Smells like a rose or a fish?

Question

The numbers on this deal seem excellent, but I need help on due dilgence.  This smells fishy to me.
          
          Tri-plex with 1/1, 1/1, and 2/1.  Rent $400, $400, $500. REO asking price $35k, located in neighborhood of $35k SFRs.  Tri-plex is a converted 1900's SFR.
          
          2% rule: 1300/35000 = 3.7%.  NOI = $7,800 (50% rule).  Rehab cost is unknown at this point, assuming $30k rehab and it still meets 2% rule.
          
          Trulia claims it sold in June 2009 for $300k. 89% depreciation in 5 months! How is that possible?  Also, even if June buyer never made a single payment can they foreclose quickly enough to have it back on market in November?
          
          Things I need to research:
            Rehab costs.  
            Is the tri-plex conversion legal?  Could they make me unconvert?
            Check for mold, dry-rot, termites, toxic waste, lead, and asbestos.  
            Have professional building inspection.
            Roof inspection.
            City has new ordinance requiring all rental property to be 
              inspected and brought up to code (I'm surprised that's legal).
              Find out implications for this property.
            Anything else?
          
          Comments?  Am I going to regret this or love it?  What's the gut feeling of the experienced people here?

Brian Levredge · Answer

I would be take a good look at the utilities and how they are metered if this is an old conversion.  If they are land lord paid utilities because they are not separated, you can end up with some really high expenses since old homes bleed a lot of energy if they haven't been updated.

Steve L. · Answer

The 300k sale you see on Trulia is probably the bank taking it back.  They numbers that it show have nothing to do with anything.

From a numbers standpoint it looks good.  You have to be careful with really properties this age, hopefully everything else in the neighborhood is a similar age.

Also, you mention that there are not a lot of other triplexes in the neigbhorhood.  That is not good, even if it is legal, you don't want to be the weird property on the street unless you can profitably fix it.

Your first stop is to check if it is a legal triplex.

Good lucky.

Ralph S. · Answer

Truliaâ€¦..  The Assessor will have the actual sold dates and amounts.  Your agent should also be able to provide assessment and sale histories.

Check with Assessor and City Inspection people.  Zoning will tell you if it is zoned one or three family.  That will tell you whether the conversion was permitted or not without tipping off the locals.  As Jawsette said, determine if any code violations exist.

If the rehab looks to be in the $30k range on a former SFH, thatâ€™s considerable, and likely to require permits.  If so, you may have to bring things up to code anyway.  Another discussion for local authorities.  If the conversion was unpermitted, and you let the cat out of the bag, they could force you to comply with zoning, or allow you to legally convert now, but the latter would require current code compliance.

Donâ€™t forget DD on the rents.  Research if you arenâ€™t sure.

Iâ€™d raise my eyebrows, too, if the neighborhood is SFRâ€™s are in the $35k range and theyâ€™re asking $35k for the former SFR that needs significant repair.  Might want to argue and support a lower offer price.

Love the older ones.  If youâ€™ve got the stomach to work through the rehab and all those joys, they can be a solid performer.

Jim Wineinger · Answer

I have advised others, and would think that this should be your very first stop, to see the county/city building inspector and verify and code violations recorded against this property. A decent conversation with him/her and you will find out much of what you need to know.

Also stop by the assessors office and pull all the plans for this property, including when converted, if converted, to triplex.

I am currently doing this with an home built in 1900. Rewards are often that the construction back then were more solid than some of what we find today, even though they were not as energy efficent and often wired for 110 as opposed to 220.

Downside was that the bedrooms were built much smaller than we are used to today because their activity was in the study, den, or family room. Bedrooms were for sleeping and not much else.

Account Closed · Answer

dennis, there's another thread on here about slumlords...check it out

Jeffrey K. · Answer

Sound advise Dennis.

Dennis Treacy · Answer

For that price I would buy, fill the place up and collect the money. What is the worst that can happen? Just don't take the place in your personal name and everything will be good.

Robert Mayo · Answer

Thanks guys for the advice!  It turned out to need more rehab than I am willing to manage.  No bathrooms or kitchens, but some of the rough plumbing is there (not all).  Heavily patched exterior siding, mold and dryrot in places.

Jim Wineinger · Answer

City has new ordinance requiring all rental property to be 
inspected and brought up to code (I'm surprised that's legal).

In light of this "new ordinance" they should make the owner of the REO update and bring the property up to code in order to sell it or the ordinance is unfairly applied and can be challanged in court easily!!!!

Robert Mayo · Answer

I found the ordinance online, and it doesn't look too bad.  It requires compliance with the code in effect as of the date of construction, which in this case is circa 1908 for the main structure and who-knows-when for the conversion.  In addition, it requires inexpensive safety items like GFCIs and smoke detectors.

Smells like a rose or a fish?

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