What would you do?

Question

There is a property that I am interested in however, there are a couple of red flags. The property itself is a newly rehabbed four Plex, and on the same property is a single-family home with three beds one bath. Some red flags, it has been sold and purchased numerous times over the last 10 years. The last ones to buy it was an investment firm that rehab it during their rehab they pulled a permit to fix some structural issues, but never had the final inspection done. They also do not have any rental history for the property. The cap ex would be approximately 18 to 20%. Would you consider purchasing something like this or would there be too many red flags making it too risky. By the way, the purchase price is at 259K and is reduced from 275 in less than a month. Any input is appreciated.

Janice Carter · Answer

@Martin McGrath The biggest concern for me would be the unresolved structural permit and lack of rental history. Neither is necessarily a deal breaker but I would want the permit issue resolved and independently verify the condition of the property before moving forward. Multiple ownership changes can be a red flag but sometimes they are simply the result of investor turnover. If the numbers still work after a thorough inspection, realistic CapEx reserves and conservative rent projections, it may be worth pursuing but I would definitely perform extra due diligence before committing.

Seph Hancock · Answer

Personally, I wouldn’t automatically walk away from the deal because of those red flags, but I would make sure I understood exactly why those issues exist before moving forward.

The biggest concern to me isn’t the multiple sales over the years—properties can change hands for many reasons. The larger concerns are:

• The structural permit that was never finalized• No rental history despite a recent rehab• A relatively high CapEx assumption (18-20%)

Before making a decision, I’d want answers to a few questions:

• Why wasn’t the structural permit closed out? Was the work completed properly and just never inspected, or was there an issue that prevented final approval?
• Can the seller provide contractor invoices, engineering reports, or photos of the structural work?
• What are market rents today, not projected rents? I’d verify them independently rather than relying on pro forma numbers.
• Will financing and insurance be affected by the open permit or structural history?
• What does an independent inspection reveal? I’d consider bringing in a structural engineer given the property’s history.

If the numbers still work after accounting for potential repairs, vacancy, and a contingency reserve, it could still be a solid opportunity. Sometimes properties with a few question marks create the best discounts. On the other hand, if the deal only works when everything goes perfectly, I’d probably pass.

For me, the determining factor wouldn’t be the red flags themselves—it would be whether the discount is large enough to compensate for the risk.

G. Brian Davis · Answer

The unfinished structural permit would be my biggest concern. Before going any further, I'd want to understand exactly what work was done and what it will take to get the permit closed out.The lack of rental history doesn't bother me as much if the rehab is recent, but it does mean you'll need to be conservative with your rent projections.

The question I'd ask is: if you budget for some unexpected repairs and lower-than-expected rents, does the deal still work? If yes, it's worth investigating further. If not, I'd move on.

What would you do?

Most Popular Reply