Investment Property Gone Bad

Lender · Vancouver, WA · Member since 2015 · 482 posts · 316 votes

@Marlia Stone I suggest you run the numbers both ways objectively, fix or sell, and see which option you like better.

So many make REI an emotional decision, but it is a business. As Joe said, don't fall in love with it. In the end it has to profit somehow. If not, cut bait and move onto next.

Re disclosures, they are there to showcase what you know that may influence a buyer. It is not just a legal form to fill out, but also the right thing to do. It makes me squeamish when I hear people say, "I will have to disclose..."

In all transactions, I take what people say with a grain of salt. And if you look at the bottom of most MLS listings, there is some version of "Buyer beware".

Re utilities you can also call utility co before owning and ask what is high and low over last 12 months, and avr bill, of each unit. During that call you would have found out about the disconnected meter.

1 Reply

Rick Albert

Real Estate Agent · Los Angeles, CA · Member since 2018 · 2k+ 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!

1. If it wasn't disclosed, then you have to prove that the Seller did have knowledge but just didn't say anything. That would be difficult without proof. Now one angle (and I'm not an attorney) would be if the Seller knew the electrical work was illegal and didn't disclose. I would go that route.

2. If it were me, I wouldn't sell at the discount. I would find a way to get it ready. It will cost you more in the loss than it would in fixing it. Maybe you can work with another investor on it.

3. It is about cost and time. Just make sure everything is safe and to code.

4. Totally random thought but is there a way to get your home warranty involved? Maybe there is a caveat that can help in this. This is assuming you got one.

Good luck!

0 Reply

Matthew Olszak

Real Estate Broker · Chicago, IL · Member since 2015 · 1k+ posts · 2k+ votes

4y

Originally posted by @Jim K.:

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.

One thing I've frequently told folks is on these old, low class properties, if you need a home inspector, this is not the right property class for you. The 100 year old C/D 2-flats are dreadful if you have to pay contractors, or frankly even handymen (unless you know enough to give precise direction). There are ALWAYS hidden surprises like electric that got ran around the meter 15yrs ago, copper stub-outs off galvanized plumbing, split floor joists held together by nailed-in 2x4s, etc. Many many times there are telltale signs around the house based on visible work that there is plenty of hack work behind the walls, but most home inspectors don't know those. Instead, they miss the cloth or aluminum wiring and poor circuit allocation and instead show you with their fancy plug that "polarity is reversed"; or the always arbitrary "the roof likely only has 5 more years left max" because they see a 3-tab shingle from the ground and completely miss hail/wind damage on a newer architectural shingle citing its "lifetime warranty".

4 Reply

Michael Plante

Deland, FL · Member since 2017 · 2k+ posts · 1k+ 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.

SO sorry to hear about all this trouble

I have been buying rentals for 40 years and probably would have run into all the same troubles you did.

Best of luck. I wish I had good advice for you

2 Reply

Jim K.

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

4y

Originally posted by @Matthew Olszak:

Originally posted by @Jim K.:

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.

One thing I've frequently told folks is on these old, low class properties, if you need a home inspector, this is not the right property class for you. The 100 year old C/D 2-flats are dreadful if you have to pay contractors, or frankly even handymen (unless you know enough to give precise direction). There are ALWAYS hidden surprises like electric that got ran around the meter 15yrs ago, copper stub-outs off galvanized plumbing, split floor joists held together by nailed-in 2x4s, etc. Many many times there are telltale signs around the house based on visible work that there is plenty of hack work behind the walls, but most home inspectors don't know those. Instead, they miss the cloth or aluminum wiring and poor circuit allocation and instead show you with their fancy plug that "polarity is reversed"; or the always arbitrary "the roof likely only has 5 more years left max" because they see a 3-tab shingle from the ground and completely miss hail/wind damage on a newer architectural shingle citing its "lifetime warranty".

That's a wise post, Matt. I really think it's how they become home inspectors in the first place. An outsized percentage of them are guys who never quite made it in the trades and decided to get their home inspector's license to supplement a not-so-steady income from other sources. Failed HVAC guys who don't work well with others, electricians with a lousy customer base, sometimes a journeyman plumber who can never quite qualify for his master credentials. Once in a while it's a failed code official who sees it as a good side gig.

So these guys know a lot of real estate agents, they go and get their license, and they're good to go as home inspectors. Better than an amateur evaluating a place and guessing what's wrong, not likely to miss something big after training, but really not qualified to tell you if X property is likely to make steady money as a rental after you fix what's obviously wrong or Y property is just going to be a total money pit.

It's not like you and the roofing inspector/public adjustor space, where you go toe-to-toe against the insurance companies for real money. These guy know they'll never have to back up anything unless it's an incredible screw-up.

3 Reply

Bruce WoodruffPro Member

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

4y

@Jim K. The ones that never made it in the trades are the better ones......there are too many retired accountants that thought it sounded like a fun easy way to make money. Out of all the HIs out there, I'd say there are 10% I'd want inspecting my house.

Disclaimer: I did HIs for a couple years back when times were tough, so I know a little about the business....

3 Reply

Nathaniel Walker

Investor · USA · Member since 2017 · 94 posts · 71 votes

4y

Currently as long as you are classified as a passive investor you can only reduce your expenses by your passive income which you currently don't have. Until you can generate income you need to become classified as active so at least your losses can reduce your tax liability on your earned income. Consult with your tax advisor on the requirements so you are compliant with tax laws. This is a short term consideration as you work through our issues.

2 Reply

Martin Taylor

Rental Property Investor · Dubai, UAE · Member since 2019 · 19 posts · 8 votes

4y

@Bruce Woodruff this may come across as a silly question but wouldn’t fines like you mentioned against the property show up in the title search?

2 Reply

Robert Edwards

Specialist · Butte, MT · Member since 2021 · 27 posts · 17 votes

4y

Unfortunately this is going to cost you no matter if you keep it or sell it. Get it fixed and fall forward!

3 Reply

Max T.

Investor · Philadelphia, PA · Member since 2015 · 3k+ posts · 3k+ votes

4y

@Marlia Stone

What block is it on?

1 Reply

Joe VilleneuvePro Member

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

4y

Originally posted by @Robert Edwards:

Unfortunately this is going to cost you no matter if you keep it or sell it. Get it fixed and fall forward!

Get rid of it, and run forward.

1 Reply

Bruce WoodruffPro Member

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

4y

Originally posted by @Martin Taylor:

@Bruce Woodruff this may come across as a silly question but wouldn’t fines like you mentioned against the property show up in the title search?

I'm not sure, possibly, but you don't even want to enter into escrow with a property like that.

1 Reply

Justin Sullivan

Real Estate Agent · Phoenix, AZ · Member since 2019 · 158 posts · 140 votes

4y

@Marlia Stone

I recently purchased a 4 unit property with 3 units livable snd one unit gutted. Through the process I learned Thea foundation was shot and needed to replace about 80 linear feet of foundation. As we got into it the roof sprung a leak snd the copper was stolen. So at that moment we decided to redo everything. So we sunk an extra $40,000 into the property. Luckily we’ll recoup most of the once we refinance but my point is if you have the funds then put the money into the place. In my opinion it’s always best to just do things the right way and be done. Now you don’t have to worry about it for years. Like some others have said finish one collect cash flow save money and finish the other unit down the toad. We are only finishing 3 snd well finish the fourth in 6 months or so after collecting some cash flow and saving money.

Welcome to investing. Adds theses items to your pre purchase check list!

1 Reply

Wale LawalBusiness Member

Real Estate Broker · Houston | Dallas | Austin, TX · Member since 2018 · 5k+ posts · 2k+ votes

4y

This is why the inspection period is important. If you had done the inspection on time, it would have given the agent time to negotiate a better deal for you or had the option to terminate the contract. It happens to the best of us. Good luck!

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2 Reply

Marlia Stone

OP

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

4y

Originally posted by @Joe Villeneuve:

Hi Joe, Thank you for this detailed response. I agree with your point about not falling in love with the property, just because it's my first property. I made that mistake when I first started by trying to adjust the entire home, so it would be suitable if i were to live there. This costed me a lot, but i am learning a lot along the way. The numbers making sense is the most important about making a deal. Recovering all my costs may take some time if i do decide to keep the property, and even more to put into it. I am going to give it some thought, thanks!

0 Reply

Marlia Stone

OP

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

4y

Originally posted by @William Moya:

@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!

Hi William, Thank you for your advice! Entering the RE game is tough, but I'm glad I am learning things now, to know what not to do. During the inspection period, I didn't know I should have been doing my own inspection as well such as the electric and gas bill, this check could have been done during that time period, and a lot of things could have been avoided. I did have some unexpected costs, but to some extent. I do not currently know any investors, but I will definitely keep that in mind. Thanks again!

0 Reply

Marlia Stone

OP

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

4y

Originally posted by @Jim K.:

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.

Hi Jim, thanks for sharing this story, it helps a lot. Being as though this was my first investment, i decided not to go with properties that needed a full rehab, but i'm realizing it's not just about the way the property looks. I have to take everything into consideration when estimating the investment such as the plumbing, electric, and gas. They are the unseen damages, that could cost almost the same amount as a full rehab/ shell property depending on the severity. Thanks again, I will take this into consideration!

0 Reply

Marlia Stone

OP

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

4y

Originally posted by @JD Martin:

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.

Hi JD, i agree with you. If this was something that could have been done during the time the property was under contact I could've avoided a lot of problems.

1 Reply

Marlia Stone

OP

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

4y

Originally posted by @Dave Chapa:

@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 :).

Hi Dave, Thanks for writing. I love everything that you have said, the wording was perfect. My property budget was 15k in renovations, but it looks like I will be spending about 25k or more, out of pocket. My original plan was to fix the property up and keep the property for some time. I never really had intentions on selling until I started to face so many problems, when it was supposed to be considered a "Turn Key" property. I agree, it gets overwhelming, but after hearing everyone's responses I think I can stick it out if I have the funds to. With the new renovations, i am not sure what the After Repair value will be. How should i factor that in? However, I did calculate the first 2 years numbers and they seem to have great cash flow of $1.6k-$2K a month, which is not bad after expenses. I won't give up. Thanks :)

2 Reply

Marlia Stone

OP

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

4y

Originally posted by @Bruce Woodruff:

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

Thanks Bruce, i agree. Thanks!

0 Reply

Marlia Stone

OP

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

4y

Originally posted by @Tony Kim:

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).

Hi Tony, Thanks for writing in. Yes, the cost for rewiring was completely unexpected, but i think that is something to accrue for in the future. That does make me feel better, because i thought maybe some properties were "turn key" and you could start listing right away. But, boy was I wrong!

0 Reply

Marlia Stone

OP

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

4y

Originally posted by @Dan H.:

The seller should have known the electricity was illegal and about the gas issue. How could they not know this? I would suggest you consult with an RE attorney about what appears to be an intentional non-disclose. Many attorneys will provide an initial consultation without charge.

I do not know the cost of purchase. The more significant the cost of the RE, the more likely that an attorney will be willing to take the case.

As for the other recommendations suggested, I would have suggested the start with one unit but I would defer to local expertise and therefore fear @Jim K. is likely correct. I cannot think why I would go with non-local suggestions over the suggestion from the local expert.

I am sorry this happened and suspect the sellers intentionally did not disclose the known issues. I wish it was easy to make them pay for their nondisclosure but I suspect that will not be the case (consult the local attorney).

Good luck

I believe the seller did know this, but failed to mention. I will look into this, once I retrieve the Seller's disclosure. I think i a going to go that route as well by doing one unit at a time. Thank you so much!

0 Reply

Marlia Stone

OP

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

4y

Originally posted by @Steve Milford:

@Marlia Stone I suggest you run the numbers both ways objectively, fix or sell, and see which option you like better.

So many make REI an emotional decision, but it is a business. As Joe said, don't fall in love with it. In the end it has to profit somehow. If not, cut bait and move onto next.

Re disclosures, they are there to showcase what you know that may influence a buyer. It is not just a legal form to fill out, but also the right thing to do. It makes me squeamish when I hear people say, "I will have to disclose..."

In all transactions, I take what people say with a grain of salt. And if you look at the bottom of most MLS listings, there is some version of "Buyer beware".

Re utilities you can also call utility co before owning and ask what is high and low over last 12 months, and avr bill, of each unit. During that call you would have found out about the disconnected meter.

Hi Steve, Thanks for writing in. I agree with you, this is a business and i should focus on the numbers more. The utilities as well, could've been investigated better during the inspection period. Knowing this now, i will keep this in mind for my next property. Thanks again!

1 Reply

Dante Pirouz

Investor · Almont, MI · Member since 2015 · 361 posts · 302 votes

4y

@MarliaStone Your most recent response is the right way to look at things...you learned something for the deals...plus it makes for a great story when you finally get your episode on the BP podcast :)...Mine will be: "I remember when I bought that deal from a wholesaler that had 2 feet of raw sewage in the crawlspace..."

1 Reply

Mark Cruse

Investor · Fort Washington, MD · Member since 2014 · 1k+ posts · 1k+ votes

4y

Iḿ pretty much mirroring what most have said in here. Its part of the game. You have to be very careful, do massive research and have some understanding of what it is. Many people sell, hiding tens of thousands of discrepancies to pass on to others. I know it sucks now but think how this lesson will prepare you for the next. If its a viable investment, 10k in is not that bad and depending on the numbers it can be recouped. Depending on where you are located, getting that one side up and running can generate enough to service the mortgage. It will get the foot off your neck and give you time to work through the other unit. Selling will make you lose more because it would be unloaded for much less than you got it for when the problems are disclosed. I have no idea how any competent inspector to miss those things.

4 Reply

Investment Property Gone Bad

Investment Property Gone Bad

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