Need Advice on Offloading a Property

[Eric Boshart]

Hi BP Community, I am currently in the process of offloading a property in north Texas. It was one of the misses my brother and I have experienced throughout our investment journey, and it really forced us to eat some humble pie. We're much better investors because of it, but the process has been pretty grueling. I'd love any and all advice. I'll try to keep the details short.

Last year we purchased a portfolio: a single family home, a 6-plex, and a 5-plex. They were in such bad shape that we were considering tearing all of them down. However, we got a really good quote from a contractor we trusted, so we decided to move forward with repairing them. The plan was to BRRRR this portfolio. This was our first dabble in commercial properties, and it was our contractor's first dabble as well (Mistake #1). We also decided to use the architect the previous owners had used because he already had drafted a set of plans for each property. This would save us some money. We didn't know that the city didn't like those plans (Mistake #2).

The contractor eventually was in over his skis between having to increase the diameter of the public sewer line to ADA compliance to the required indoor sprinkler systems, so a few weeks after closing on the property, he had to walk away from the project.

As we scrambled to find a new contractor and to get our plans approved by the city, our holding and soft costs ballooned. It took six months to find a contractor we trust and to get the city to give us a thumbs up. 

Once we did start the work, prices for material and labor had skyrocketed. Because of this, we used locals for the unskilled labor (demo and clean-out), but because I live an hour away from the property, I wasn't able to monitor them closely (Mistake #3). They had only completed half the work of cleaning out, so trash and debris were scattered throughout the lawn. The city did not like this at all and fined us heavily. We then had to pay twice for the work.

We also had used a lender that had good initial terms but were very strict and delayed about releasing reimbursement funds for the rehab completed (Mistake #4). This put us out of pocket considerably and hurt other areas of our business.

Eventually we decided to offload the properties. We put it on the MLS and got no real offers because of the amount of work it would take to fix these, and because we had civil penalties imposed already, when people called into the city to inquire about the property, they would tell them that it's under close watch from the building inspectors, which no investor wants to hear.

We decided to delist and offload them off the market at a reduced price, and eventually got all three under contract. The buyer was using a bank line, so it was a 30-day close with inspections and appraisals. Much to our surprise, the single family appraised less than what he was buying it for, so he only picked up the 6-plex and the 5-plex.

We have now gone through about 10 wholesalers trying to offload this single family home at our payoff amount with the lender and have had no luck. Even at that number, we will still be losing a good amount because of all the holding costs, city fines, the work we put into it, and the construction fence the city forced us to rent.

We are considering putting it back on the MLS at a further reduced price, because it has been about 7 months and we know market conditions have only improved, but with both the over-exposure in the off-market world and the city deterring potential buyers, it's tough to see this actually being sold. We also no longer have the cash to rehab this ourselves.

We explored tearing it down and selling the lot, but the lot comps in the area are very weak.

We can get foreclosed on, or close at a heavily reduced price and refinance our personal homes to meet the payoff amount at closing, but we are trying to exhaust every option before doing either of these things.

Is there any other option I am not exploring here? We still think it's a viable deal for a skilled contractor to take on and flip, supported by real comps. Plus, we went through the headache for getting the plans approved, demo, clean-out, foundation, and roof. Now it just needs a fresh pair of hands to realize.

As mentioned, we have grown so much as people and as investors throughout this process. We can gripe at the city and the contractors and the lender, but responsibility is 100% on my brother and I. We can't wait to get back out there and find some good ones!

Thanks for reading.