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So this BRRRR starts off with me freshly having my real estate license. I went and aquired my real estate license because I definitely planned on doing some serious investing. I wanted the freedom to be able to go see properties on my schedule and not to wait for a realtor.
From my previous BRRRR, you might know that I like townhouses in the Chicagoland area, specifically on the south side because they are undervalued and the cash flow is good. (If interested in my first deal: https://www.biggerpockets.com/forums/850/topics/662940-my-first-brrrr-success-or-failure-lots-of-details-and-pics?highlight_post=3938383&page=1)
The next property that I purchased was a 2 bedroom 1.5 bath townhouse as well. It was about a mile south of the first one I bought. This property was listed on the MLS originally for $49,500. I noticed the agent who had the property listed was dropping the property price fairly quickly and consistently. I would notice the price change from anywhere from $500-$1500 every couple weeks. This let me know that the seller was in a hurry to unload the property and might even take a little bit less for it. The property had been on the market for about four months before I finally made an offer. I offered $35,500 and we agreed on 38,500.
Small problem: When I went to sign the contract, the agent had a addendum that he wanted me to sign. The way that I interpreted it was that he would only warranty the property within the time period in which he had it and accepted no liability for anything that encumbered the title before he had possession. My attorney did not see it this way and he strongly advised me not to go through with the deal. His interpretation of the addendum was that they avoided all liability even during the time period in which they held it. Having a strong allegiance to my attorney, I took his advice despite the fact I disagreed.
I continue to watch the price on this property drop and drop some more. Once the price got under 35,000 a month later, I decided to consult another attorney about it. They agree with my interpretation. So for this one deal I had to use a different attorney and we agreed on a price of 33,900.
This property was in fairly good shape. One of the things that I love about these townhouses is that the rehab is typically cosmetic. These townhouses were built in the 50s-60s so the have electrical panels versus fuses or cloth wiring, drywall versus hot plaster walls, and sometimes copper plumbing. There was already ceramic tile in the kitchen. The furnace was working (No A/C) and hardwood floors one the first floor. For any property that I’m rehab, there are some things that I just cannot do without. I must finish the hardwood floors, paint the entire house, order appliances if none are present, and granite countertops. This quickly turns into a 20K rehab very easily.
I tried to salvage the cabinets I could but I had to order some new cabinets because the top ones were really old. I actually wrote a post about needing help with the cabinets (https://www.biggerpockets.com/forums/52/topics/660143-kitchen-help-this-cabinets-did-not-turn-out-as-expected).
Despite the fact that there wasn’t much to do, it still took three months to renovate. Finding good contractors was still a struggle and I didn’t want to rush it. I had one contractor doing mostly everything with no help.
Here’s the breakdown of what I spent:
I found a tenant in the first couple of weeks and rented the location for $1000. I actually put a stipulation in the lease that says if I installed a A/C, then the rent would go up to $1050. To be completely honest, I probably could've found a better tenant and probably should have found a better tenant. It's took a lot for me to admit that I made a mistake to everyone here but this is where my excitement and enthusiasm for real estate investing begin to get the best of me. I started skipping steps in my screening process that I should not have skipped. I had begun my third BRRRR during this time and was in a rush to focus on that one. I took a tenant that under my normal screening criteria, I would not have taken. The biggest steps were accepting a lower credit score and no home visit (I like to visit the prospective tenant home to see how they will treat my property). Later down the road I discovered that the company I use for my credit and background checks didn't include bankruptcy and evictions (that's an separate charge). So now I have less than an ideal tenant in my property. They have paid every month but I feel like I am just waiting for the tenant to go bad. So I am not spending any of the cash flow in preparation of an eviction. More importantly: when you lose, don't lose the lesson. -The Dalai Lama. I've created a document that I fill out every time I screen a potential tenant. If I don't fill out this sheet, then I am asking for trouble.
Not all appraisers and appraisals are created equal. I was confident that I was going to get the appraisal that I wanted on this particular property. I used the same specific criteria the last appraiser used in my first BRRRR. Based on the comps that I pulled, the ARV should have been anywhere from $90,000 to $100,000. So of course, this appraisal comes back at $68,000. The biggest difference with this appraiser in the last appraiser was that this appraiser refused to leave the neighborhood in which my property was located in. Only four townhouses had closed during the last six months for an average of $68,000 and the appraiser only used three. I immediately challenged the appraisal based on the following reasons:
"I feel the comparables that were used were low for the amount of rehab work I did to the property. I feel that the appraisal could have included higher comparables that have similar bedroom and bathroom count. Furthermore, one could make the argument that if properties similar to my property have a sell price of $85K, then comparables must exist to justify that price considering it was financed with a loan. Using the limited area of Avalon Park for comparables, only 4 townhouse have sold in the area in the last 6 months. This forces a lower appraised value. I strongly believe that at least 6 comparables should have been used. I've attached a copy of a CMA with several properties I would like the appraiser to take into consideration when evaluating my property."
The appraiser responded with the following statement:
“Reconsideration of value.
The borrower states that using comps that sold in the subjects market area forces a lower appraised value or what we appraisers call an appraisal.
Location is still the most important factor in all appraisals. The subject was purchased in 2018 for $33,900, not as a foreclosure or short sale and has updating work completed since that purchase, and saw a 50% increase in value. All the comps used are similar in condition. The cost of rehab work is worth what the market pays you back for that work and not for the cost of the work.”
He went on to disregard the other comps based on location and included the one property that he missed with raised the value to $73,000. So the first appraisal I stayed in my immediate neighborhood and the appraiser went 3 miles south of my property. For this appraisal I expanded the radius but was told that's too far. Inconsistency between the appraisers definitely hurt my property value. Nevertheless, when I look at the totality of my investment, It is still a solid investment. I am still looking for that perfect BRRRR with no money into the deal but what I have into it isn't so bad. So I will take my returns and move on to the next one.
View Photos Here: https://www.icloud.com/sharedalbum/#B0XGqkRUiGbzyj...
Hey @Martin Neal - congrats on your second deal! I definitely know how it goes with appraisals. 2 years ago I purchased a 3 flat in Pilsen and for the construction loan we needed a subject-to appraisal. The appraiser came back with a $360K valuation, subject-to. I was buying it for $350K and it needed to be completely gutted so you can see why this was an issue lol. I appealed the appraisal and unfortunately I was unsuccessful so I had to find another bank. Within a few weeks I had a new appraiser out there that appraised it for over $700K. Same property, same market, same scope of work, just different appraiser. Crazy how that works!
I do agree with your second appraiser on one thing though. Location is everything and in the city, 3 miles is like a different country. It definitely gets tough though with unique properties when there's nothing within .5-1 miles.
Best of luck to you on the next one!
Really love your posts! I'm planning on getting into BRRRR soon in the Chicagoland area, so it's really nice to be able to read about your process in doing it.
With the lack of appraisal coming through and some of the issues with rehabbing, what are some takeaways or things you've learned for the next deal? I think the benefit of doing it this way, is that you get to understand what works and what doesn't and create systems for the next one, each successive BRRRR gets better and better until it runs like clockwork and you can really start scaling as quickly as possible.
I started to realize that I was running a construction company as well as a rental business. While I can rely on one guy to do everything, it's not the most efficient way to get things done. I save a couple of dollars on the front end but lose time and money on the back end. Also, I would have to find new contractors if and when that one guy who was doing everything walks out (which is what happens in BRRRR #3). I started to create manuals and an materials book to repeat the same process with each property. As long as I invest in these type of properties and in this price range, I can't rely on the appraisal at all. I need to be prepared to leave money in the deal each time. Combine that with everything from the first BRRRR and the information begins to compound.
@Martin Neal I love your line of thinking process when you look got build a systems and process including feedback loop to improve your systems and process for the next BRRRR investing. Great insights! Thank for sharing your experience with BRRRR method.