Wow, what an action-packed few days. I finally got hold of the owner Friday evening, and we talked for a while. He told me the house originally belonged to his father, who was a pastor. His father decided to convert the house into multiple units, so that he had steady income for retirement. Shortly before his father passed away three years ago, his father had sold the property to an aspiring rehabber for $85,000 ($10k down, and owner-financed the rest). The property was in terrible shape even then. The man said the new owner was paying regularly, and then just all at once stopped paying, so the mother had to foreclose to get the deed back. It turns out, the rehabber who bought the place got several tenants in before making the place habitable again. The city caught wind of the situation, and kicked everyone out and fined the rehabber. This was last year, and the place has sat empty since then. The owner said that HE had a relative change the price from $45,000 to $29,000, so I got really excited. I asked if I could see the inside the next day, and he gave me the combination to the front door lock, since he was in an accident last year, and is now immobile.
Whe we got there, I started taking a lot of pictures (~125), which I'm still trying to organize. The next door neighbor was in his yard, so my in-laws and I started talking with him. It turns out HE was the one who called the city last year, because raw sewage was running into his yard from the place. He also said the rehabber tried to just paint the place, but it requires a lot more work than that. He even said that he was going to buy the place, but didn't have the money to put into fixing it up. He also said that there were three families living there when the rehabber had the place. All of them were illegal aliens, he thinks. And one family had a small child (5-6 yrsw old). He said one day, the parents were out working and left the child alone. Some teenagers broke in the place and molested the child. How sad. Coincidentally, when my FIL and I went into one of the upstair units, we found a picture of a young boy that was taken in the unit. I'm guessing this was the young boy the neighbor spoke about. Looking at the place, I could only imagine what horror the young kid went through and what emotional damage it caused. The neighbor also mentioned that since it's been empty, druggies and cats use the place now. Wonderful.
After talking to the neighbor for a while and taking a lot of pictures of the outside, we went inside. I thought the outside was in bad shape, but the inside was even worse. The place will probably have to be fully gutted. It smelled of nothing but mildew and urine. All of the upstair windows were either completely gone, or severely damaged. Even the bottom floor windows will all need replaced. I couldn't even begin to describe the place, and it's better to see the pictures to get an idea of how bad the place really is.
Link to Pictures
I had promised the owner I would call him back, but I needed the remainder of Saturday and most of Sunday to let everything sink in. From my quick estimations, I figure the place will need at least $50,000 in repairs, and probably a LOT more. For the outside, it will need a new roof, new siding, windows, general clean-up, utility connections, and so on. I figured roughly $25,000-$30,000 just for the outside. The owner claims soneone releveled the place 25 years ago to try and get the warp out of one of the unit floors, but the leveling didn't fix the warp. Who knows how much it will cost to get that one problem fixed as the warp rises above the floor about 3-4" for about 10'. There are also places in the second floor that require extensive repair to the floors, walls, and ceilings. For the life of me, I cannot imagine ANYONE actually lived in this place for even a day, but my MIL said illegal aliens will stay in places like this just to survive.
Like I said, the inside will need to be almost completely gutted and redone. I figure I'd have to get plumbers and electricians in just to make sure those things are up to code. Some of the places I was actually afraid to step for fear of falling through, so I'm guessing a lot of reframing will have to occur to support the place better. Almost all the cabinets in the baths and kitchens will need replaced as will the sinks, toilets, and tubs. I'd also have to get new appliances for all the units. Two other major quirks are the heating and A/C. The place has no central heat/AC - cooling is by window A/C units, and heating ... well ... it looks like half the units have wall heaters and the others have nothing but a gas outake. That would have to be another hurdle to cross.
So you can see how extensive this project would be. I think my $50,000 repair estimate is actually too low given all the work involved, and NOT including any surprises along the way. Perhaps $80,000 would be a better estimate. As I said before, comps are next to impossible, but I'm figuring about $175k-$250k, and perhaps more. Me being low on cash reserves as it is decided to see if the owner would strike a deal. I would offer him MORE than his asking price, however, my concession would be a low downpayment and finance the remainder.
So, I call the owner on Sunday evening, and I start fluffing my side up in the hopes that he will see my viewpoint and go along with owner-financing the place. I thank him for giving us the combination so we could see the inside. I then tell him the inside was in a lot worse shape than I even imagined. I also tell him we found out about the city kicking the people out and almost condemning the place. I then ask him if he could be flexible in his sell price. He tells me he's already dropped the price a lot from $45,000, and the price it is now ($29,000) is how much the land itself is worth. Seeing that he won't budge in his list price, I then ask him if he'd be willing to have me give him a low downpayment and finance the rest for 2-3 years with a balloon at the end, since I'll need a lot more money now to make repairs. He balked almost instantly and said he has other people interested (hmmmm). I then started closing the conversation. I thanked him for his hospitality the last few days, and told him I completely understood his position. I then wished him luck trying to find a buyer and if he didn't have any success, I would always be interested (a huge gamble on my part). He then asked me if he were willing to do owner-financing, how much the monthly payments would be. I slipped here, and should have just told him it would be negotiable, but, instead, told him probably $150-$250/month. He then thanked me, and we traded niceties to each other and parted ways.
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3 comments:
Wow... Lovely wood paneling! :-)
If you end up with this property, I would hire a contractor to handle everything. There are probably too many things for a non-professional rehabber to keep track of, not to mention who knows how many code violations that need to be fixed. But try to find a good contractor - talk to other REIs if you can.
I don't believe the guy has other offers. Since you have the combo, you might want to get a contractor in there and have him give you a rough estimate of the repair cost. Then, when the owner calls you back, you'll have a better idea of the finances of the place. You can also then change your monthly payment figure, telling him you had a professional give you a repair quote and that required you to recalculate.
Would you fix and sell or fix and rent out? It looks like the unit might be metered individually, which is good for renting. Of course, selling will get your money back the quickest and is probably the route I would go, if your comp figures are correct.
Yeah, I got a kick out of the "workmanship" that went into the place, too! :-)
I'd definately hire a GC to handle everything i nthe house. I never thought of sneaking one in now that I have the combo - thanks!
As far as an exit strategy, I would definately like to do a fix-n-flip as we will be neck deep in debt. I figure if I could get it fixed and sold within 6 months, I would net a minimum of $50,000, and probably a lot more. This could be a good seed for future properties. My wife, on the other hand, once ALL of our acquisitions for now on to be fix-n-holds. I'm a little leary of this one as a rental, because the rooms are awfully small. All the units downstairs are 2/1, and all the ones upstairs are 1/1, so the NOI won't be huge. I figure about $500-$600 for the 2/1's and ~$400 for the 1/1's, I hope. After all the expenses, and debt service, I'd be lucky to pull $500/month in profit for the first few years.
BTW, gas and electric is metered separately, but water (and sewar?) isn't. I'd have to charge a flat fee for all tenants for water, I guess, or have the contractor rig something up.
One thing I noticed after posting the pictures is the camera sure makes the place look BETTER than what it is. The upstairs is definately better than the downstairs, but both are in worse shape than they appear.
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