Hi BP community,
Once the inspection has been done, when do you walk away from a deal? I know there's no one answer to that but I'm facing that as I evaluate a fourplex opportunity.
It's a brick building that is fully leased. Cash flows very well and it is priced reasonably for the market (if one were to assume no deferred maintenance). The building is around 100 years old.
However, the inspection flagged some significant issues:
The basement/crawlspace area is host to the bulk of the problems.
- Basement has an obvious moisture problem.
- Subfloors are saturated with moisture at some parts, leading to wood rot, fungus/mold, and obvious safety issues.
- The floor unit above the basement's problem site has a concerning issue with floor sloping/alignment. This seems connected to the issue with the subfloors.
- The electric wiring is a mess in the basement. There are at times exposed wires and knob and tube wiring (that doesn't seem to be carrying a current, but should definitely not be there). There is also an issue with corrosion due to the moisture problem.
In my opinion, these are structural issues that call into question the building's integrity. However, I want to see if somewhat normal to encounter issues like these where a possible solution could be made by the seller hiring a structural engineer and electrician. Have you guys encountered results like this and still moved forward, or did you walk away? Thanks!
@Jonny R. Some things are always going to be easier to fix than others. I recently purchased a brick 3 family building that was also about 100 years old. (Was a factory and then converted into a 3 family). Even though the property was turnkey, unexpected issues, like an unnoticed broken water pipe can still happen.
Speaking from experience, water issues and mold can be a huge pain to fix, and often costly. Before walking away from the property, you may want to consult either a structural engineer or a contractor to ensure the building is safe, sound, and easily repairable with issues found in the home inspection. While the numbers may look good now, two things can happen:
1) your reports will give you ammunition to get an even larger discount on the property
2) your reports will give you a better understanding on the amount of money that it'll cost to repair all the issues therefore giving you a more definitive answer on whether it is a project you want to undertake or to look for a new opportunity
More information will provide you with the answers you seek!
Every property is worth what it's worth to you. The seller may think it's worth $300,000. I could think it's worth $275,000 and you may think it's only worth $225,000.
Consider what you found in the inspections and determine what you're comfortable paying. If you need to drop your offer price, do so. Sometimes, your inspection will identify problems they weren't aware of and they'll realize that it's better to take a low offer and walk away than to deal with no offers or having to pour more money into the property just to sell it. I recently had a buyer offer $300,000 on a property and then drop the offer $60,000 after discovering some major problems during the inspection phase. The seller accepted it because they knew the drop was justified.
Another approach is to ask yourself if you would have even made the offer in the first place if you knew these problems existed. If not, walk away. There's no obligation to move forward if the property is not as advertised.
If you are going to make your decision based on the current numbers this to me I would walk away. I would think of the potential of this become a different kind of a deal for a different kind of project. Are you in a position to deal with a major project now and if so would the ultimate numbers still work? In other or words, if this was a different kind of property at whatever you can determine to be the end costs would those numbers still work and are you in a position to take that on at this time and if not then it's time to walk away and find a better deal. I mean either something is a deal or it is not. Some things offered as a deal are nothing more than someone passing their current problems onto you. The thing to ask is if the real property which is not present but the present property has the potential to become a good deal would you take it now and if not then walk away.
You say the current numbers look good but in fact they are not representative of the actual property that is being offered for sale. Someone can offer me a Porche for $15,000.00 and if it was truly a Porche then I might consider that a good deal but in fact it turns out they are offering a 1960 Volkwagen that is in need of a rebuilt engine and more. Factually this is not a deal at all. However I would consider if this possibly represents another deal that might still prove to be in my favor.
I mean the current numbers are based on hanging on by, " the hair of my little chin chin" but not but a solid, safe and dependable structure.
You walk away when the numbers don't make sense anymore. As stated by others, get professionals in, get prices to fix it all, add a solid margin for error and hidden issues and then give them your new number. It is all math, when math doesn't work, you move on to a place where it does work
Anything can be fixed, at a price. The key is to find that fix along with its cost and show it to the seller... back up your claims w/ some real numbers/bids. Then get credit for that (reduce sale/credit back whatever) and either A) get it fixed w/ those bids or cheaper, B) do it yourself, C) defer it and roll the dice.
If you can't nail down the problem/price or can't get the purchase at a price that allows room to fix those problems then you walk.
Thanks everyone. These responses all point to a consistent POV. Thanks for taking the time to share your input and experience.
Follow up question: let's say I do generate reliable quotes and present a price reduction to the seller. Could he leave me the delta at closing?
@Jonny R. In the past 2 years I bought a 97 yo duplex and a 92 yo SFR, both had all these kinds of issues and more. It may all be manageable depending on your willingness to investigate and then your willingness to tackle the problems.
Your response to the inspection will depend on if you’re all cash or not. Traditional financiers will call out what they find and may want it fixed before funding. That’s dealt with differently than if they will allow you 12-24 months to correct problems, or if you’re all cash you decide how soon to fix. This is why buying all cash then fixing and financing last is less stress and more fun.
In some situations problems like these can give you a huge deduction to the selling price but not actually cost that much to fix. You have to get your pros in there to assess the root cause which might be as simple as bad surface water run off management. In some cases this is as cheap as reconnecting gutters to drains and/or digging a trench & filling it with rocks. (It can still look nice, it doesn’t have to look like the side of a freeway)
An engineering inspection is usually not too expensive, roofers, electricians and landscapers are usually free, have all those and your GC give you written reports, all that can be used to lower the price.
Have a roofer and a landscaper give you opinions on where all rain and surface water enters the property and where it then goes, price out to correct any issues where the water is headed towards the basement.
Look at neighboring property. If the neighbor disconnected their downspouts from the drains 50 years ago all that water plus the yard rainfall and irrigation could be flowing onto this property. You can ask them to reconnect the gutters or you’ll need to divert that water elsewhere. Sometimes neighbors make changes to their topography and intentionally or not send more runoff one way or another.
I believe there are also solutions for waterproofing the inside of the basement walls and floor with a latex product. Anyway, deal with the source of the water first then worry about repairs and wood rot. You’d never get ahead of fungus and mold without first stopping the water. Chances are pretty good the water is the cause of all this including the uneven floors. With 100 years water had plenty of time to flow all around and under the house, micro streams and variations is water retention in different soils will cause uneven settling.
All in all you may have a real gem that just needs some love. Gather info first then assess if you can lower the price enough to make tackling the problems worth it for you.