What would you do?

10 Replies

Hello BP friends, newbie here. Made my first phone call! (Whew!) I read an ad in the local paper. (I live in west central Indiana about 50 miles north of Indianapolis.) It read "5 investment properties, possible contract". So I called. His words were "All 5 are rented, all need repairs, some updating". 2 properties have 4 bd/2 ba. The other 3 have 3 bd/1 ba. 3 are in the little city I live in and one is 5 miles south in a smaller town and one is 5 miles the north in another smaller town. I drove by each property and all have different degrees of deferred maintenance, but to me, A newbie, seemingly urgent nonetheless. He spoke of a new roof on one property 5 years ago. A $3300.00 boiler in another property. All need windows, siding, and I'm sure other extensive issues. All were built before 1930. It's seems just from appearance of the outside of the properties that this is a distress seller. His story was that he had owned these homes for 20 years, and that he had recently lost an adult son and it had "knocked the wind outta my sails". He had an appraisal done on these properties eight years ago that is what he's asking for the five properties as a whole. $258.000, 10% down with a balloon in 5 years. Income is $3200.00 a month and he said that I could "keep $600 or $700.00" a month. Only 2 had tenants with less than 2 years. This is not something that I could or would want to fund. I would appreciate some thoughts from the more experienced investors on this on how to make this a win win. Thanks!

What do you think the properties are worth? Appraisals are not worth the paper they are printed on. The appraiser isn't ever going to make an offer so why should you care what he thinks you should spend? You shouldn't.

Do your own evaluation, deduct for all the repairs needed, deduct some more for an equity grab (just in case you have to sell, you want something in there to pay for sales expenses), the make an offer with him carrying the paper.

Sounds like a potential deal, but just because the houses are beat up, that in no way should indicate to you he's a motivated seller. Lots of beat up houses out there owned by long term landlords looking to spend some quality time talking about real estate, but never getting close to the closing table. Good luck.

Well, I would dismiss the appraisal all together b/c a lot has changed since then so do your own research on the market b/c I am sure the appraisals would be less, especially with a little more deferred maintenance for the last eight years. Calculate the cost of repairs individually by looking at each of them and get a total that way, or just the ones you want to buy. The market might say differently but I doubt full rehabs are in the equation for these #'s to profit unless you buy/hold but even at that you don't want to overpay. 

See if he will sell you 1 or 2 of them? If he is really a seller he will consider discussing it. It sounds like he is flexible b/c he is offering with terms but it could be a warning sign also that the price is too high, never know? 

Run your market/rehab #'s for each property separately to see if its a deal or not, then calculate rental cap rate. this will let you know where you actually stand on the package and you can use these #'s to find a partner or investor/buyer that may want to buy a few of the properties from you or just buy a few from him and help him sell the rest. Ask him to discount each property you buy $xxxx for every one you help him sell that you dont buy.

Just a thought. Best of luck.

Step one is know your numbers. Sharpen two yellow #2 pencils, and get a legal size yellow pad. Analyze each one. Figure repairs carefully. Then double your repair figures. Using internet and other sources, develop your own "Appraisal". Offer him about 50% of your "Appraisal". My motto is. "Get your butt thrown in the street about once a month." Only deal with motivated sellers. Only buy if you can buy right. If you are short of funds, offer him an option to buy. Then, sell your option. Be darn sure of numbers, and don't worry about losing a deal. It is better to lose sleep over a deal you didn't buy than lose sleep over a deal you bought.

If you are new to investing I strongly recommend easing your way into it.  Perhaps buying 1 property and moving on from there. With each purchase you will learn more and more and your strategies may change overtime as your experiences grow. Jumping into a five property deal fresh out the gates is setting you up for failure.  This is something experienced investors due as their comfort levels and experiences are much higher and they are capable of making bulk moves like this and being successful.  You don't want to be stuck with a rotten 5 property deal as your first purchase.  Buying one is less risky and allows you to feel out the market, the area, the realtors, the lenders, the insurance people, the property managers, the contractors ect.  With each process you will be able to fine tune your team, make the right connections and develop a well oiled machine that can handle bulk property deals like this.  

Thanks for your replies. I was in the weeds on this and had no idea of what to do next.

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@Michael Chan  I agree with @Joey Noel  . As a 1st time investor, you should ease in to it. You'd be taking on a lot of risk buying 5 properties with a lot of unknowns with potential for a lot of deferred maintenance from 1 seller. Another big problem I would have is 5 properties all located in very small towns. You're tenant pool is much more limited and by having all the properties in small towns, you have no diversification. What happens when several go vacant at the same time and you have a hard time filling the vacancies?

Mike D'Arrigo, Pinnacle Investment Properties, LLC | [email protected] | 800 348‑0956 | http://www.investwithpinnacle.com

Investors dont typically sell something that is working well for them, they sell headaches. That does not mean its a bad deal, it just means you need to understand you will be buying his headaches too.   I doubt he is stupid enough to think that values have not changed in 8 years.  Eight years ago was 2006, at the height of the real estate market before the crash.  Many markets have recovered, but who knows for rural Indiana.  

At $3,200 a month and $258K purchase price, thats about a 1.25% monthly rental return.  Not good, given everything else you stated.  And certainly not a smokin' deal.  And at $3,200 gross a month, $700 net to you, sounds like expensive financing.  In five years, you are grossing $35K to $40K, barring any rent increases. And with that, you have to cover the vacancy, repairs, upgrades.  Sounds like you are in a zero cash flow situation if not worse.  I personally dont like the smell of it.  Unless there is a huge amount of equity, this is just not a good deal, especially for your first one.  

If you really like the homes, the location, etc, I would negotiate very hard.  And be fully prepared to walk away.  Leave him with the headaches unless he makes it worth your time. 

I'm a newbie myself, but @Dan Brewer 's post sounds like sage advice that I'd follow especially given what sounds to be red flag information; an 8yr old appraisal, really?

That said, if it's something you can't let go, then definitely take @Aaron Mazzrillo 's advice and get seller to carry the note and give you credit at closing to fund the rehab.