Investment Property Gone Bad

Rick Albert

Real Estate Agent · Los Angeles, CA · Member since 2018 · 2k+ posts · 1k+ votes

4y

There are a couple of things you can do:

1. I would review the Seller disclosures and see how long they have owned it. I find it hard to believe that the Sellers didn't have some knowledge if they had a vacant unit for so long.

2. If you try to sell now, you have these disclosure items, which would either make a for a tough sale or a very low price. I would bite the bullet and get everything rent ready and then decide.

3. See if you can make the entire unit electric so that you can eliminate the gas problem. Electric stove, hot water heater, etc.

I hope this helps. Good luck!

6 Reply

Jim K.

Handyman · Pittsburgh, PA · Member since 2018 · 5k+ posts · 13k+ votes

4y

Originally posted by @Marlia Stone:

Hey BiggerPockets, I’m here for any advice that you can give me on my current situation.

I recently purchased my fist Duplex property in July 2021. The property seemed like a great investment with minor cosmetic issue to be done. Certain things in regards to the property my realtor didn’t advise me to look further into after the home inspection, such as the gas and electric bill. As I began to work on the property with my contractor. We found more and more issues wrong with the property like the plumbing and state guidelines. A month later I tried to turn the gas on and put the service in my name. One unit was successful and the other wasn’t. The service was off for a year(which I didn’t know) and the unit required an inspector. I hired an inspector referred by PGW and it failed due to it not being up to “Code”. For the unit to be up to code I had to hire an electrician and all of them were mentioning that It would be thousands of dollars to fix.

On another note I tried to put the electric in my name as well. One unit was a success and another unit was not. The repress mentioned that one unit has been off since 2017( which I didn’t know) During the home inspection, for some reason the electric was on for both units and is currently on (Illegal Electric). Being as though this was my first investment property, who was supposed to figure this information out? Was I?

These two are keeping me from listing the property and putting tenants in there. It has been almost 4 months since I purchased the property and it has done nothing, but stress me out to the point where I am considering selling and starting over. I’ve lost more money than was expected. Please share any advice that you may have or any stories that may help.

There's a huge learning curve to buying ancient crapshacks in Philly that have been converted into duplexes. You don't mention how old this place is, you don't mention where this place is, but I think it's pretty safe to assume your place was once a big old single-family residence that was Mickey-Moused into a Section 8 duplex maybe fifty-sixty years ago and sits squarely in what is now a D-class neighborhood.

Sell it. Now. Try to buy something that requires less renovation in a nicer neighborhood. Otherwise this place is going to be one headache after another for the rest of your time owning it.

6 Reply

Joe VilleneuvePro Member

Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes

4y

First question...how did you buy the property? All cash or with financing?

2nd question...How much money per month is this costing you?

3rd question...How much in total have you spent so far in cash only?

Derrick E.

Investor · The Creek, WV · Member since 2014 · 890 posts · 1k+ votes

4y

As others have said. Put all of your focus and time in to getting one of the units up and running. Preferably whichever one is cheaper to fix and/or will bring the better return.

Then you can save up to get the other one fixed and rented. Best of luck!

Alecia LovelessPro Member

Member since 2019 · 3k+ posts · 2k+ votes

4y

@Marlia Stone The advice to get the first unit running and rented to generate some money is spot on.

Definitely Get multiple estimates for both the electrical and gas projects which I know is difficult in today’s market but different contractors vary wildly in prices. Also check their references.

Do as much of the other renovations as you can yourself if any such as painting or whatever. You can learn to do a lot with YouTube videos. Obviously you want the work to be done right so if you’re just not handy, hire it out.

Even if you need to sell and not complete the rehab on unit #2 due to cost having unit #1 occupied at full market rent likely will increase your market value.

OP

Rental Property Investor · Member since 2018 · 61 posts · 33 votes

4y

@Bruce Woodruff Thank you for sharing this story I appreciate it. Finding out all this information was pretty new to me, and I’m realizing a lot of it does fall back on me.

Yes I’m going to continue to fix the first unit up as advised to cover the Mortgage. Revealing this information may put me in a below market value property situation.

I’ve been thinking about just switching the entire unit to electric, and minor cosmetic things to raise the rent as well. Thanks for sharing your advice!

OP

Rental Property Investor · Member since 2018 · 61 posts · 33 votes

4y

@Austin Johnson Unfortunately, they are currently the opposite units. I tried running the numbers as well and I think you are correct. Holding the property will put me in a better financial position, because if I sell I have to reveal thins information that everyone mentioned, which may cause a bigger hit. The 1k per month can easily be priced with the first unit.

OP

Rental Property Investor · Member since 2018 · 61 posts · 33 votes

4y

@JD Martin Thank you for sharing your story, and after speaking with the inspector they all mentioned that I would need to rewrite as well.

Yes I didn’t transfer the service right over to my name, and I’m realizing this is one of my biggest down falls. Do you mean day 2 after closing? If so is there like a 30 day rule ? But I’m going to take your advice and continue to work on it one unit at a time.

OP

Rental Property Investor · Member since 2018 · 61 posts · 33 votes

4y

@Rick Albert

Hi Rick,

1. I’m trying to get access to it currently, because I did it online. What if I discover that it was not in the disclosure? Would this be a legal issue. The unit was in use, they’ve just been using illegal electric.

2. I agree with you, I may have to sell for a lower price than I purchased it for.

3. I’ve thought about this idea with my electrician, since the home has to be required I think that might just be easier.

This helped. Thanks!

OP

Rental Property Investor · Member since 2018 · 61 posts · 33 votes

4y

@Jim K. Hi Jim, yes I’ve been learning so much about the property and backtracking how things went wrong. Selling I would have to disclose this information, putting the property at a low price, are you sure?

0 Reply

OP

Rental Property Investor · Member since 2018 · 61 posts · 33 votes

4y

@Joe Villeneuve Hi Joe, I financed the home. The mortgage per month is 1k. As far as renovations costs I’ve already spent about 10k for plumbing, painting, flooring, etc

0 Reply

OP

Rental Property Investor · Member since 2018 · 61 posts · 33 votes

4y

@Derrick E. Hi Derrick, thanks for the advice. I think that is the route I’m going to take, by focusing on one unit at a time. Thanks for your insight.

OP

Rental Property Investor · Member since 2018 · 61 posts · 33 votes

4y

@Alecia Loveless Yes I’ve received multiple estimates for the electric and it was around the same price. The minor cosmetic renovations such as painting and patching up holes are done. I just have to figure out the gas and electric dilemma. Thank you for your advice, that makes sense.

0 Reply

Joe VilleneuvePro Member

Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes

4y

Originally posted by @Marlia Stone:

@Joe Villeneuve Hi Joe, I financed the home. The mortgage per month is 1k. As far as renovations costs I’ve already spent about 10k for plumbing, painting, flooring, etc

NEVER fall in love with any property. You are NOT a property collector.

Never mistake what the asset is as a REI. It isn't the property...it's the equity and cash flow...it's the money, and you have none in this property yet. In fact, you have negative assets...and they are adding up.

Realize that you must recover all of your costs (costs = cash out of pocket) before you can make ANY profits. As long as you are spending money, and not gaining money, you are just adding to the number you must recover before you can make a profit.

Any cost of yours (cash out of pocket) is gone when you spend it. The more you spend, the less you have available to you to recover the money you spent.

Sell it. Move on. You've spent (notice I didn't say lost) $10k so far. Every month you hold the property you are adding to your cost. Assuming utility costs and insurance and taxes to be around $300/month, if you add that to the mortgage, you're spending $1300/month every month you have no tenant(s) in place. In order to rent one of the units, you will still have added rehab costs...probably another $10k or more.

You have NOT lost any money yet, you've just spent it. There's a difference. Why do I say that? You can recover your costs in the next property and move forward, once you rid yourself of this property. The longer you hold onto it, the more your costs add up, the more costs you have to recover, and the fewer funds you have available to use to recover them with.

Think of it like playing Poker (not because it's gambling...REI shouldn't be gambling). Question: If you sit down at a Poker table, with a stack of chips, and after the first 4 hands, your stack is less than half of what it was when you first sat down, how much money have you lost?

William Moya

Investor · Land O lakes, FL · Member since 2016 · 72 posts · 61 votes

4y

@Marlia Stone sorry to hear what you are going through. But it's part of the game. If you purchased the property right, there should have been some room for unexpected issues that will always come up. If you have to bring in a partner with more experience and or funds, that may also be an option to help maneuver through this deal. But don't give up. If it cashflows hold it if you can. To your success!

Podcast Guest on Show #243

Jim K.

Handyman · Pittsburgh, PA · Member since 2018 · 5k+ posts · 13k+ votes

4y

Originally posted by @Marlia Stone:

@Jim K. Hi Jim, yes I’ve been learning so much about the property and backtracking how things went wrong. Selling I would have to disclose this information, putting the property at a low price, are you sure?

Knowing what I know now...yes, I would take the hit square on the chin and sell. Because your choices are to sell the property or to fix the property, and fixing the property is going to cost a lot in time and energy. It would be a long, painful, drawn-out learning experience for you, and unless you plan on specializing in assets like your duplex for the next 10-15 years to get your real estate investing career off the ground, I don't think it's worth it.

I do speak from some experience here, Marlia.

In 2017, I bought a duplex that was a converted from a big old single-family.I bought the duplex for $5000 at the county sheriff's sale. I got the taxes way down on it and held the property for two years. I finally paid a guy $2K to empty it and clean it up a bit and sold it through a wholesaler for $10000 to a young, big-talking investor from out-of-town who was positive that all he needed was some basic repairs (that he confidently told me he knew all about).

To date, that property is still under renovation. The new owner fixed the sagging porch and it seems some of the interior issues, but the back is still as terrible as it ever was and my plywood boarding up the front windows is still in place. I suspect he's holding it to sell to someone else for $20K someday.

Here are pictures of the property as it was back then, not that it looks much different now. To get the full effect of how I first saw it, I'm going to have to ask you to imagine a raccoon sitting up on top of the bed.

5 Reply

JD MartinBusiness Member

Moderator

Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes

4y

Originally posted by @Marlia Stone:

@JD Martin Thank you for sharing your story, and after speaking with the inspector they all mentioned that I would need to rewrite as well.

Yes I didn’t transfer the service right over to my name, and I’m realizing this is one of my biggest down falls. Do you mean day 2 after closing? If so is there like a 30 day rule ? But I’m going to take your advice and continue to work on it one unit at a time.

No, I mean if utilities are off you get them on immediately after contract during your inspection contingency in order to be able to inspect everything while powered (water/electric/gas). It's hard to check for sewer line backups without water. It's hard to check electrical issues without electricity. ETC. That becomes part of your due diligence. If for some reason I can't get a utility turned on, I assume that the utility itself inside the house is faulty and will need repair/replacement and adjust my offer accordingly. I won't pay for a property on the assumption that all systems are good if I have no way of checking the systems.

Skyline Properties

View Page

Zac P.

Rental Property Investor · Lexington, KY · Member since 2012 · 115 posts · 64 votes

4y

Welcome to the world of real estate. Lol.

Dave Chapa

Rental Property Investor · Katy, TX · Member since 2015 · 175 posts · 111 votes

4y

@Marlia Stone What is your long term goal? Every property I have bought has ALWAYS had issues. One property was budgeted 40k renovation, however cost 55k. Another property budgeted 85K, cost me 125k, out of pocket.

In the short term it can be overwhelming, you lose sleep, you worry about other hidden issues popping up, you second guess your decision to buy the property (buyer's remorse).

So, what happen to the two property I listed above?

The first one appraised for 38k over what we estimated when the work was finished, and now is worth 77% more than what I have into it, and cash flows very well.

The second property has doubled in price and is a cash cow.

So, what is your long term goal? What is the after repair value? Do you have the staying power to hold and finish the project?
What will the numbers look like 2 years from now?

Only you can answer these questions.

I'm in a different position in life where cash flow is not as important that equity capture. For you it may be different.

Don't give up without a fight :).

6 Reply

Bruce WoodruffPro Member

Contractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes

4y

What @Dave Chapa said.....! Real Estate is rarely (if ever) a bad thing to have and hold onto.

Tony Kim

Rental Property Investor · Los Angeles · Member since 2018 · 844 posts · 1k+ votes

4y

Originally posted by @Marlia Stone:

@Rick Albert

Hi Rick,

1. I’m trying to get access to it currently, because I did it online. What if I discover that it was not in the disclosure? Would this be a legal issue. The unit was in use, they’ve just been using illegal electric.

2. I agree with you, I may have to sell for a lower price than I purchased it for.

3. I’ve thought about this idea with my electrician, since the home has to be required I think that might just be easier.

This helped. Thanks!

I like Rick's answer. Even though it'll cost thousands to get the electricity back online, I would still try to get that done regardless of whether or not you decide to sell or keep. Also, and I'm sure you're aware of this....it'll cost you thousands more to sell. And if the buyer happens to be a savvy investor and starts to understand the situation you are in, they will try to lower the transaction price as much as they can.

If it makes you feel any better, I always have to spend tens of thousands of dollars whenever I buy a new property from all the gremlins I discover (or the tenants tell me because the prior owner was a deadbeat).