Adding a Unit to a Duplex to Make A Great Deal!...Or not...

[David Drew]

So, I've been listening to the Bigger Pockets Podcast for two months, reading books, posts, going to REIC meetings and analyzing deals, all in an effort to make the 'best offer' and close the 'best deal', on my first deal. Sure, it's a newbie illusion and I realize that any successful investor has surely experienced the same the thrills and frustrations that go a long with 'taking the plunge' into REI. I'm seemingly deep in the woods at this point and the trees are all starting to look the same. Or do they?

Over and over I hear, 'Get into Action,' 'don't be paralyzed by analysis,' 'just make the deal!', and while I hear those messages, I'm also starting to notice specific aspects of certain deals that seem to be shining out.  One of those gems I noticed (which was a tip I took away from a podcast...can't remember which one) noted that great deals are often made when the buyer can see things within the deal that others can't.  I'm brand new at this, so I don't know what I don't know yet, but when I saw an old/vacant third unit in a fully rented two-family, I was all over it.  The house would cash flow nicely without the third unit, but was this the gem I was looking for?     

In this case, the third unit had been condemned for many years.  The town rezoned the area to Single Family and the property was grandfathered in as a two family.  This meant that a three family was illegal.  I wasn't satisfied with that.  It simply wasn't logical to me that a unit could just sit empty like that.  Granted, it was trashed and condemned for a reason - down to studs - and I could see the outside, from the inside!   

I went and introduced myself to the Town Code Director and she gave me the history of the property.  She seemed to take a liking to me and when I asked her if there was a way that I could get this building re-zoned, she said it would be difficult.  I still was not discouraged.  I kept going.  I had a Contractor come over and give me an estimate on the renovation of the third unit.  It was going to cost $20k but according to my analysis, it would payoff quickly.  There were very apparent structural issues.  Again, I went back to the town and asked for all the records they had.  One of the documents was an engineering report referencing the existing two units and how they had been restored to certified occupancy.  There was no information on the third unit so I inquired about obtaining a Zone Variance which is the exception that would be needed to  restore the property to a three family.

I spent long nights reading the Zoning Board notes form meeting past, looking for a good strategy.  In case my good looks failed to do the job, I wanted to see what other petitioners had done.  I found very few examples that fit, but I was able to get the name of an attorney who represented investors in the noted proceedings.  I called her and she said I had a good chance of getting the variance, which she'd guide me through.  She also suggested that I should represent myself in the proceeding...Zoning Board Officials were regular folks like me, and her presence might tend to formalize the meeting... Being satisfied that I had a good chance I decided to make an offer.  

The Seller accepted my offer but he needed some time to get the leases reviewed and have the tenants initial lead and addendum F stuff.  It took a while and when the seller delayed on signing a basic contract amendment, I kept at my research. 

I called the Engineering company who had done the report I saw about the existing two units.  They told me there was another report on file but it wasn't public record.  I asked who had ordered it and found out it was a local home services company.  I called the person and asked him to release the property report to me (which had been completed about 6 years ago, much later than the original report that was a part of the public record).  He did and the firm sent it to me.  When I read it, it stated that the third unit should have been torn down many years ago and that the property was a veritable liability altogether!  It was in total disrepair and the main problem was in the slab foundation.  My dreams of the best deal for my first deal were dashed.  After that, and during an uncomfortable delay in the contract agreement, I withdrew the offer.  I didn't want to risk that the third unit (which was about 40% of the structure) would cause the rest of the property to fall into decline.   

As I lamented about the whole process, all the wasted work, wasted research and time I spent NOT making a deal, I was reminded by a trusted, guiding voice in my life (my wife) of the reality of the situation...  The fact was, the deal wasn't meant to be but I still got more than I bargained for:  I had built relationships with a top town official, the top local zoning attorney and an engineering firm.  I gained the experience of investigating property history and contract negotiations.  I made an offer and listened to my gut when it told me to get out while I still could.  Frustrating, yes.  But overall, rewarding and experiential.   

I was back at it that day, looking at new properties the day after and now, two weeks later, I just made another offer on an even better deal.  Here's to research, luck and listening to the gut!...And to knowing that as a Buyer and Investor, I have the leverage and the power to keep going.