Mid-Deal Regrets on a Small MF in Chicago
It's been a rollercoaster as we look to buy our first small MF (four flat) in Chicago. This market moves fast and it seems like a few due diligence items were poorly handled on the part of us and our realtor leading up to offer and then definitely leading up to inspection. In sum, every single variable changed. We (the buyers) verified and caught everything during due diligence period (better than closing!) but the lack of strategy from the "real estate professionals" helping us is wild to me. Curveballs include: bait and switch on interest rate quoted from mortgage broker, taxes wrong in MLS (old #s), insurance quotes are 4x what the auto quotes are in all the real estate portals, and then there is a tenant timing issue. It feels like every single detail is designed to catfish buyers into getting too far into deals they feel sunk cost pressure on. The property is at a good price ($925k for a West Town four flat that's been pretty run into the ground w/ no rent increase in 20 years) but all the other variables throw off our deal math. It's highly feasible to get it to a $1.1M building with $100k of work over two years). Current deal math: we can get this thing at $6,150 monthly carrying cost (all factors including utilities except our ongoing maintenance budget) and we assume we'll need to put in 100k of work over the next 3 years (good news is not all at once, we can cash flow it). I think we can someday get in the $8ks on rent range - after a long stabilization period (and we are set to live there so not counting that period). We flagged a month ago that although the contract has a fast closing date - there are some medium-term tenants subject to longer notice on move outs. This apparently was never discussed with the seller (we assumed it had been given we mentioned it three times to no response from agent). I don't like operating in this environment of lack of communication. We are now in a period where we don't want to close until its vacant (except one tenant we have screened and trust) so pushes closing date to July 1. We already got our current condo under rental contract (at suggestion of mortgage broker, to improve residuals math) for May 1, so now I'm looking at a two month gap with a newborn - hello in-laws! I'm not mad there are twists, but they seem VERY avoidable. Next steps: I'm requesting immediate confirmation on seller willingness to close July 1 not sooner (we don't want liability of super tricky unvetted tenants) - or we close whenever its vacant if he wants to get them to agree to sooner) and if that gets a yes I think we can salvage the deal. If not, I walk.
Questions for this group:
- Anything else I'm missing I should be watching for on deal strategy?
- Any favorite Chicago small MF agents in case this deal dies and we start over w/ someone specialized?
- Any favorite insurance options we should try (8 quotes so far, lowest is 4x the MLS estimate) - owner occupy 2 flats, 2 other flats rented, 1880s building, and roof only has five years of life left (that was a no-go for two companies). Lowest quote now is $475 per month
- Methods to verify the mortgage rate without it moving on us! My trust is shaken on that... We operate super transparent across board so all the "surprise factors" are getting annoying across the deal variables - we flagged all factors earlier. I shouldn't complain - I think we can still land it at a good rate - but the constant shiftiness scares me.
- Tenants have 90 day notice period due to length of tenure - we flagged this a month ago but apparently it's news to all the agents and seller just now -eye roll. Is it common practice for seller to able to work out agreement for 30 day notice with them? E.g., I'd give back $5k in seller credit if they put it toward tenant move out/support in exchange for early departure if it sped up schedule.
Then there's of course the life discussion for a different forum: Will I be okay staying with family for two months with a newborn? :)
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Huh? I'm concerned by the lack of knowledge that you are attributing to your realtor. There's plenty of stupid here to go around. The taxes in the MLS are not wrong...they are the current taxes that the seller is paying - not what the buyer will pay. Always has been, always will be - because what the buyer pays is based on the purchase price which doesn't exist when listed, right? The property tax office in every muncipality has an estimation tool that gives a range of the buyer's potential taxes. Insurance - if you're using real estate portals, you will always be wrong. The portals are for 'entertainment value only' - they don't consider condition, location, and other factors. That's not a bait and switch - that's reality. Lender: your lender should have given you a good faith estimate within 3 days after application that would provide you with the costs associated with the transaction; none of it should have been a surprise. You can lock your rate for a fee if you're as far out as it sounds you are from closing but until then 'you're living on the edge.' In any case, the rate is the least of your issues here.
You're not going to like the rest of this either so please put on your coat of armour. I don't think you're ready for this investment on many levels including the age of the building, hoping rents will increase and rates won't 'move' on you (they will; reality sucks), the lack of trusted and knowledgeable advisors...please discontinue using any online portal - aka 'real estate porn.' I hope you'll step back and realize that what you actually control in this transaction is very little yet you have your financial well-being riding on it.
I offer this as an investor, owner of a 1925 money pit - and I assure you that these 'historic' buildings are the gift that 'keep on taking,' and an investment Broker of a private client firm that I own. Real estate mistakes are painful and costly. I don't want that for you.