My First House Hack Unsuccess Story

My First House Hack Unsuccess Story

Rental Property Investor · Bronx, NY · Member since 2011 · 193 posts · 322 votes

Ok, I sorta lied, but I got your attention ;-)

Although this story is full of bruises, blood, sweat, tears and bad decisions, I still consider it somewhat successful... may not be the best investment ROI-wise, but could've been much much worse :-)

Firstly, let me preface this by apologizing because this post is so overdue and soooo long, I'm sorry! It must be the slight OCD in me to want to cover every detail. But I know as a newbie I would have LOVED to read something this detailed with all the ups, downs, lessons and costs. I've been studying real estate for a few years and I learned A LOT along the way, but DOING is def the best educator. I still did things I heard multiple times not to do, and I kicked myself as I was doing them. I just hope my experience can help someone out there in their journey.... So here we go :-)

I FINALLY closed on a 3 unit multifamily house on March 10th, 2015 in the Bronx!!! AHHHHHHH I was so excited! Although the actual closing was very anticlimactic - sign sign sign sign 1st born child (that I don't yet have) and now your done... no champagne, no trumpets, no confetti from the sky.... nothing. After all the turmoil I'd been through just getting to the closing table, I wanted just a little more fanfare. Almost 2 years of trying to wholesale (alone and in partnerships), I started actively looking to buy something/anything the summer of 2013, had 2 failed condo contracts, moved into one of those condos as a 'rent with the first option to buy' before finally finding this property via a direct mail of July 4th cards I sent in 2014 and being in contract for 7 months before finally closing.

LESSON: Stay focused and don't give up, you are bound to get where you are headed. One step at a time, it will happen!

After the seller called and I looked up the property, since I know how to use Acris (NYC's tax and property info database), I found out that the seller had paid cash (during foreclosure auction) and must have rehabbed it, so I knew he was an investor. And because banks left a bad taste in my mouth after the condos failed, my thoughts where to pitch him on the idea of seller financing, with me doing a refi in 1-2 years to cash him out. When we met and started talking price, he was asking above my strike price (if I was purchasing with a traditional mortgage), so I told him I could only offer what he was asking IF he was willing to hold the note with a payoff in a couple of years. Mainly because I knew I would not get approved for the asking amount by the bank (for reference, he was asking $535k and I had previously been pre-qualified for $200k for the condos). Anyway, I think that "IF" part went in one ear and out the other because he started going on and on about how good his mortgage broker is and how it's no problem he could get me approved, etc etc. I didn't harp on the price because I was dead certain I wouldn't get approved and we'd have to bring the price down anyway. More than anything I really didn't like the thought of wasting so much time applying with a bank just for them to decline me (I really wanted to close before the end of 2014). But I went ahead and called his broker and so the long, tedious, but ultimately well-worth it, journey began....

Issues Before Closing:

1. DEBT-TO-INCOME - We signed the P&S contract in Sept 2014. About 2 months into the process, my broker tells me he thinks my loan is going to be denied. He couldn't resolve the DTI issue because the write-offs I had taken on my taxes the previous couple of years made my net income too low. Fortunately, he already had a replacement bank in mind. The bank had just started offering a new loan product where they didn't need to look at your taxes at all... Perfect! He had never worked with this bank before, but he thought it was out best shot. So we withdrew the other application before they could decline me (it's important to do it before because other loan applications will ask if you've ever been declined!) and submitted the new application with the other bank.

LESSON: Have a great team, they will save you if they know what they are doing. Also, minimize tax write offs in the couple of years before you plan on buying if you are going the traditional bank route.

2. APPRAISAL - The appraisal came in at $505k (contract was for $535k). The seller tried to fight it and talk with the bank, but ultimately they stuck with their appraisal. It was very thorough, I had a copy to review. But the seller was really stuck on his price and wanted me to pay the $30k difference to them in a second note outside of the closing. I can't lie, I didn't like the idea, but I actually seriously considered it. I crunched the numbers, and because I was sooo eager to buy, they didn't look too bad to me. So I initially told him yes, but after MUCH deliberation and getting advice, I decided to tell him I changed my mind and I couldn't do it. He said he would have his attorney send bank my earnest money deposit. So I officially walked away from the deal the first week of Dec 2014 and it was the hardest thing to do, I'm pretty sure I cried. I WANTED IT SO BAD! While waiting for my earnest money refund, I figured I'd take a break for the holidays and start looking again in Jan. Two weeks later my lawyer calls me and says the seller agreed to lower the price and sell at $505k with no side deals.

LESSON: Don't be afraid to walk away from a deal. Don't let emotions get in the way (I know it's hard for newbies and your first deal), this is business. The person willing to walk away is the one with the strongest position in negotiations.

3. TENANTS - When I first saw the property in July 2014 it was vacant. The seller offered to help me by finding tenants so that when I closed, I would have rental payments right away. He would rent the top 2 units for $1,850 each (both are 3 bedrooms), and save the 1st floor 2 bedroom unit for me. The tenants would pay for their own electricity and water since everything was separately metered (I asked repeatedly about the water since I knew it wasn't normal in NYC for tenants to pay water... more on that later). So we agreed to him placing tenants with the caveat that I would be able to look over all tenant applications/background checks and give final approval BEFORE the tenants moved in. He found a few candidates but didn't place them because the new Certificate of Occupancy had gotten delayed. He got the CO in mid December, and started looking again for tenants, and found a few. I asked to be updated and to get their background info. Yes yes yes, don't worry, he told me, you will get their application packets soon. After the holidays (mid Jan), I still hadn't heard anything about the tenants, so I called the seller to get an update and that's when I find out one already moved in and the other was moving in that weekend. In my head I'm yelling WHAT HAPPENED TO GETTING MY APPROVAL!?! But I ask him about it calmly and he says "Oh don't worry these are very nice people, I want to pick only the best, a lot of people I did not accept because they would not be good for you, I will still bring you their applications," etc etc. I trusted the seller because he was sooo nice during this process and was a established investor, I figured he would know how to screen tenants properly so I just said a little prayer that he picked good people and everything would turn out ok... I didn't want this to kill the deal a second time.

LESSON: I didn't fully learn this until after closing, but ALWAYS VERIFY EVERYTHING!Don't trust verbal agreements, get it in writing so you have recourse if the other party doesn't follow through. Don't be afraid to ask for monetary compensation if something was not followed as per the agreement! It might seem as if you're being an a$$ but so what, even the "nicest" person has their best interest at heart, not yours. Protect yourself!

Issues After Closing:

1. ELECTRIC - My first electric bill was ridiculously high (almost $500 for half a month) and I got complaints almost immediately from my tenants as to their super high electric bills (almost $1,000!). After countless calls back and forth with Con Ed and having them come out to assess the meters, I ended up needing to get an electrician to come out and take a look. Come to find out, every unit was wired to the wrong Con Ed meter. The 2nd floor was paying for the 1st floor (me) and the hallway (which was wired together with the 1st floor), I was paying for the 3rd floor and the 3rd floor was paying a "estimated" (read: made up) amount from Con Ed since their meter actually was reading 0. By time the electrician had the accounts switched and wired the hallway to a separate box (in which he needed to put multiple holes in my walls/ceiling to do) the bill was almost $2,800 (and yes, I had multiple quotes).

2. WATER - There was a $7,000 past due 2014-2015 water bill owed by the seller. Half of it was from surcharges (which are 100% of cost) for not having a water meter plus late fees. They were supposed to pay the bill in full before the closing, but they hadn't because they were still fighting the surcharges since they insisted the property was metered. So escrow held $10,000 from the seller's proceeds until the water bill was resolved. I got the new bill for 2015-2016 which was another $7,000 (for a total of $14,000), but was told by my closing attorney that the seller was disputing the surcharges, so wait until they got those resolved so the surcharges could be taken off of my bill too. I waited a little, but then started investigating and found out the $14,000 water bill had just been paid in full..... by my bank (they had it categorized as a delinquent tax bill)! So now my loan escrow was $14k negative! After agreement with the seller's attorney, the title company released the seller's full escrowed $10k to me. In multiple calls with DEP (handles water bills in NYC), I found out the reason surcharges were being assessed was because they never received a permit for a meter at the property (the property was built in 2007, so the original developers never returned the permit to DEP). It didn't matter that there was physically a meter present, it didn't count because there was no permit (bureaucracy smh). I got a couple of quotes from plumbers install a new meter w/the appropriate permits. One quote was for $4,200 and another for $3,475. The cheaper quote confirmed that his quote included the cost of the new meter (which is $1,000 by itself!), so I went with him. Ends up, he doesn't listen to anything I said about the meter situation and ends up pulling the wrong permit, which costs about $1,200 and could not be credited to the correct permit (we tried). So he wanted me to pay him an additional $1,200 to cover the new permit that needed to be pulled AND $1,000 to buy a new meter. Because when he told me his quote included a meter, he meant he already had one unused from another job, but ends up that meter is outdated and couldn't be used. So his originally quote of $3,475 ballooned to $5,675 because he didn't know what he was doing.... and he wanted me to pay for his mistakes! ARE YOU CRAZY?!? After a LOT of back and forth we settled at $4,925 (he basically wouldn't make any money off the job - he's a GC who hired the plumber). But once the meter was installed and DEP approved it, I was switched to monthly billing and refunded most of that 2015-2016 bill, including the surcharge fees. I'm now waiting for the credit on my water account to be paid to my bank, applied to my escrow and bring me current.

3. TENANTS - I didn't get the tenants' leases/application packets until closing, not before hand like I was supposed to. So it wasn't until I was sitting at the closing table that I found out 1) their rents were for $100 less than the seller told me they would be, 2) the leases were for 2 years instead of 1 and 3) the leases said nothing about paying for their own water. I was just so upset at the closing, that I didn't think until way after that I could have at least asked for a credit of $4,800 ($200 loss per month for 24 months). Hindsight is 20/20.

So far one tenant has been fantastic and pays on time majority of the time. Even when she is slightly late, she leaves me an apologetic note letting me know when I'd get it. The other tenant paid on time the first two months, then started paying about 2 weeks late every month. They would never communicate, never apologize or tell me when they expected to get it to me. It was as if it was their right to pay whenever they could. I eventually gave this tenant a very stern letter with their rent statement in October, letting them know that they were taking advantage of my kindness and because of the continued lateness 1) if they were late again with parking rent, their car would be towed and 2) if they were late again with the apartment rent, I'd be giving them a formal Rent Demand followed by filing a Non-Payment Petition with the court, which would be on their record whenever they were looking for a new apartment. They've paid on time since then :-) So the seller's choices of tenant ended up not being ideal, but not too bad. I bought in an area that still has growth to do, so there's a certain caliber of tenant. I figured the seller picked well based on the options he probably had.

THE NUMBERS

Purchase Price - $505,000

OOP Closing Expenses:

  • $10k EMD at contract signing
  • $11k cashier's check brought to closing
  • Approx $2k additional in checks at written at closing
  • I didn't have to pay my bank's closing fees (about $16k worth) by taking a .25% increase in my rate (so my final rate ended up being 3.875% - still not bad!)
  • So about $23,000 covered my down payment (which was $17,675) and all non-bank related closing costs.

Monthly PITI: $3,240 (Yearly Taxes $5,240; Yearly Insurance $1,545)

Monthly Expenses*:

  • Water and Sewer - $225 (approx)
  • Common Area Electric - $50?
  • Vacancy @ 5% - $190
  • Maintenance/Repairs @ 10% - $375
  • Management - $0 (self managing)
  • Retirement Account loan repayment - $50
  • Total = $890

Monthly Income:

  • Apt 2 - $1,750
  • Apt 3 - $1,750
  • Parking spot 1 - $100
  • Parking spot 2 - $150
  • Total = $3,750

*I don't know the monthly charge for common area electric, as I haven't been charged separately for that as of yet.

*I believe vacancy rates in NYC are closer to 2%, but I used 5% for cushion.

*Even though I'm not accounting for the management fee, whenever I move out, I will still have positive cash flow if I decide to pay for a PM (but I will prob still self-manage).

*I took a loan from my 403b retirement account to help with the down payment funds, so I included that repayment into my expenses.

I know the numbers officially make me cash flow negative by $380, but I haven't been putting the vacancy and maintenance/repair reserves away like I should, mainly because I've been using them (+ more) to correct all the water/electric issues I explained earlier. But even when I start saving the reserves (which should be soon), my fiance and I will be splitting that $380. So paying less that $200 a month for "rent" in NYC is still pretty great :-)

Plus this leaves the rest of our W2 income to save for our wedding, school, and the down payment on the next house hack (which we will close on together, this first one I closed on by myself). I only plan to be in this house for about 3 years before buying the next house hack, but I'm very eager to continue building my portfolio in the meantime (in the Bronx or outside of NYC - Trenton? Philly?). I want to use the BRRR (buy, rehab, rent, refinance) strategy to acquire more units.

In the meantime... I'm going to start reaching out to leads I still have who responded to that first mailing (I've already checked which ones haven't sold since then), if anyone wants to partner on Bronx 3-4 family properties. I plan to acquire at least 10 units in 2016 :-)

Whew! Well if you've read everything thus far, I commend you. And if you just skimmed through, I don't blame you :-)

Thanks for reading, I hope my experiences and mistakes help someone else avoid them and I welcome any insights/future advice!

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Most Popular Reply

Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
10y

@Nicole (Dunlap) Pendergrass, wow!

I believe your thread title IS and will continue to be: a REAL lie!

A big thank you for sharing the whole story. Onwards and upwards! Cheers...

See this reply in the discussion

71 Replies

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  • Investor · Chicago, IL · Member since 2015 · 40 posts · 24 votes
    10y

    @Nicole (Dunlap) Pendergrass True Grit!! Good luck this year!

  • Investor · San Jose, CA · Member since 2015 · 64 posts · 26 votes
    10y

    What an entertaining post with good lessons to boot! Congrats on a great investment.

  • Chris K.Pro Member
    Investor · Baltimore, MD · Member since 2012 · 1k+ posts · 655 votes
    10y

    Never feels good being lied to....but congrats anyway

  • Youngsville, LA · Member since 2016 · 1 post · 0 votes
    10y

    Wow...First time here. Looking to get in the business! What a great first story. Can only imagine how fustrating that journey  could have been! Any advice on getting started before I jump in?????

  • Rental Property Investor · Durham, NC · Member since 2014 · 1k+ posts · 1k+ votes
    10y

    Great work @Nicole (Dunlap) Pendergrass.  This is definitely NOT a fail story.  Its success all the way, baby!

    I'm excited for you. 

  • Rental Property Investor · Bronx, NY · Member since 2011 · 193 posts · 322 votes
    10y

    @Kevin Wilson Depends on where you're at and where you're tryna go :-)

    But generally I'd say make sure you read the fine print, don't trust anyone's word w/o verifying (get it in writing), don't be so eager for your first deal that you do a bad one, and don't give up!

    :-) 

  • JD MartinBusiness Member
    Moderator
    Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
    10y

    Actually a quick look your numbers don't appear so bad, since you are eating up some of the rental profit by living in one of the units; if that were not the case, it appears you'd have at/close to $1000 cash flow per month. And you learned a lot, and yes, renting for $300/month in NYC is pretty nice figures. 

    Skyline Properties
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  • Rental Property Investor · Bronx, NY · Member since 2011 · 193 posts · 322 votes
    10y
    Originally posted by @JD Martin:

    Actually a quick look your numbers don't appear so bad, since you are eating up some of the rental profit by living in one of the units; if that were not the case, it appears you'd have at/close to $1000 cash flow per month. And you learned a lot, and yes, renting for $300/month in NYC is pretty nice figures. 

    Yep, my unit would rent for $1,500-$1,600 so I'd have about $900-1,000 in cash flow.  But once I actually move out (in about 2 years), rents will have increased so I'll have little more than that :-)

  • Melbourne, FL · Member since 2015 · 7 posts · 1 vote
    10y

    @Nicole (Dunlap) Pendergrass Thanks for sharing your FANTASTIC story. I think the overall message here (to me anyway) is that REI is full of ups and downs, but perseverance is key. Also, I'm sure you learned a ton throughout this deal and it will help you with deals to come. Living in the Bronx for $300/month is superb!

  • Investor · New York City, NY · Member since 2013 · 263 posts · 141 votes
    10y

    Congradulations!!!

    Yes some nice people will scam you, I experienced it in my situation too.  There is so much that I learned that books and gurus will not teach you.

  • Rental Property Investor · Milwaukee, WI · Member since 2014 · 63 posts · 16 votes
    10y

    Great story, keep it up!

  • Chicago, IL · Member since 2015 · 6 posts · 1 vote
    10y
    Awesome post! Thanks for sharing
  • Matthew WeiserPro Member
    Investor · Flushing, NY · Member since 2013 · 175 posts · 29 votes
    10y

    Congratulations @Nicole (Dunlap) Pendergrass on a great house hack in NYC! I'm trying to do the same thing in Nassau county

  • Lincolnton, NC · Member since 2015 · 6 posts · 0 votes
    10y

    WOW, THANKS!

  • New to Real Estate · Colorado Springs, CO · Member since 2015 · 125 posts · 86 votes
    10y

    I love, love, love the detail you put into your post. Way to go above and beyond to provide a great example of your first experience, and I think there's so much value in being straightforward about all the bad stuff and stress that comes with just getting started. Best wishes to your continued success.

  • Specialist · Lakewood, CO · Member since 2014 · 1k+ posts · 1k+ votes
    10y

    Absolutely amazing! Thank you so much for sharing. I closed on a 3-plex almost a year ago, found heavy termites, then it flooded, then both of my tenants broke lease to leave. The next time rough stuff happens, all you'll be able to do is giggle because it will seem so petty  ;)

    Great post, great information, great job  :)

  • Investor · Los Angeles, CA · Member since 2015 · 17 posts · 7 votes
    10y

    Thanks so much for sharing! I'm about to contract for my first multi-family, so this is very helpful. Also, I'd be interested in your next Bronx investments, so let's connect!

  • Rental Property Investor · Bronx, NY · Member since 2011 · 193 posts · 322 votes
    10y
    Originally posted by @Bryan O.:

    Absolutely amazing! Thank you so much for sharing. I closed on a 3-plex almost a year ago, found heavy termites, then it flooded, then both of my tenants broke lease to leave. The next time rough stuff happens, all you'll be able to do is giggle because it will seem so petty  ;)

    Great post, great information, great job  :)

     WOW... all my issues seem completely trivial compared to that... that's insane!

  • New York City, NY · Member since 2015 · 95 posts · 39 votes
    10y

    @Nicole (Dunlap) Pendergrass  Awesome post - tons of good information.  Persistence pays!  Plus in NY it's really hard to cash flow - so good job!  You'll make a lot on appreciation for sure.  The Bronx is doing great and will only go up up up.

  • Real Estate Investor · Lake Wales, FL · Member since 2015 · 12 posts · 1 vote
    10y

    Thank you Nicole. I read every word and I will take them all to heart. I appreciate you being so detailed both with your successes and mistakes. 

  • Kansas City · Member since 2015 · 23 posts · 13 votes
    10y

    @Nicole Dunlap. Great post and lots to learn from your experience. I have to admit that when I read about the wiring and water meter issues, I wondered if you'd gotten an inspection :-)  I too have a goal of purchasing my first multi-family property by May or June of this year and your story reinforced how important it is to be prepared for the unexpected.

    Thanks for sharing and glad it all came together!

  • Nicole O.Pro Member
    Atlanta, GA · Member since 2015 · 29 posts · 5 votes
    10y

    Very insightful, it brings to mind this quote...  "Hope for the best, but plan for the worst."

  • Brooklyn, NY · Member since 2016 · 6 posts · 1 vote
    10y

    @nicoledunlap what a fantastic story. Very inspiring especially for a newbee trying to start out. 

  • Investor · Bloomington, IN · Member since 2015 · 195 posts · 36 votes
    10y

    Awesome work! Sounds like you have your fair share of issues with that purchase.

    One question, are you accounting for cap ex in the maintenance/repairs? 10% seems a little low for maintenance/repair and cap ex. I know rents are a lot higher then my area, but I think the cost of a new roof/HVAC is probably going to increase as well in the city?

  • Puyallup, WA · Member since 2013 · 2 posts · 2 votes
    10y

    "I actually spoke to someone at DEP (water) about the new CofO and who should be responsible if they were supposed to sign off on the meter, etc, and he admitted they (DEP's inspector) would be responsible....

    LESSON (again lol): Even though the city can be bureaucratic and make you jump through stupid hoops, doesn't mean all their employees will check everything they are supposed to before signing off."

    Never trust the utility companies, building departments, city/county employees, etc. to do the job they ARE PAID TO DO! And never, ever, ever, ever trust building inspectors to PROPERLY inspect anything! They hardly ever do the job they are there for. On top of that, you will never be able to hold them or the building department liable for anything. Being a general contractor has proved this to me time and time again. We used to purposely leave something structural for inspectors to call, just to see what would happen.....never once did they catch it! I've even seen serious health problems affect tenants because the inspector called ventilation issues on new construction, but never checked to see if it was corrected by the contractor....signed it off and gave CoO....poor tenants paid the price with health problem due to toxic mold. The price of a GOOD, TRUSTWORTHY contractor to handle the job, or at least to come in to independently inspect your contractors' work, is well worth it. 

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