Disappointment right before closing (inspections/roof issues)
So we're about to close on an 8-unit apartment building at $250K, no money down and seller-financed at 6%, 5-year term, 30-year amort. The plan was to fix it up, normalize rents, and refi out with a standard banknote as the building is appraised at $305k while about 17% under market rents. We were hoping to refi with 20% equity and nothing out of pocket, and get the land note converted to standard financing where we could build a reputation with the bank and get ready to grow into more properties.
In the inspection it was noted that the roof didn't look great, there were a couple mold spots in two of the apartments, and there was a noticeable leak in two places. It's a flat rubber roof with rock covering it, and pretty large - 5K sq ft probably.
I decided to get a few roof guys up there, and they tell me the roof is shot. Bids came in from $30k to repair seems/flashing, etc, all the way up to $70k to completely replace the roof. To make matters worse, while I was there meeting with one of the roof contractors I got to meet with a tenant in one of the apartments, where she showed me that a leak in the roof had filled up one of her light fixtures in her bathroom, burning that out as well as the bathroom fan, and causing paint to bubble on her wall and ceiling. Who knows what kind of troubles we might uncover if we really dig into this.
How would you pros recommend we proceed? I think the owner, who's pretty laid back, would suggest we hire a handyman and patch a few places, re-paint and fix the fixtures that were burnt out, and he would think he could get it all passable for $3-5k. Do we do that, or negotiate more from the selling price with the plans to get the roof more permanently fixed?
Part of me wants to just do the minor fix and see if we can't make it passable for a year or two while we build up reserves. We've got $25k set aside for max budget on improvements right now, so we wouldn't be able to afford a total overhaul.
As a side note, what's our worst-case scenario here? We're buying it contract for deed in an LLC, and I believe since the LLC/partnership will have a contract with the previous owner, it's non-recourse on us personally. This is our first property, and we don't want to fail. If we ran it for a year and worst-case a renter who's unhappy with us attempting to raise/normalize rents reports the leaking roof, we could be stuck with MAJOR repairs that we can't yet afford, or who knows, a condemned building because there's mold in that roof/attic/walls that have been leaking.
It's discouraging - we could walk away and take our $25k and go 20% down on a duplex that cash flows $300 a month, or we gamble on this place where the cash flow is approaching $1.5k per month after budgeting conservatively with the bigger pockets calculators.
Thanks for any input you can offer.