15-unit in Bad Area, Partner left, 100% Vacant (Dumb Sh^*)

15-unit in Bad Area, Partner left, 100% Vacant (Dumb Sh^*)

Developer · Cincinnati, OH · Member since 2018 · 1k+ posts · 3k+ votes

A contact of mine asked me today at lunch time to check a building out and since it's near my office, I decided to drop by. 

The building is 15-units, 100% vacant and the owner drove all the way from Missouri and this is the first time he saw the property. His partner and everyone, including the Property Manager, went "dark" on him. 

We went inside and he told me later that the building's condition is worse than he expected.

He overpaid for the building by a lot, specially given the area where he bought it. He got a hard money loan on it that's costing him a lot of money every month.

I told him flat out that there's no way I was buying his building but I know 2 people who can or has the network of buyers. 

I treated him to lunch and encouraged him that this is just a detour. If he does not quit and goes through it, he will be a smarter real estate investor and he too will become successful.

His situation is a real estate NIGHTMARE scenario and provides valuable lessons on what NOT to do when investing in multi family. Here they are:

1. Don't buy a building you have not personally seen or inspected. A week ago, I inspected a 91 unit building in Mariemont. Me and my partners went through all the units as part of our due diligence. I have been informed of a hotel in New Jersey and I trust the guy who told me about it and shown me the numbers, but I am flying out there to see it for myself.

2. Trust but verify. He trusted his partner. He trusted his property manager. But never took the time to verify things for himself.I trust my partner Nate but I always inspect a building I am about to buy and will visit from time to time to see what's going on even after I bought it. Three weeks ago, I visited my 145-room hotel in Columbus and I plan to visit every 2-3 weeks specially during the PIP (Property Improvement Plan).

3. Know your Market before you buy. He really does not know Cincinnati, again because he trusted his partner. His partner really can't know it as well because he is not from here. When I buy buildings, I always walk the area - where are the developments around it, what's the real value of the comps, how do they look like, what are the issues in the location, what are the potential problems, etc.

4. Hands-on Management is the Key to Success in Real Estate. Being present, on the ground (specially during the acquisition phase) and hands-on is the way to properly invest in real estate. I've never met a truly successful real estate investor who manages from behind the desk. Or, if you can't be local, you need a really good property manager who is local, ahnds-on and knows the area. But even then, trust but verify everything he/she tells you.

5. Honestly Assess Your Capabilities: If you're a Newbie, Do NOT Buy Dumb Sh*^. You might be a successful wholesaler, or rehabber or maybe even a successful landlord of single family homes. But success in single family, or success in rehabbing does not necessarily translate to success in multi family. Heavy repositioning deals is not for the newbie. Buying in D and F areas is not for the newbie. Don't be too greedy for big money -  if you don't have the experience and skills to pull it off, don't do it. Remember that a good deal for one investor could be a terrible deal for another.

So what about other multi family investors here on BP: what have you learned from other "real estate nightmare properties"?

Spill the beans here so that newbie investors specially won't suffer like this guy did.

32Reply
108 views

Most Popular Reply

Specialist · Tampa, FL · Member since 2012 · 933 posts · 492 votes
6y

@Michael Ealy those are some pretty good lessons provided there. Not sure how someone just lends their trust with out doing their own due diligence on the asset worth hundreds of thousands or even worse millions. To reposition in a D or F area you def. need the experience, skills and the right team to pull it off

See this reply in the discussion

29 Replies

Jump to latestLatest
  • Bjorn AhlbladPro Member
    Investor · Shelton, WA · Member since 2017 · 6k+ posts · 6k+ votes
    6y

    @Michael Ealy what a great coaching piece Michael right on all 5 points! It isn't that sellers and brokers will deliberately lie; people have different versions of the truth depending on their perspective. Get the version of the truth that is relevant to you-some people measure success by CoC-whereas to me that is a completely irrelevant yardstick. Some will measure actual expenses without allocations for CAPEx, vacancy, and bad debt.Set your own expectations and goals and measure against those.

  • Developer · Cincinnati, OH · Member since 2018 · 1k+ posts · 3k+ votes
    6y
    Originally posted by @Bjorn Ahlblad:

    @Michael Ealy what a great coaching piece Michael right on all 5 points! It isn't that sellers and brokers will deliberately lie; people have different versions of the truth depending on their perspective. Get the version of the truth that is relevant to you-some people measure success by CoC-whereas to me that is a completely irrelevant yardstick. Some will measure actual expenses without allocations for CAPEx, vacancy, and bad debt.Set your own expectations and goals and measure against those.

     You're exactly right Bjorn.

    It also depends on one's skills, experience, expertise and strengths. Take away my partner Nate and I will struggle with a heavy repositioning deal. I can do it and figure it out since I've done it many times before but that's just not my highest and best use today.

  • Patrick LiskaPro Member
    Investor · Verona, NJ · Member since 2014 · 1k+ posts · 832 votes
    6y

    Michael,

    Good story and points, thanks for sharing. the one key factor like you said, is always visit the properties you are buying. I did that once on a flip, I never saw the house in person ( except a couple of pictures), trusted the person that found it and was in charge of renovating it. long story short it did sell and I did make money on it $100, yes one hundred, they made more than me renovating it. They did end up making it up on a second flip where I made 50K ( I did visit this one). but always do your do Diligence.

  • Investor · Columbus, OH · Member since 2017 · 31 posts · 27 votes
    6y

    I see it all the time as a property manager.  People buying property site unseen, don't get inspections, and over pay for the property.

    Another area that newbies miss are the pending capital improvements.  Some think they put money down and you should be sending them a check.  Roofs, driveways, windows and mechanical's are ignored and owners get upset with ME when they go bad.

    When I started out I asked the "old guys" for advice.  One guy said "you won't make any real money for 10 years."  Me, being in my 30's at the time, was maybe a little cocky by thinking "I'm better than that and I'm going to show you!"  ...It took me 12 years.  

    My point is DO YOUR HOMEWORK, ASK LOCAL EXPERTS AND USE WHAT YOU LEARN!  

  • Specialist · Tampa, FL · Member since 2012 · 933 posts · 492 votes
    6y

    @Michael Ealy those are some pretty good lessons provided there. Not sure how someone just lends their trust with out doing their own due diligence on the asset worth hundreds of thousands or even worse millions. To reposition in a D or F area you def. need the experience, skills and the right team to pull it off

  • Developer · Cincinnati, OH · Member since 2018 · 1k+ posts · 3k+ votes
    6y
    Originally posted by @Patrick Liska:

    Michael,

    Good story and points, thanks for sharing. the one key factor like you said, is always visit the properties you are buying. I did that once on a flip, I never saw the house in person ( except a couple of pictures), trusted the person that found it and was in charge of renovating it. long story short it did sell and I did make money on it $100, yes one hundred, they made more than me renovating it. They did end up making it up on a second flip where I made 50K ( I did visit this one). but always do your do Diligence.

     Wow $100...good thing they made it up on the 2nd one. So you've made $25,050/flip. Not bad.

    Thanks for sharing your story.

  • Developer · Cincinnati, OH · Member since 2018 · 1k+ posts · 3k+ votes
    6y
    Originally posted by @Mitch Deminski:

    I see it all the time as a property manager.  People buying property site unseen, don't get inspections, and over pay for the property.

    Another area that newbies miss are the pending capital improvements.  Some think they put money down and you should be sending them a check.  Roofs, driveways, windows and mechanical's are ignored and owners get upset with ME when they go bad.

    When I started out I asked the "old guys" for advice.  One guy said "you won't make any real money for 10 years."  Me, being in my 30's at the time, was maybe a little cocky by thinking "I'm better than that and I'm going to show you!"  ...It took me 12 years.  

    My point is DO YOUR HOMEWORK, ASK LOCAL EXPERTS AND USE WHAT YOU LEARN!  

     You are right about capital improvements. That's really the most "unknown" expense going in a rental property. This is why we decided to be vertically integrated so that we can control our construction/renovation costs.

    @Brian Burke said something similar about making money after ten or even twenty years later. I've been investing since 1999 and I'm making the REAL money NOW after doing it for a while. So if you don't quit, and as long as you survive, you'll make REAL money with real estate eventually.

    And when I say REAL money...I am talking about making more money in 1 month than what normal people make in a year (or even 2).

  • Developer · Cincinnati, OH · Member since 2018 · 1k+ posts · 3k+ votes
    6y
    Originally posted by @Tj Hines:

    @Michael Ealy those are some pretty good lessons provided there. Not sure how someone just lends their trust with out doing their own due diligence on the asset worth hundreds of thousands or even worse millions. To reposition in a D or F area you def. need the experience, skills and the right team to pull it off

     I know, people do crazy and dumb things. When I asked him, he told me that he and his partner were successful wholesaling houses and bought some single family and 2-family rentals together. So they have some experience together but it's still not an excuse for buying a 15-unit building in a D area sight unseen.

  • NV · Member since 2019 · 254 posts · 57 votes
    6y

    @Michael Ealy thank you for sharing, some valuable info there.

    I'm currently looking for a commercial broker in Indy, do you by chance happen to know someone?

  • Developer · Cincinnati, OH · Member since 2018 · 1k+ posts · 3k+ votes
    6y
    Originally posted by @Rene D.:

    @Michael Ealy thank you for sharing, some valuable info there.

    I'm currently looking for a commercial broker in Indy, do you by chance happen to know someone?

     A lot of the brokers I know are in Cincy. Are you looking to buy apartment buildings in Indy, or office/retail/industrial space?

  • NV · Member since 2019 · 254 posts · 57 votes
    6y

    @Michael Ealy apartment building in Indy.

  • Matthew Irish-JonesBusiness Member
    Real Estate Agent · Buffalo, NY · Member since 2017 · 2k+ posts · 2k+ votes
    6y

    Yeah same.  I see people buy things all of the time because of what numbers looked like on a spreadsheet.  I even see them pass up fantastic buys because they don't hit a preconceived cash on cash return number.  I see homes well kept, great tenants in place,new windows, new roof, new interior and has a 10% cash on Cash return.. passed up for old house, nothing new but, high rent and a low price making the cash on cash return 18%.

    Guess who's going to have the best return over 10 years?

    Irish Jones Realty4.947 Reviews
    View Page
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    6y

    MIke while this seems like Basic logic those of us in the industry for decades it just seems like who would not know this.

    but here we are right ?  

  • Contractor · Seattle, WA · Member since 2019 · 339 posts · 325 votes
    6y

    @Michael Ealy where in Mariemont was that 91unit? I grew up in Terrace Park and went to Mariemont High School

  • James WilcoxBusiness Member
    Real Estate Agent · Bowling Green KY ~ Lexington, KY · Member since 2015 · 1k+ posts · 601 votes
    6y

    @Michael Ealy Sad story but great take a ways. Thanks for posting! Says a lot about your character in trying to help this guy out any way you can.

    REI James w/ eXp Realty54 Reviews
  • Developer · Cincinnati, OH · Member since 2018 · 1k+ posts · 3k+ votes
    6y

    @Matthew Irish-Jones

    I agree with you. This is why I am getting more A and B properties and when I get C properties, I renovate them to A standards so my cost of repairs and capex are low.

  • Developer · Cincinnati, OH · Member since 2018 · 1k+ posts · 3k+ votes
    6y

    @Jay Hinrichs

    As they say, "Sometimes 'common sense' is not so common"

  • Developer · Cincinnati, OH · Member since 2018 · 1k+ posts · 3k+ votes
    6y

    @Parker Eberhard

    You can google "Mariemont Trails Apartments". We are still in the DD phase but everything looks good so far.

  • Developer · Cincinnati, OH · Member since 2018 · 1k+ posts · 3k+ votes
    6y

    @James Wilcox

    Thanks man.

    I told my assistant just meeting the guy made my day bad because I feel bad for him. Even though I wont make a single dollar, I decided to cheer up the guy, and make a few phone calls with the hope that he can find a way out of his dillemma.

    We, real estate investors should help each other instead of taking advantage of one another.

    I told my assistant: watch...in the future, our paths will cross again with that guy and he will either bring us a deal or work with us. I did not help him to get anything in return but whatever good you put out, I believe it always goes back to you multiplied!

  • Contractor · Seattle, WA · Member since 2019 · 339 posts · 325 votes
    6y

    @Michael Ealy those were the apartments that the high school would have the start football players from other school districts rent so that they could play for Mariemont

  • Developer · Cincinnati, OH · Member since 2018 · 1k+ posts · 3k+ votes
    6y
    Originally posted by @Parker Eberhard:

    @Michael Ealy those were the apartments that the high school would have the start football players from other school districts rent so that they could play for Mariemont

     That's funny - they use the apartment as a "bribe".  Goes to show those apartments were really nice then and they still are today. However, the owner has not increased the rents and not updated the units and that's what we're going to do once we take over the management.

  • Contractor · Seattle, WA · Member since 2019 · 339 posts · 325 votes
    6y

    @Michael Ealy you can’t beat the Mariemont School District

  • Realtor · Tulsa, OK · Member since 2019 · 76 posts · 42 votes
    6y

    @Michael Ealy it’s the first I’ve heard if the 10 year rule of thumb. Newbie here, but I had already decided to only reinvest earnings for the first five years. Make that 10 or even 15 with my 15 year loans. Thanks for the pro-tip.

  • Tony RobinsonBusiness Member
    Rental Property Investor · Eastvale, CA · Member since 2017 · 138 posts · 459 votes
    6y

    @Michael Ealy I know you deal exclusively in large commercial real estate, but do you feel this holds true for when you're investing in SFR out of state? Would you suggest an out of state SFR investor fly to each prospective property?

  • Polson, MT · Member since 2017 · 115 posts · 105 votes
    6y

    Fantastic post. Great reminder that money can drive people to act emotionally or illogically given the right circumstances or desperation.

Join the conversationCreate a free account to reply, vote on answers and follow this thread.