Help! Need Advice Whether to Close or Back Out of a Solid Deal!

19 Replies

Hello fellow BP'ers, I have a slight issue at hand right now. A few months ago, I acquired a solid deal - 2 two-families that are adjacent to each other in Paterson, NJ for $125,000 each. They were off-market and I know a lot of other investors were trying to buy it even after I got it under contract, which was almost immediately. So my all-in price for both two-families total was $250,000. We are going to pay cash so no financing was needed. I had my contractor and handyman both go check it out and they estimated about $60,000 in repairs. ARV for each from my broker based on comps is $230,000 each 2-family, so $460,000 total. I never even went to go check it out, as I had my partner, contractor and realtor go check it out after I signed the contract. The numbers looked good and I trust all their judgment as they've never let me down thus far.

There were some title work issues that needed clearing so we still haven't closed yet, but I got notice last week that title was finally clear. Today, a few weeks before closing, I decided to go check out the property with my partner and handyman. Originally, I was told that both properties were vacant, but once I went there that both properties were indeed occupied, however, just 1 unit each. The first tenants were fairly nice tenants, mom and her two kids (both teenagers) who were very helpful, showed us around their place and got us upstairs (vacant) access; however, both complained consistently about the previous (still current?) landlord's neglect and how they were paying more in electricity (electric heat) almost than rent ($1,500/month), saying how they were given no fridge, heater, A/C, etc. and had to get everything themselves. 

Then we walked over to the next property and found out that nobody was home. The first 2-families downstairs tenants were nice enough to call their upstairs tenant neighbor and find out she was coming home in 20 minutes. She said she was just picking up the kids. Cool, no problem, we said, we could wait. 20 minutes later and she did show up, with 2 little babies, ages 6 and 2 she later said. Long talk aside, she too had the same complaints about the LL, how he was never there, promised to fix problems but never did, had heat loss, etc. etc. She said she had a lot of problems at home (just won a custody battle) and couldn't afford to move out, otherwise she would have (same as the first tenants). Her rent, however, was only $900, as her boss was friends with the current LL, so he gave her a break. Later, she also said that she heard a loud boom a few weeks ago (after my whole party had visited the space) and when she called the LL to find out what it was, he said "oh the ceiling just collapsed downstairs"!!!!???? We couldn't get access to see the downstairs space so we couldn't even see the damage or estimate repairs. We did, however, tell our broker and she said she could get us access early next week (before closing). My contractor however already estimated this house to take most of the $60,000 in repairs, as the first 2-family seemed like it only needed about $10,000 or so in cosmetics.  

All in all, she did seem fairly nice and both parties seemed like good tenants. However, we have an issue at hand. 1. We thought the properties were both vacant, so we could just close, rehab, then either rent & refi and get all our money out, as even a 70% LTV would be enough to cover our purchase + rehab. Plus, as we just found out, the first two-family (which I should say is even SMALLER than the second, more-damaged two-family) is paying $1,500 in month with cosmetics needed, so even that x 4 = $6,000 is great cashflow on our investment (2% rule!). However, if we keep the properties we would have to most likely switch over to gas, which would cost an additional $7,000/per unit approximately, as quoted by our GC, which would inflate our rehab costs by $28,000! Or we could just save the extra money & headaches and just flip the properties for $460,000+ (and our broker has not missed yet on comps anywhere in North NJ) and make a good 6-figure spread. Or should I just forget about even trying to evicting them, especially with kids I heard it can get messy (even though Paterson is said to be "sort-of" easy for eviction) and back-out of the deal, especially if the ceiling mess looks way worse than we thought (even though that was already considered a total gut-job) and since we put no deposit down, we technically have no loss (besides some damaged relationships w/ the broker)?

So fellow BP'ers, especially those who have been in similar situations, what do you think I should do? I think there is money to be made in this deal for sure, regardless if we decide to rent or flip, I just don't know how to deal with the whole evicting then rehabbing thing. Any advice would be greatly appreciated!

@Vishesh Shah , I have a few questions.  Why did you think the properties were empty?  How could your contractor or partner have missed that on their inspection?  The same with disclosures from the seller?  Next WHY did the ceiling collapse?  It is not magic something more is at play.  Again how could your GC or partner have missed that?  You also say that your Broker has never missed a Comp yet.  How many properties have you done with that broker?  30?  1?  I have really bad feelings about the competentcy of your team.  These are all things that should have not been missed.

Now you say you can flip it for a 6 figure spread, I am a bit worried about your ability to do that if you are relying on your team telling you this.  While listening to others is great you need to know enough to know when someone is full of BS on your own.  What do you think the property is worth?  What do you estimate repairs at?  Maybe pay for a second opinion.  There are some big holes in your operation so make sure your estimates to flip and make money or rehab and cash flow are accurate.  Are you the guy bringing the money?  If so you are the one at risk.  Sorry to be negative but if I were you I would bring in an outside person who answers only to you and get a 2nd opinion or two.  I would do it right away.

Originally posted by @Jerry W. :

@Vishesh Shah , I have a few questions.  Why did you think the properties were empty?  How could your contractor or partner have missed that on their inspection?  The same with disclosures from the seller?  Next WHY did the ceiling collapse?  It is not magic something more is at play.  Again how could your GC or partner have missed that?  You also say that your Broker has never missed a Comp yet.  How many properties have you done with that broker?  30?  1?  I have really bad feelings about the competentcy of your team.  These are all things that should have not been missed.

Now you say you can flip it for a 6 figure spread, I am a bit worried about your ability to do that if you are relying on your team telling you this.  While listening to others is great you need to know enough to know when someone is full of BS on your own.  What do you think the property is worth?  What do you estimate repairs at?  Maybe pay for a second opinion.  There are some big holes in your operation so make sure your estimates to flip and make money or rehab and cash flow are accurate.  Are you the guy bringing the money?  If so you are the one at risk.  Sorry to be negative but if I were you I would bring in an outside person who answers only to you and get a 2nd opinion or two.  I would do it right away.

 It's 45 minutes from New Brunswick, NJ to Paterson, NJ. What am I missing here? 45 minutes away and you didn't visit the property before you bought, eh?  I'm confused.

Originally posted by @Jerry W. :

@Vishesh Shah, I have a few questions.  Why did you think the properties were empty?  How could your contractor or partner have missed that on their inspection?  The same with disclosures from the seller?  Next WHY did the ceiling collapse?  It is not magic something more is at play.  Again how could your GC or partner have missed that?  You also say that your Broker has never missed a Comp yet.  How many properties have you done with that broker?  30?  1?  I have really bad feelings about the competentcy of your team.  These are all things that should have not been missed.

Now you say you can flip it for a 6 figure spread, I am a bit worried about your ability to do that if you are relying on your team telling you this.  While listening to others is great you need to know enough to know when someone is full of BS on your own.  What do you think the property is worth?  What do you estimate repairs at?  Maybe pay for a second opinion.  There are some big holes in your operation so make sure your estimates to flip and make money or rehab and cash flow are accurate.  Are you the guy bringing the money?  If so you are the one at risk.  Sorry to be negative but if I were you I would bring in an outside person who answers only to you and get a 2nd opinion or two.  I would do it right away.

 The vacancy thing I think was a communication issue. The broker claims she always said it was occupied by 1 unit each but I guess that was lost in translation. Regarding the ceiling, like I said it was a few months since we signed the contract. They went before it supposedly happened. The tenant said when heard the “boom” only a few weeks ago. 

I have done about 5 deals with the broker in the past. However, I will be getting second opinions with both contractor and comps before closing. I also want to inspect the “dropped ceiling” with 2 different contractors. I do think she is accurate about the comps though. But you are 100% right about getting a second opinion. My partner and I both put up the money evenly. 

Originally posted by Account Closed:
Originally posted by @Jerry W.:

@Vishesh Shah, I have a few questions.  Why did you think the properties were empty?  How could your contractor or partner have missed that on their inspection?  The same with disclosures from the seller?  Next WHY did the ceiling collapse?  It is not magic something more is at play.  Again how could your GC or partner have missed that?  You also say that your Broker has never missed a Comp yet.  How many properties have you done with that broker?  30?  1?  I have really bad feelings about the competentcy of your team.  These are all things that should have not been missed.

Now you say you can flip it for a 6 figure spread, I am a bit worried about your ability to do that if you are relying on your team telling you this.  While listening to others is great you need to know enough to know when someone is full of BS on your own.  What do you think the property is worth?  What do you estimate repairs at?  Maybe pay for a second opinion.  There are some big holes in your operation so make sure your estimates to flip and make money or rehab and cash flow are accurate.  Are you the guy bringing the money?  If so you are the one at risk.  Sorry to be negative but if I were you I would bring in an outside person who answers only to you and get a 2nd opinion or two.  I would do it right away.

 It's 45 minutes from New Brunswick, NJ to Paterson, NJ. What am I missing here? 45 minutes away and you didn't visit the property before you bought, eh?  I'm confused.

 I know I should’ve gone earlier. But I didn’t buy or pay anything yet, just simply signed the contract, so I thought I had time. Usually I go before signing the contract even, but this was a hot deal in a hot market so I just signed based on my team’s evaluation. The title work was still going anyways plus I was away for some time, that’s why I took time to go this week before closing, as soon as I got word that title came back clear. 

Originally posted by @Wayne Brooks :

Still looks like a solid deal even if you’re in it for an extra $40k. 

 That's what I think, even though I estimate it should cost less than $40k (a lot of that was probably covered by the original 60k estimate). However, do you think the eviction process will be lengthy and $$ consuming? I still think it is a solid deal even after all the stuff that popped up yesterday.

@Vishesh Shah why are you necessarily leaning eviction? If the tenants are paying regularly even considering poor landlordship from the previous landlord then they might be good tenants to keep. I would at least think it would be worth your while to have a discussion if you intend to raise rent to see if they would be willing to stay.

By the numbers you put up I see $100k worth of upside - that's a pretty nice short-term profit on two buildings, assuming your ARVs are correct. 

Originally posted by @Odie Ayaga :

@Vishesh Shah why are you necessarily leaning eviction? If the tenants are paying regularly even considering poor landlordship from the previous landlord then they might be good tenants to keep. I would at least think it would be worth your while to have a discussion if you intend to raise rent to see if they would be willing to stay.

 Only reason I was leaning eviction is because otherwise it would make it difficult to do rehab while people are living there. That’s a whole another can of Insurance, etc. issues. I do agree they seem like good tenants and if they were ok with paying $1,500/month with a crappy LL who did no maintenances and only had false promises, it would definitely be a good cashflow buy, especially after a refi. Maybe tell them to leave while Construction and offer them first right of refusal to live there again after construction is complete?

Originally posted by @JD Martin :

By the numbers you put up I see $100k worth of upside - that's a pretty nice short-term profit on two buildings, assuming your ARVs are correct. 

That's what I was thinking as well. The comps do look accurate as another reliable broker gave me similar #s. Do you think it's worth a BRRRR (but then prob have to spend the additional $ on converting to gas) or just a fix and flip? Thanks for your input and love your stuff! Keep killing it.

Did I miss the part wherein you talk about the tenants leases? As in, how do you evict somebody who is paying their rent and on a lease? I've never done this, but......what if you somehow got both tenants to live in one building while you rehabbed the other? And then when one building is done, they were offered to pay top dollar to move into the finished one while you rehabbed the second one? It's probably not convenient or cost effective, but it just popped into my  head. All this is assuming you cannot evict them/end their lease terms. 

Originally posted by @Anthony Wick :

Did I miss the part wherein you talk about the tenants leases? As in, how do you evict somebody who is paying their rent and on a lease? I've never done this, but......what if you somehow got both tenants to live in one building while you rehabbed the other? And then when one building is done, they were offered to pay top dollar to move into the finished one while you rehabbed the second one? It's probably not convenient or cost effective, but it just popped into my  head. All this is assuming you cannot evict them/end their lease terms. 

 They are both month-to-month leases, I thought I put that in the initial post but I may have forgotten, my apologizes. But that is not a bad idea. I was going to ask them if they wanted to relocate somewhere and then have the first right to pay the new asking rent when construction is complete. 

I was going to suggest the same as Anthony if you dont want them in the buildings while renovating. If they dont want to do that then you can perhaps mutually agree for them to leave

Originally posted by @Vishesh Shah :
Originally posted by @JD Martin:

By the numbers you put up I see $100k worth of upside - that's a pretty nice short-term profit on two buildings, assuming your ARVs are correct. 

That's what I was thinking as well. The comps do look accurate as another reliable broker gave me similar #s. Do you think it's worth a BRRRR (but then prob have to spend the additional $ on converting to gas) or just a fix and flip? Thanks for your input and love your stuff! Keep killing it.

 Hard to say. I grew up in Orange and it was a rough, rough place, and Paterson had just as bad problems and reputation. I haven't been back in 30 years.

Originally posted by @JD Martin :
Originally posted by @Vishesh Shah:
Originally posted by @JD Martin:

By the numbers you put up I see $100k worth of upside - that's a pretty nice short-term profit on two buildings, assuming your ARVs are correct. 

That's what I was thinking as well. The comps do look accurate as another reliable broker gave me similar #s. Do you think it's worth a BRRRR (but then prob have to spend the additional $ on converting to gas) or just a fix and flip? Thanks for your input and love your stuff! Keep killing it.

 Hard to say. I grew up in Orange and it was a rough, rough place, and Paterson had just as bad problems and reputation. I haven't been back in 30 years.

 Orange is definitely still rough. I wouldn’t go near those areas. Paterson still has its parts as well; however, a lot of areas have been getting gentrified, including this area. Crime is not as bad as it used to be, even though it is still prominent is spot still. 

Originally posted by @Vishesh Shah :
Originally posted by @JD Martin:
Originally posted by @Vishesh Shah:
Originally posted by @JD Martin:

By the numbers you put up I see $100k worth of upside - that's a pretty nice short-term profit on two buildings, assuming your ARVs are correct. 

That's what I was thinking as well. The comps do look accurate as another reliable broker gave me similar #s. Do you think it's worth a BRRRR (but then prob have to spend the additional $ on converting to gas) or just a fix and flip? Thanks for your input and love your stuff! Keep killing it.

 Hard to say. I grew up in Orange and it was a rough, rough place, and Paterson had just as bad problems and reputation. I haven't been back in 30 years.

 Orange is definitely still rough. I wouldn’t go near those areas. Paterson still has its parts as well; however, a lot of areas have been getting gentrified, including this area. Crime is not as bad as it used to be, even though it is still prominent is spot still. 

 It's funny how all of this comes full circle. I grew up in an apartment building in Orange proper that was built in the late 1800s, when the Oranges were one of the first rich people suburbs. This apartment was state of the art when it was built - grand staircase, elevator, like a brownstone; even the street was upscale (Park Avenue). Of course it was a ghetto when I lived there, but lots of those North Jersey towns were after the 60's. Now they're all slowly coming back. 

Originally posted by @Michael Plante :

I would not trust a contractor who gave me a price and hadn’t seen all units. 

The contractor did see all the units when he originally went, before we signed the contract, and then only he gave me the bid. I personally didn't get to see 1 of the 4 units when I went the other day, due to nobody living there and it being locked. Obviously that was the unit that was said to have the falling ceiling (which said to have happened within the past few weeks, AFTER the contractor and my team had initially checked it out.) I am scheduled to go see that unit early next week with the broker.

Originally posted by @JD Martin :
Originally posted by @Vishesh Shah:
Originally posted by @JD Martin:
Originally posted by @Vishesh Shah:
Originally posted by @JD Martin:

By the numbers you put up I see $100k worth of upside - that's a pretty nice short-term profit on two buildings, assuming your ARVs are correct. 

That's what I was thinking as well. The comps do look accurate as another reliable broker gave me similar #s. Do you think it's worth a BRRRR (but then prob have to spend the additional $ on converting to gas) or just a fix and flip? Thanks for your input and love your stuff! Keep killing it.

 Hard to say. I grew up in Orange and it was a rough, rough place, and Paterson had just as bad problems and reputation. I haven't been back in 30 years.

 Orange is definitely still rough. I wouldn’t go near those areas. Paterson still has its parts as well; however, a lot of areas have been getting gentrified, including this area. Crime is not as bad as it used to be, even though it is still prominent is spot still. 

 It's funny how all of this comes full circle. I grew up in an apartment building in Orange proper that was built in the late 1800s, when the Oranges were one of the first rich people suburbs. This apartment was state of the art when it was built - grand staircase, elevator, like a brownstone; even the street was upscale (Park Avenue). Of course it was a ghetto when I lived there, but lots of those North Jersey towns were after the 60's. Now they're all slowly coming back. 

Funny how life works. South Orange and West Orange are significantly nicer (and more expensive) than Orange and East Orange. Now the Oranges' have been lapped by their sister towns, such as Newark, Jersey City, Harrison, etc. in terms of significant gentrification in the past decade, whereas the growth in Orange has been relatively stagnant. And of course, the "rich" towns surrounding Orange, such as Short Hills, Montclair, etc. are day & night different than Orange, almost like it's a tale of two different countries.