Have an amazing cash flow multifamily to buy but there one problem

19 Replies

Hi fellow BP nation, I would like your opinion on this scenario.  
I am in discussion with a seller right now on an 8 unit property: (4) duplex's.  The numbers work, and are as follows:
Purchase price:  $340,000
25% down: $85,000
3% closing costs: $7,700
Property Tax/ yr: $1,400
Insurance/ year:  $1440
35% of rent allocated to property management (myself), Repairs, maintenance, vacancy
Mortgage: 5% interest 30 years local lender.  P/I: $1,369/ month
Currently 100% occupied, with 2 long term tenants: the remainder are 1 year leases. 

These are 2 bedroom, 1 bath units that rent for $628/ month each unit.  The property is very clean, no obvious deferred maintenance. Knock out roses, drift roses, crepe myrtles planted around the homes.  Parking is adequate, and taxes are great.  Location is 15 minutes from my primary residence.  
Initial out of pocket costs: $92,650
Monthly expenses:  $3,363
Monthly rent :           $5025 
Cash flow: $1,662/ month  


In the city of Jacksonville, Fl.,  we have both city water and well water. We have both city sewer and septic systems.  All 4 duplexes are on 4 septic systems and 1 well.  There is a push to convert all properties eventually to city and do away eventually with septic systems and wells.   The conversion is at the cost of the homeowner, and can be mandated by the city to comply.  A recent voluntary conversion in our neighbor cost the home owners $18,000 per home to tie into city lines.  This was voluntary, but at some point in the future, it could be mandatory.
I called our local water/ sewer provider (JEA) and spoke to the director of water counter planning.  He told me there are no immediate plans to mandate that area where I am considering investing to city water/ sewer. He told me it could happen 10 years from now or never…there is no way of knowing.  
I talked to my realtor this morning and mentioned why don't we just offer $260,000 (as it would be $80,000 to convert all 4 duplexes/ 8 units).  My realtor presented that informaly to the listing agent, and the agent was "suggesting" that we should go ahead and submit it in contract as the sellers are "eager" to cash out their investment properties (the sellers are a brother and sister who inherited this property and others in September last year when their mom died).  
Now, I am getting cold feet all together.  The homes are great.  The cash flow is great.  But, the utilities (specifically if there is a well problem or septic problem that presents OR if the city of jacksonville mandates a conversion).  
Furthermore, the due diligence (septic inspections X4, well inspection, home inspections, etc..) could be close to $3,000.  
I am seeking thoughts, ideas, comfort, criticism, any words of wisdom to help me commit or walk away.  
Thank you all in advance.  

Hey Aaron, I have 2 properties in J-ville.  One is city water, septic.  The other is well water, septic.  I keep hearing that if your septic fails, they will not issue a permit for it, therefore "forcing" you connect to city sewer.  You could have septic inspections done to ease your mind.

I personally don't worry about it.  They're hasn't been a big push to force people over.  There are thousands, maybe tens of thousands of properties still on well and septic.

A lot of it depends on your risk tolerance.

Good luck!

Hi Aaron - 

This is a great opportunity to educate the seller as to why the property will sell at a discount. Perhaps they know, but maybe not - they sound like involuntary property owners.

I would prepare a letter for the seller, explaining all of the possible issues in some detail, and let them know you are a fair and informed buyer, and that you can get them out of the property quickly. And (good letter) > (agent's verbal presentation of your ideas).

I would talk to the county (or city) re mandated hookup schedule - they would know a lot more than the water/sewer provider. Talk to long range planning, or get a copy of the general plan, etc. There is often someone who knows the whole story - sometimes you have to ask around.

Like K Marie Poe says, albeit in a different area of REI: take a problem child property and diligently apply creative solutions.

Keep us posted!

Offering $80,000 less does make it look like you will have paid the same price if you end up having to do this. However, I assume you are financing this as you mention 25% down.

If you put 25% down on on the new price of $260,000 that is $65,000. 

Let's say you put the $20,000 difference between the old down payment and the new one to one side and 5 years from now you have to put in the new systems. The first one can be paid for with the $20,000 you set aside but you will have to find the other $60,000 from somewhere. Will you be able to find that money? Unless the building has gone up in value substantially, you are not going to be able to refi enough to cover the cost of the new systems. How will you find the money? That would be my biggest concern.

@Aaron Thivierge

You've got a hot one! I would pull the trigger. Septic is something that is very fixable. It's a very knowable issue and new technologies are being developed all the time.

Build your reserves and move forward (after septic inspection).

@Dana Whicker I would certainly do the due diligence and have septic inspections done during the inspection phase.   Thank you for your contribution.  I truly appreciate your words of wisdom.  The septic on that many units is just a risk that I can not accept at this time (most likely a product of my inexperience, but I would not sleep well at night with this variable).  Where in Jacksonville do you have rental properties ?  

@Doug M. That is brilliant:  writing a letter of intent with a full description of WHY I was offering that lower figure would be exactly the approach I would take at this moment if I was going forward. In fact, last night I was conflicted with this decision. I started to write that letter.  But, my "gut check" doesn't sit right.  The numbers look great on paper, but the risk is too high for me to go forward.  I will not be pursuing this property any further.  Your letter suggestion is written down in my real estate journal.  This is a tactic I will implement in the future.  Furthermore, I loved your Poe statement about a problem property and creative solutions.  It is an excellent mindset.  

@Fred Grant  You are correct.  Saving the $80,000 at the closing table does not imply that there is $80,000 sitting in escrow waiting for that project to begin. The money has to come from somewhere.  I have discouraging images in my mind of the well drying up and 16 people being without water for 2 days…. this alone is enough to deter me from this property purchase at this time (again, my inexperience at this time and lack of intestinal fortitude for that high a risk).  

@Al Williamson  I love your enthusiasm and vote of confidence.  However, after sleeping on this over night, I do not have the risk tolerance for such a potentially expensive repair and inconvenience to the tenants to pursue it any further.  I did look up your profile and see your business. I would be interested in reading more of your tenant maximizing profit strategies.   Thank you for your contribution to this thread.  

Finally, thanks again to all 4 of you who commented and gave suggestions.  I knew I would find a candid response on BP.  This website is like a sounding board for ideas, and that is invaluable to me.   
I am going to pass on this deal due to the logistics in play at this time concerning the details of the sewer/ water/ well.  
Have a powerful sales day everyone.  

"35% of rent allocated to property management (myself), Repairs, maintenance, vacancy"

--If the place is indeed in good shape with no deferred maintenance, that sounds high.

"I have discouraging images in my mind of the well drying up and 16 people being without water for 2 days"

--Don't be discouraged before you get inspections.  If the well is very shallow and/or you have got great flow, this is not much of a concern.

If I could get an 80K discount for something that might happen in years  that would  cost 80K max,  I would do it.  Also, based on the interaction between the agents, you could come in even lower and see if they take it.

Please correct me if I am wrong but couldn't you offer them full price and have them pay to convert all the utilities to public after the closing? That way you are alleviating your concerns for the utilities and your numbers still stay the same. 

Think about the homeowner (and voter) perspective on this.  Homeowners would not want to pay the cost to convert any more than you.  And the administrators who push for it would be unpopular with these voters. I would go with the planning director's opinion...you are in the clear for now. 

Take advantage of your current opportunity - a good deal and a motivated seller.  Set aside half the cash flow for this potential future cost.  In a short time you'll probably be able to refinance and pull at least some of your cash out.  In a couple of years you can follow up and see if the conversion mandate is any more likely. 

Go for it! If you have to connect to municipal in the future, that is not a bad thing. Furthermore you can write off the expense.

Another option would be buying this property, at the lower price, with a partner who would provide the cash for the conversion after the purchase.  Now you have a property with a resale value 80k more than your purchase price (instant equity for you), while moving forward in running this seemingly quality property without the lingering worry of that axe waiting to fall.  In other words, get in front of the problem.  

lol.  One problem only.  Thats kind of a miracle deal. You haven't closed on it yet lol so. There is always a problem in real estate.  What usually happens with that is the city wants the water revenue and will hook you into the water line eventually.  Shouldn't cost much if anything.  Sewer it possibly could become or the entire situation more than likely will become a grandfathering issue.  I wouldn't let that hold me up. 

hi aaron. quite the dilema. personally, i have never dealt with anything of this sort of deal, but here is what i would do. first, make the offer minus the $80k. my guess is that they would take the deal. then, have that inspection done on the well and septic. you have to know where you stand right now. eventually, the city will enforce hooking up to city water and sewer but they will probably follow the path of requiring it when one or the other fails and they do not issue a permit to put in a new well or septic. in that case, you really need to know where you stand now. if you have a few years left, then start saving. take some of that cash flow and set it aside knowing whats coming up and possibly when. by that time, you should be able to refinance and make the necessary ( required) repairs. 

We are assuming the seller will take the 80K lower offer.  What if they don't go for that.

If they don't take the 80K price reduction, you could offer their asking price; however, you could get the seller to hold a 2nd for 80K.  You could structure the deal with a 20 year note with interest only payments on the 80K and if the city ever requires you to convert, the note would be forgivable or they would agree to pay for the conversion.

A win-win - they get their asking price, but the risk is on them if there is a conversion in the future.  Hopefully they will take the 80K reduction initially and as others have said, you save your cashflow in a reserve account.  If the city requires conversion, you can deal with that problem later - don't let this deal get away from you!

I have submitted a letter of intent to purchase the property. I will follow up on this thread as the deal develops.   Furthermore, I do have a planning/ development meeting early this week with a representative from the city to further quantify this concern or mitigate it all together.  Standby for updates.  Thank you ALL for your contributions. 

One thing I will mention: when someone inherits a property, there's often not a whole lot of difference between 300K and 220K, so long as someone is bringing a suitcase full of money to the closing. In other words, cash in hand is better than a bird in the bush, and since likely little to none of it was their own principal in the first place, it could be easier to just make the offer and go forward. I would not write any kind of letter; I would make the offer and let the agent take it from there. Even with good cash flow, there is always a limited market for selling MFH. I don't worry about whether an offer is low-ball or not; I make it and let the other agent deal with it. Either we come to terms, or we don't; it's just business, after all :)

@Aaron Thivierge

I live in, own, and manage property in Duval county and Jacksonville.  I personally think both your tax and insurance information is off.  When you buy this property the county is going to re-access the tax value on the property to roughly what you pay for it.  With millage rates around 19 in Duval county your estimate for taxes will triple or quadruple.  Check out this tax estimator:


Also I would suggest calling an insurance agent to give you a quote on the insurance.  Just my 2 cents!

@Todd Miller  It's almost as if you were sitting next to me in my office right now: as both of those figures are EXACTLY what I was just working on in estimating real world numbers.  Your timing is impeccable with this comment as you are 100% correct.  There have been some nuances discovered with the property that make the cash flow significantly less than initially reported.  
Taxes and Insurance are two of the variables.  The seller has accepted my letter of intent, and this initial due diligence phase has uncovered some discrepancies.  I am working through real numbers now to see if this will be a productive asset or a liability.  Thank you for your input. It is TRULY invaluable during this due diligence phase.   

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