How Does an Impending Eviction Affect Your Buying Decision?

Buying & Selling Real Estate
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How Does an Impending Eviction Affect Your Buying Decision?

Eric SmithPro Member
Investor · East Greenwich, RI · Member since 2016 · 48 posts · 15 votes

Hey so I'm pursuing my first deal on a multi-family unit in Columbus, Ohio.  It's in a rougher part of town, I've heard from some folks on here that the area is C-C+. I've been in discussions with the listing agent for the past week and one of the things that's come up is a tenant is currently going through the eviction process. Now, as an investor in name only, looking for my first deal in a remote location, this is obviously something that concerns me. 

I'm looking for advice but I'd also like to share what I feel are my options going forward. Please note that I don't know how plausible they all are so feel free to comment:

1) Write it into the offer that the eviction process has to be completed by closing, else I can walk.

2) Ask for money back at closing to cover any fees plus unforeseen damages to the property.

3) Walk away and find something else.

Oh great, now I can't figure out how to get my margins back to what they were before....anyway, I haven't made an offer yet. I'm having a manager in the area check out the property and report back to me.  After that, I'll make a decision on whether I should fly there to see the place myself.  At this point in the analysis, the deal makes sense on paper but I'm still fact gathering.  I've reached out to the listing agent to provide more details on where the seller is with this process.  What I've heard before is 'he's going to take care of it so you don't have to'.  Hardly reassuring since I haven't seen any paperwork yet.

Thoughts? Thanks all!

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Eric P.
New York City, NY · Member since 2016 · 470 posts · 348 votes
10y

write it into the offer that you won't close until eviction is complete, all damages are remediated, & you do a final walk-through / inspection & confirm it's in proper shape. If seller wont agree to this (or tries to pressure you against this), walk

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  • Eric P.
    New York City, NY · Member since 2016 · 470 posts · 348 votes
    10y

    write it into the offer that you won't close until eviction is complete, all damages are remediated, & you do a final walk-through / inspection & confirm it's in proper shape. If seller wont agree to this (or tries to pressure you against this), walk

    5Reply
  • Thomas S.
    Member since 2016 · 13k+ posts · 12k+ votes
    10y

    Make sure it is part of closing but expect to deal with evictions on a ongoing bases in a C neighbourhood.

    0Reply
  • JR T.
    Financial services executive · Frederick, MD · Member since 2015 · 609 posts · 341 votes
    10y

    Walk away. You did not have any margins in running class C real estate in Ohio from Maryland. You could get access to the same type of property in Baltimore, Hagerstown, Front Royal VA etc. What is making you want to take the leap to Ohio? The claims of turnkey salesmen?

    2Reply
  • Curt DavisBusiness Member
    Flipper/Rehabber · Memphis, TN · Member since 2008 · 5k+ posts · 2k+ votes
    10y

    sounds like a cheap duplex is mostly a D area.  You would be better off with a single family home. 

    Curt Davis - KAIZEN Realty538 Reviews
    WebsiteView Page
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  • Eric SmithPro Member
    OP
    Investor · East Greenwich, RI · Member since 2016 · 48 posts · 15 votes
    10y
    Originally posted by @JR T.:

    Walk away. You did not have any margins in running class C real estate in Ohio from Maryland. You could get access to the same type of property in Baltimore, Hagerstown, Front Royal VA etc. What is making you want to take the leap to Ohio? The claims of turnkey salesmen?

    Thanks for your response. It's a fair question though I've never talked to a turnkey salesman. It was more about looking at areas that I thought would cash flow decently and provide double digit ROI. I've spent a lot of time on loopnet and the like looking at areas. This is one that intrigued me, though I totally agree there are some red flags. Baltimore scares the hell out of me, personally.

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  • Eric SmithPro Member
    OP
    Investor · East Greenwich, RI · Member since 2016 · 48 posts · 15 votes
    10y
    Originally posted by @Curt Davis:

    sounds like a cheap duplex is mostly a D area.  You would be better off with a single family home. 

     Thanks for the response. Yeah, I'm looked at some SFHs in the area.  What's your line of reasoning though?

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  • Eric SmithPro Member
    OP
    Investor · East Greenwich, RI · Member since 2016 · 48 posts · 15 votes
    10y
    Originally posted by @Thomas S.:

    Make sure it is part of closing but expect to deal with evictions on a ongoing bases in a C neighbourhood.

     So this is where I naively ask, if I use a property manager that's familiar with the area and has experience with screening tenants, don't I minimize this possibility?

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  • Curt DavisBusiness Member
    Flipper/Rehabber · Memphis, TN · Member since 2008 · 5k+ posts · 2k+ votes
    10y

    from what I have seen and experienced in the past is that the cheap duplex will not perform as well as a single family.  For example, a $60k duplex with $1,200 gross rents will not perform as well as a $90k single family with gross rent of $950-$995. Duplex will never stay occupied on both sides long enough to be the investment you thought it would be on paper. 

    Curt Davis - KAIZEN Realty538 Reviews
    WebsiteView Page
    2Reply
  • J.T. Littlejohn
    Suitland, MD · Member since 2016 · 49 posts · 21 votes
    10y

    @Eric Smith all things being equal, you do have a valid point. Using a property manager familiar to the area SHOULD minimize the possibility of something going wrong. If you get a crooked PM, that could be the end of your investment career even before it gets going good. Doing your first deal or partnering on a deal locally will give you that first hand perspective on what "something going wrong" would actually look like. Discerning this from many miles away is difficult to say the least. Also, giving control over to someone you barely know is a bit risky on your first deal. Month to month renters are challenging locally much less from a distance. Your vacancy expense could be quite significant and consume all of your profit and even get into your principal. I am a new investor and these are some of the issues that I have contemplated as I develop my overall plan. 

    0Reply
  • Eric P.
    New York City, NY · Member since 2016 · 470 posts · 348 votes
    10y

    @Eric Smith I think what @Curt Davis means is that SFR tend to attract higher quality tenants who are more responsible & stay longer than apts do. Not always the case of course, but in general

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  • Darren Budahn
    Investor · Milwaukee, WI · Member since 2014 · 811 posts · 420 votes
    10y

    @Eric Smith

    I would read all of @Jay Hinrichs posts about investing out of state in rough areas.  I certainly wouldn't do it if I were you.  

    I am sure the cash flow numbers look good on paper, but realizing those numbers is difficult and it is not as simple as collecting the rent in your mailbox on the 1st of the month.  It is certainly not a passive endeavor in my opinion and I sure wouldn't invest in a rough area out of state and pray that I had a somewhat competent property manager.  

    The reason for the low price points and high cash flow on paper is because they are riskier investments than buying in a nice area.  Being hundreds of miles away puts you at the mercy of someone else controlling your investment.  

    1Reply
  • Eric SmithPro Member
    OP
    Investor · East Greenwich, RI · Member since 2016 · 48 posts · 15 votes
    10y

    So I'm probably opening myself up to criticism and ridicule here but I probably just need to continue getting my thoughts down on the record so that I can get good feedback.  

    I've spent a great deal of the last week talking to property managers in a couple of different areas of the country where I've found deals I'm at least interested in learning more.  My rationale is I'm probably not going to invest in the Maryland area.  That's certainly open to change but I've said all along that if I can find a good deal elsewhere, I'm not going to be deterred because of location. I travel all over the place for my job so it's not something that I would have trouble doing.  Having said that, I recognize that having strangers control large amounts of my investments is unnerving.  That's why a place like BP, in my opinion, is so invaluable.  I can run names and areas by folks and most likely somebody will have some input. I would like to get some feedback from others that threw caution to the wind, so to speak, and just went for it in parts unknown.  I'm sure it's like everything else - some good, some bad experiences.

    @J.T. Littlejohn, you're right, the turnover on month to month leases would be a huge drain.  In this position, I think the best course of action is to seek out tenants that can sign annual leases.  If that means I have to talk to multiple managers to get a sense on whether that's possible or I need to keep a house vacant longer to get it, that's what I'm planning to do. Now, I don't know if that means I'm more or less susceptible to having to evict clients in the future but that's my line of thinking at the current time. I'd love to hear more of your thoughts.

    @Eric P. yeah, I get that now.  Thanks.  I will admit that I'm guilty of focusing too much on initial numbers on deals and obviously economies of scale favor multis.  Of course you're also multiplying the number of problems as well.

    Thanks everyone for the feedback.

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  • Eric SmithPro Member
    OP
    Investor · East Greenwich, RI · Member since 2016 · 48 posts · 15 votes
    10y
    Originally posted by @Darren Budahn:

    @Eric Smith

    I would read all of @Jay Hinrichs posts about investing out of state in rough areas.  I certainly wouldn't do it if I were you.  

    I am sure the cash flow numbers look good on paper, but realizing those numbers is difficult and it is not as simple as collecting the rent in your mailbox on the 1st of the month.  It is certainly not a passive endeavor in my opinion and I sure wouldn't invest in a rough area out of state and pray that I had a somewhat competent property manager.  

    The reason for the low price points and high cash flow on paper is because they are riskier investments than buying in a nice area.  Being hundreds of miles away puts you at the mercy of someone else controlling your investment.  

     Thanks Darren, and yeah I've read Jay's posts.  I value his opinion on this stuff and it's something that I've tried to remember as I'm looking through these deals. I mean the mileage doesn't bother me too much, I can be anywhere on the east coast in a few hours from DC.  It's more the 'rough neighborhood' part that concerns me.  I don't mean to sound naive (though I'm sure I am) but a property manager is supposed to take care of most of this stuff, right?  My guess is most PMs are in business because owners either just don't want to be bothered or they don't live near close enough to their properties to be involved. Maybe I'm wrong tho..

    0Reply
  • Eric P.
    New York City, NY · Member since 2016 · 470 posts · 348 votes
    10y

    @Eric Smith I think here's where your naivety is showing: 90% of property managers are AWFUL. I wish I had a good link to an article or post to prove this to you but I'm sure if you google you can find articles & experiences reflecting this. Don't think you can just "call a couple PMs where you're thinking of investing" & they'll magically manage your investments perfectly. Quite the opposite actually

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  • Eric P.
    New York City, NY · Member since 2016 · 470 posts · 348 votes
    10y

    @Eric Smith

    here's one:

    https://www.biggerpockets.com/renewsblog/2013/01/2...

    0Reply
  • Darren Budahn
    Investor · Milwaukee, WI · Member since 2014 · 811 posts · 420 votes
    10y

    @Eric Smith

    In theory, you are right about the role of the PM. 

    I mean if you get a great property manager who gets good tenants and is hands on, it certainly could work out.

    But, they could also easily take advantage because they know you are out of state.  Will they have any incentive to not have tenants turn over all the time?  If they get to keep a month's rent when leasing, what incentive do they have to screen the tenants?  

    And in general, the tenants in these neighborhoods will be rougher on the property.  How will you know when something needs to be repaired?  The PM will probably get paid a high hourly rate to hire contractors to fix things.  Will they hire a $100 an hour plumber or a $20 an hour handyman for something simple? 

    And if the s..t really hits the fan and you have to evict someone and they trash the place, how will you deal with this when you are out of state?  Then, you will have to manage a rehab from out of state--not an easy thing to do.  

    I see tons of houses in Milwaukee that are left to rot in the inner city by out of state landlords who probably thought it was a good idea to buy a $25,000 house that rents for $800 and just hire a property manager to deal with everything. They think it's a no brainer to buy these houses, but they find out otherwise.   

    Again, I'm not saying it can't work with the right team on the ground locally for you, but I think it's really tough. 

    1Reply
  • Eric SmithPro Member
    OP
    Investor · East Greenwich, RI · Member since 2016 · 48 posts · 15 votes
    10y

    Thanks @Eric P. this is a really great article. I've asked some of this stuff to prospective managers but not all. A lot of stuff to chew on here...

    0Reply
  • JR T.
    Financial services executive · Frederick, MD · Member since 2015 · 609 posts · 341 votes
    10y

    @Eric Smith You are not going to like the mileage when you are traveling out to Ohio to chase a $500 rent that won't ever be paid, find the unit trashed, have to travel back because property mgr didn't handle repairs right and you need to chase down deadbeat contractor who will never return your money nor finish the work etc etc. 

    You have exposure to the exact same type of tenants in Maryland, but state they "scare the hell out of you." It seems like your investment strategy relies, at least in part, on your ignorance of just how bad those Ohio tenants are going to be.. Betting on what you don't know is rarely an effective strategy. 

    1Reply
  • Hayward Bryant Jr
    Oxford, GA · Member since 2016 · 10 posts · 1 vote
    10y
    It just makes sense to me what Curt Davis mentioned. Not only are you going to loose money through vacancy, but imagine what the cost is going to be to prepare the property for another tenant. Roaches and other peasants that could creep over to your other tenants, replacing soiled carpets, holes in the sheet rock, litigation......Who know what your set back will be every time a tenant leaves.
    1Reply
  • Mike HurneyPro Member
    Real Estate Investor · Boston, MA · Member since 2009 · 2k+ posts · 542 votes
    10y

    @Eric Smith

    First deal?

    "I haven't made an offer yet. I'm having a manager in the area check out the property and report back to me."

    Should have it Under Agreement before you let anyone know about it...

    0Reply
  • Linda LabbePro Member
    Investor · North Bay, Ontario · Member since 2015 · 709 posts · 262 votes
    10y

    +HI  all  interesting thread  for me in Ontario everything is long distance so I do it all the time the key for me is getting a strong team on the ground 1st would not but anything or sell anything without them. I go and meet with my team whenever needed and  I can  trust them. Now we are moving forward with properties to buy and hold and flip  and yes many are in c  neighborhoods where the cash flow is amazing...Its been a challenging year with many twists but would not give it up for the world not am hooked...IN this case I would walk from the deal to many loose ends ..and I always like reports from building inspectors they are independent and tell it like it is

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  • Jason V.
    Investor · Rochester, NY · Member since 2016 · 477 posts · 426 votes
    10y

    @Mike Hurney He says first thing that he's pursuing his first deal - it's a legit post/question. Personally, he'll be a lot better off for asking on here than if he had just pulled the trigger on it. 

    @Eric Smith To answer your original question: either stipulate it's empty and rehabbed when you close (seller won't like that) or figure out what it would cost you to do the eviction and rehab, then subtract it from your offer. Simple - just be generous with yourself, and assume they'll trash everything in sight and steal the appliances, cabinets, plumbing and electric. 

    Bigger picture: if you're going to buy in a C/C- area for your first deal, make it as close to home as possible. You'll know the area a ton better (critical in real estate) and it'll save you road time/phone hassle every time something goes off the tracks (and it will.) I'm all for buying cheap, cashflowing properties - because that's what I want right now: cashflow. But you need to be extremely conservative in all of your estimates - everything will go worse than you think, and cost more than you want. (Research Optimism Bias and Planning Fallacy)

    Lots of folks start out buying those properties, then move onto other things that are less of a hassle later on. Other folks buy and hold these forever. But until you get a couple of deals under your belt, you won't know what works for you. 

    I say you find this exact property and buy it: just change the Zip code to the one you currently live in (or as close as possible.)

    P.S. We're all just guessing at numbers (folks probably have it pretty much nailed) but it's always a good idea to post numbers if you'd like help with analysis. 

    Good Luck!

    1Reply
  • Michael Henry
    Real Estate Consultant · Brookfield, WI · Member since 2014 · 873 posts · 350 votes
    10y

    Eric,

    Unless you know or someone you trust (like really really trust) know the area in this scenario well you might want to reconsider. In your shoes  (if you wish to proceed) I'd push to have the eviction completed prior to close as a contingency.

    I applaud your interest in getting into real estate it has been a very rewarding and enjoyable career for me. However, I would hate for you to get burned on your first deal. So, it goes without saying please do your due diligence here and any future opportunities you pursue. Happy Hunting!!!

    Thanks,

    MH

    0Reply
  • Mike HurneyPro Member
    Real Estate Investor · Boston, MA · Member since 2009 · 2k+ posts · 542 votes
    10y

    @Jason V.

    You missed my point. please reread....

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  • Eric SmithPro Member
    OP
    Investor · East Greenwich, RI · Member since 2016 · 48 posts · 15 votes
    10y

    @Mike Hurney thanks for your suggestion, though I confess I'm not sure what I should have said differently.  Maybe I gave too much information?  Not sure.  

    So I really appreciate everyone's advice in this thread.  There's a lot to chew on....

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