Small victory-first property (4plex) finally under contract!
This is just the start of my journey, both for this property and for my REI career, but I learned a lot in the long time it took me to get this property under contract. Want to share what I learned along the way in the hopes it helps other new investors take the first step.
THE PROPERTY
This is a small multifamily (4 unit) home located in Gastonia, NC. It was an old farmhouse built in 1920, and about 20 years ago the owners completed a major renovation to turn it into a multifamily unit. Three units are 1br/1ba and one is 2br/1ba, total size of the house is 3,100sqft.
HOW I FOUND IT
It was listed on the MLS for $210,000 and had been on the market for about 5 months. The sellers were an elderly couple getting rid of their entire portfolio of investment properties to include this and 5 other SFH
NEGOTIATION
I talked through the property with a friend of mine (also my realtor) and began running the numbers. It was currently renting for a combined $1,500, well below minimum market rent in the area (nearly half). Due to the time on the market and the age of the home, I thought I could get around $180k and not go above $195k. I had some questions for the sellers about how long term the tenants were as well as some major capex questions due to the house being 100 years old (concerns about condition of slate roof, wiring, plumbing, etc.).
It took my agent 4 days to finally get a hold of the listing agent (6/11-6/14) . He emphasized that they were motivated sellers, which opened doors I didn't know were available. He said the interior needed some deep cleaning and to be repainted, along with possibly replacing or fixing some cabinetry. Finally, he reluctantly offered to let me walk through if need be.
Heeding the advice of my agent as well as what I've learned from @Brandon Turner on podcasts a number of times, I decided to show that I was a serious and professional investor (despite flying by the seat of my pants on my first deal) and just put in an offer. Fake it til you make it right? Based on the way things were going and the new information we received, we threw away our old expectations for numbers and put in a verbal offer via email first for $140k on Friday evening (6/15). They responded fairly quickly with $190k, and we countered saying $160k as the final offer. Sunday evening (6/16) we heard back that they accepted!
THE HEADACHE
Unfortunately, it doesn't end there. As I stated, we initially submitted a verbal offer via email. Total time from initial contact until getting the verbal offer accepted was nearly 1 week (initially reached out on Tuesday, accepted on Sunday). On Monday we were preparing to officially send over the OTP for a $160k purchase price, excited to get the ball rolling. The listing agent said that the sellers wanted to see him to talk about it more on Tuesday afternoon, apparently having second thoughts. On Tuesday (6/18) the OTP was provided and the clock started.
So we waited.
And then we waited some more.
It turns out this nice elderly couple had a third interested party that wasn't listed on the deed, and a week in (6/24) we found out that they were still trying to get a hold of the third party to confirm the deal. The waiting continues.
Two days later (6/26, 8.5 days after submitting the offer), we get good news...he agreed! But then bad news...the elderly couple wasn't comfortable with using DocuSign and wanted to meet with the listing agent, who was on vacation through the weekend. He ASSURED us that we would have the offer signed either Monday or Tuesday of the following week.
On Tuesday (7/2) it finally happened. The OTP was signed for $160k and I was under contract. Total time from initial contact to signed OTP was just over 3 weeks. The due diligence period was until 7/19 with a close date of 7/29.
LESSONS LEARNED
I learned a few big lessons here...
- Patience-I bothered my poor friend daily asking if we heard back yet. When I purchased my primary residence, it was 48 hours between when the OTP was sent, price negotiated, and fully signed. I did not expect 2 weeks
- Rates and fees change daily-I worked with a local mortgage broker who shopped rates for me. When I first submitted the OTP, I was looking at 5.325%...a couple days later there was an option for 4.875%, and the day before I had a signed contract I was looking at 5.125%. 24 hours later when I submitted the contract I was at 5.000%
- SHOP LENDERS!!!!-I shopped 4 different places including 2 local lenders and 2 large banks (Chase & BofA). At the time I locked for 5.000%, Chase and BofA could only offer 5.625% and the other local lender couldn't even offer that without charging points. Shopping lenders saved me a lot
- Get an insurance quote early-I found I was off significantly on my estimates for insurance costs. The fact that the home is a 4plex that's 100 years old added costs that I never expected, which had an effect on my cash flow and numbers. I shopped a bunch of places and finally found one more reasonable at the last minute, but I had to revise my numbers to make sure it still worked initially
- Creativity doesn't just apply to financing-after 2 weeks of waiting (impatiently) I realized I had no leverage to move things forward other than walking away. When the listing agent said he would DEFINITELY have the contract signed by the beginning of the following week, we wanted to hold him to it. I asked my agent to include a home warranty in the contract if it wasn't signed by the date he guaranteed. They said absolutely not, but we got it by Tuesday so if nothing else it showed that we were serious. I'm sure there are other more creative ways of applying leverage to help push things forward, this seemed like a low threat option for me
- Respect your agent's time-my agent is a busy man, and I know he has much bigger fish to fry than my $160k sale (while this was ongoing I know he had multiple listings for over 2-3x the sale price/commission). Sure I asked him a lot of questions, but the extent of his work up until the contract was signed consisted of making a couple of follow-up calls and sending a few follow-up emails. I never asked him to go show me this house, much less take me around to 5 or 6 other dumps that never would've panned out. He knows that I respect his time, and I know he's going to kick *** helping me put a deal together
- Be a real estate investor, not a hobbyist-if you act like a professional and make decisions like a professional, you'll be seen and treated like a professional. Listing agents can sniff out a brand new investor and will move them down the priority list based on prior experience. He/she has seen plenty of new investors who do a full walkthrough of a house listed for sale as-is while asking for the seller to fix the holes in the wall or the leaky faucet, and they don't want to waste their time. Do your own research, find out the numbers that work, and take advantage of your due diligence period. Know your limitations as well-I knew there was nothing I would find in a walkthrough that would prevent me from buying that house, because I don't have the expertise to know if the foundation is damaged or if the roof needs replaced. I need an inspector for that, which means that sacrificing my position of strength to ask for a walkthrough does nothing to benefit me. If it costs me $500 in due diligence and $600 for an inspection to find out about a major issue that I'd never otherwise see, but the deal has a much better chance of producing more than that $1,100 in just 2 months of cash flow, I'll take the cost all day
There are probably more, but this is way longer than I expected and took way longer than expected and I'm losing steam for the night. I will add more as I think of them, and keep track of others as I learn more along the way. But first, to wrap it up...
NEXT STEPS
I immediately got all the paperwork in for my loan so we could get the appraisal scheduled, and I've also been working with property management companies to figure out my best bet for working with tenants moving forward. I'm looking to get into the property on Friday with the property manager and the inspector, and wind up with a full list of what needs to be done on the house as well as what I can do to bring up rent.
By the end of the month, I'll close on the house and give notice to the tenants of the updates I'll be making and the subsequent rent increase. If all goes well I'll get the updates done in the first half of September and have a nicely cash flowing property by the end of the month (and hopefully have something else under contract too...). Looking forward to the rest of the journey.
Hopefully this novel of my experience will help someone take the first steps in their journey with a little more confidence, and I'm happy to continue sharing lessons learned along the way.