same page.
- Create a clear and well written contract with your GC.
- Using a big name bank may not be your best option.
- Read your entire appraisal report and don't be afraid to challenge it.
Im very happy with the returns on this deal and now use the numbers as a baseline for future projects. The momentum after this BRRRR has been incredible, I closed two more duplexes since and have a four unit under contract. Im currently working with a few small local banks to refi my second duplex in early March. Im very grateful that I stumbled upon this remarkable forum 2 years ago and want to again thank the BP community for their support.
Before and After Pictures
Living Room & Dining Room Before
Great job. Great to hear success stories even with a few bumps in the road. Many people do not realize that the road we travel have dips, bumps and some dangerous pot holes, but we navigate through, around, and bounce over them to our destination. Go find the next deal...
@John Geldert Congrats on completing your first BRRRR. I have been exactly where you were in regards to the appraisal issues and working your way through the refinance. It is not easy. Good luck on the next one.
@John Geldert great job and thanks for sharing. We are getting into our first BRRRR in '18 and def looking to work with smaller community banks and credit unions to get quotes.
All the best!
@Ron Flatt thanks, yes there is no exact science to real estate investing but persistence pays off in the end.
@Michael Noto thank you, I have spoken to a few different banks to see how this can be avoided and they basically explain to me that they use a third party vendor and have no control over the appraisal process. In your experience is there anything on our end we can do going into the refinance process to mitigate this issue?
@Shawn Ward thank you and best of luck with your Brrrr in 2018!
@John Geldert , thanks for sharing and congrats.
You mentioned the property is 2 1/2 hours away from you. Just wondering how often did you end up going there during the rehab, or was it mostly just the 1 1/2 days of sweat equity you mentioned?
@Shawn Ward are you going to do your BRRRR in the L.A area or in another area?
@Joseph M. thank you.
I visted the property 3 times during renovation, because I have other deals out there It was easy for me to stop in and check on the progress. Also I structure my contracts for second payment to GC after certain phases of rehab are completed and make sure to get out there to verify.
@John Geldert ,oh ok thanks, that makes sense . Best of luck on your next deals.
Congratulations! The house looks amazing--you did a great job! May 2018 bring you more success!
You mentioned you have $8k cash left in the deal.
I'm assuming that extra $5k is the selling closing costs and realtor commissions?
Great job on the BRRRR and the snowball effect it's already created.
regarding what we can do on the appraisal to help your chances, meet the appraiser when they come to do their walk through, and hand them a packet of comps you found, and basically everything you did to dispute the 1st appraiser. Giving it to them up front gives them an idea that you know what you're talking about, and helps guide them in the correct direction. But don't be pushy, you want to seem helpful, not rude.
@Vincent Pace thank you for the kind words.
@Brian Garrett yes thats correct the $5k was for the closing costs plus property taxes that were due. There was no sales commission as this was a refinance... Thank you!
@Donald S. those are some very good points and will definitely keep that in mind. My only issue with that is, I invest out of state and it would be difficult for me to get out there the day of appraisal. Difficult, not Impossible...
So encouraged to see success stories with actual details.
There's enough information here for others to learn and replicate!
Great job. It helps to have a plan and follow through! I can be done. You are living proof.
Way to keep grinding and thanks for showing transparency with the fact that fear entered . It shows true character to bounce back from that and it obviously worked out for your benefit
I'm looking to do a BRRRR in 2018 and breaking down the numbers was helpful. Thanks for sharing and good luck on your future endeavors!
Congratulations! Very inspiring.
Congratulations @John Geldert !
Thank you for the inspirational post. While others have asked all the questions I was going to ask, I was curious on what you did with the money you pulled out or in other words, how much of it did you use to pay back the investors and how much of it did you use to get your next deals (duplexes)?
Thank you! Happy Holidays!
Great motivation for us all.
Good luck ahead of you!
@John Geldert congratulations. Question- hypothetically speaking, if your second appraisal came in worst than the first, is your lender obligated to use it or do they have discretion over whether they use the first vs the second? Thanks.
@Kanwar Sodhi I used the majority of the refi funds to pay back my lenders principle of $100k and used the rental income to pay the interest of $8K. The remaining funds were used for the renovation on my current project.
Happy New Year!
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