How much to pay for 4-unit REO

Question

I just viewed a 4-unit REO property that will come on the market tomorrow. It's in good shape structurally except for frozen pipes, which is a pretty big deal. Cosmetically, it needs a lot of work. I estimated $22K worth of work, so I'm factoring in $35K to be safe. It last rented for $600/unit including gas and water. This was over 1.5 years ago before the foreclosure. I was planning to put in electric water heaters or possibly even get it metered separately. Since it's been vacant for so long, I can't get an accurate rent or utility bill number, but I think the $600 with gas could be raised to $625, since this is a strong rental market. I think they could bring $550-$575 w/ no utilities included. The agent expects a list price of between $60K-$80K.

Will Barnard · Answer

Peter adds great advice. In fact, one of the biggest reasons an investor fails is that they underestimate repair costs and thus, overpay for the property.

Re-piping 4 units will not be cheap and you have to factor in that you will need drywall replacement and then painting. All in all, this could easily hit you with the $22k on its own.
It is dangerous waters buying utilities paid by landlord as tenants can run up your bills with little recourse for you. Seperate meters is the way to go, but doing so will cost you.
Unless you steal this one from the bank, you may need to move on. You should be an experienced rehabber to take on such a project in my opinion.

Peter Giardini · Answer

My biggest concern is that you have under estimated the repair costs.
          
          Frozen pipes are a very BIG issue because you have to take the place apart to find and fix them.  It is almost easier to just replumb the entire building instead of chasing leaks through the walls.
          
          Also, to separate the gas and electric (a very good idea) is not going to be free.
          
          You should be able to figure out the rents in the area by contacting other realtors or calling For Rent signs.  Be sure to ask what the rents are with and without utilities.  Also, you didn't mention how many bedrooms are in each unit.
          
          As for the offering price... It depends on verifying the rents and then being absolutely sure about the renovation costs...  I probably wouldn't offer more then $45K... but I doubt the lender will be motivated enough at that price to bite.

Jon Holdman · Answer

At $550 a month you're right in 2% territory.  Without grubbing through all the math, about $25K per unit should be OK.  So, if it needs $35K in work, your max price would be about $65K.  If the work is really only $22K, then you could go $78K.  You should really narrow down that range, since it looks like that make be the difference between getting it or not.

I'd certainly split up the utilities, assuming the rental market will handle it.

You should also figure out and ARV for this property.  Stay under 70% of ARV, including repairs.

Mariah Jeffery · Answer

Thanks, all. The realtor estimated ARV at about $160K with huge upside potential, since this is zoned commercial. There are four houses right in the middle of a bunch of business. It's also within walking distance of a college. It was last purchased for $110K in '97.

Units are 2 bed, 1 bath 590 sq. ft.

I mentioned my educated guess on the rents, and the realtor agreed with me. I have other units of similar size about 2 miles away, so I feel fairly confident about the rents. I don't feel confident on fix-up costs, since I've never done a major one. That's why I'm trying to be conservative.

The $22K is roughly as follows:
$5K - new shingles (this is a quote from a contractor)
$5K - conversion cost to separate utilities + new water heaters (will definitely either separate the utilities or buy efficient, tankless water heaters)
$4K - plumbing
$2.5K - new carpet and paint (needs carpet in 1 unit only)
$2.5K - 4 new tubs, toilets, sinks
$1.5K - sheetrock
$1K - landscaping
$500 - new fixtures, misc.

Some of these costs are low because all of the work is being done by my father in law and/or his friends, who give us great deals on labor.

Peter Giardini · Answer

Just to add a quick "lesson learned"...

The very first multi-uint we did, a 5 unit, we estimated repairs at $65K.  When all was said and done... and having almost bankrupted our business... we spend over $110,000 on the renovation.

Will's comment about haviing experience is dead on!

How much to pay for 4-unit REO

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