I'm currently under agreement for my second SFR home - a small cape house in Yarmouth that we'll rent out (Cape Cod, MA) and need some advice after the inspection.
The offer price was contingent upon the owner treating the home for termite damage and repairing any damage that had been incurred to that point. We had an inspection yesterday. The termite remediation treatment is done, but the majority of the sill under the house has some termite damage - mild to moderate damage covering 60% of the sill in the front, sides, and back as well as across a couple of the floor beams. It is also clear some of the work done on the house is shoddy (forgot to pain ceiling under the cabinets while they were being replaced, didn't complete the tiling of the floor up to the wall, painted windows shut with sloppy paint all over windows, supposedly fixed termite damage- but placed a beam next to a damaged beam in one corner of the house only). Two buyers have walked away already - and this time he was supposed to fix the damage from termites, but he just mickey moused one corner of the house and it looked like he put a fresh beam of wood that wasn't even doing anything structurally (not sure why).
Because this is a lean deal I am thinking about one of three things: 1) do I quantify the worst case scenario and make an adjusted offer that would let me fix what needs to be done (since I don't trust his work) or 2) we give him a few more weeks to properly repair everything with a second inspection, or 3) we walk away.
We found the deal on MLS and have it under agreement at a reasonable price whereby rent will cover mortgage and expenses, but if any capex comes up during the first few years it will end up out of pocket. We've been looking around that area for a few months and it's the best deal cosmetically and on paper by about $20K (again, using MLS numbers and not wholesaling, REO, or any of the other great strategies used by folks on BP).
In terms of my circumstances there are a few subjective factors which pointed us towards the cape that I won't bore anyone with the details of.
Do I walk away or discount the offer (and how much % if so)? I think I could deal with quantifying the damage and adjusting my offer and walking away if he didn't take it - but now I'm worried the termites might have gotten under the shingles and perhaps there is a lot more damage that we can't see. If it were a corner here or there that I could just replace I wouldn't be so worried - termites happen, but this seems relatively risky with it being in the infrastructure of the house.
I dont do rehabs but as far as price negotiation I think you want to get at least 2 to 1 on your money. If you think it will take an extra $10k then drop your offer $20k.
If the work that's been done to date has been shoddy and not up to your standards, ADJUST YOUR PRICE or walk. Don't trust this person, who hasn't done things the way you'd like yet, to suddenly do a good job. This also puts you back in control of the deal, in my opinion.
As to how much to adjust? I would get a quote for doing the work to your standards, and subtract that amount from your initial offer price. You then have good justification for why you brought your offer down (the bid you got)
Adjust your offer to cover those unexpected "out of pocket" potential repairs you could need that you mentioned.
The last thing you want on a new rental is to be breaking even period and worse yet to be chasing money early on when the bigger repairs are needed.
Make an offer that 100% works for you and if it doesn't work out just move on.
Sure there are a few things that can be done.
You can walk as you said.
You can ask for a price adjustment.
You can ask to have the work redone to some acceptable standard.
What does the contract say as far as doing the repairs? Does it say that you can inspect the work to ensure it is to your standards? Was there a clause that the work needed to be done by a licensed contractor? Sounds like the guy may have just done it himself.
The only issue I can see is if there is no language around how to determine what needed to be done and how to do it and to what standard that the owner could say he did what was agreed to and you are breaching the contract and try to keep the deposit.
I DON'T think this is likely, but people will take righteous positions and will litigate over anything sometimes.
What I would do is ask for the reduction in order to have someone I trust do the work. Actually I would try to get most/all of what the cost is going to be in a credit since knocking the cost down $10K will do what, maybe reduce your payment by like $50/month, but you still need to have $10K cash to pay for the work.
I would walk away. With that much damage to the sill and shoddy work in areas you can see (makes wonder what's going on in places you can't see w/ a home inspection) sounds like you will surely have some unexpected surprises in the next few years.
If you are buying off the MLS on the cape I think you would be best to wait until fall or winter or even next spring when inventory is high again . The knowledge you've gained from market research now will pay off later. Summer is probably the worst time to buy on the cape because more people are looking and sellers think this means their properties are worth more.
You might also want to consider moving more towards Brewster ,Harwich, Dennis or even Yarmouthport if you can. More mass appeal for rentals, seasonals and resale when you get to that point.
Thanks all. This is really helpful.
@Shaun Reilly is right that if we knock down the price accordingly and the house needs $30-40K of work we don't have the cash available to put into it right now- and if so I'd rather use that cash to buy a second investment. I'll talk to our mortgage guy about what can be done, but otherwise likely we'll have to walk away.
Have you signed a p&s yet, or just offer? If offer, did you use the MAR "Proposal to purchase" form or the GBRE "Contract to purchase"?
Josh Birrell hit it on the head, there is very few mls deals on cape cod right now & this time of year.
I partner with another BP member here on the Cape, If it needs more $$ out of pocket than you feel comfortable with we may be interested in knowing about it as soon as you give the red light to the other party.
Create Lasting Wealth Through Real Estate
Join the millions of people achieving financial freedom through the power of real estate investing