First Deal Frustration: What did I do wrong?

[Derek Rocco]

So here's my situation. Looking for some feedback on what I can do differently next time.

I found a multi-unit in a town where I grew up. Five units total, four currently rented. Vacancy rate is low. After getting some really good advice I ran my numbers with the Rental Calculator and I would have been clearing about $900 a month cashflow.

I did my homework, visited some smaller banks. I talked with a great resource I met here on Bigger Pockets.

The property

It is listed at 89,000. We found that it was under contract at one point back in October. We asked the realtor what happened, and he willfully told us that two days before closing the buyer backed out because they didn't have enough funds to close. He also said the property appraised for 85,000.

I visited the property and it wasn't in terrible shape. The apartments were clean, and the buildings maintenance guy walked us through. The biggest red flag was there was water in the basement. The sellers disclosed this, and the guy told us this has been going on for 20 years. I believed him for whatever reason and was willing to still proceed.

* Major footnote after first reading the seller disclosure I discovered the house was owned by my moms first cousin. I originally reached because of this to see if seller finance would be considered. This got shot down.

The Finance

So like I said I visited some banks, tried to understand what my options were. Really the same across the board. 25% down. I did talk to one bank that would do 20%. I have the cash for the down payment, but it wouldn’t leave me in a comfortable spot. So, one of the awesome folks on here I’ve met helped me work something out. He would finance 90% of the deal, I’d put down 10k with him. 12% interest and then I could re-fi out in 12 months.

The Offer

So, after running comps, I submitted an all-cash offer of 65k. I put contingencies on a inspections, and receiving the security deposits from the current tenants. Probably the wrong move, but I 1.) don't think the property is worth 89k. 2.) Know, according to the realtor, that it only appraised at 85.

Probably not a great first offer.

The rejection

The Sellers rejected it. In nice enough terms they said the offer was unreasonable. They said they would consider a lower offer, but they would not consider contingencies. I decided not to counter because I am not a seasoned enough investor to take on a 5 unit without an inspection.

So back to square one. This would have been my first deal, and I probably got too excited. I am a bit frustrated, but I did learn a ton, and honestly that’s better than nothing.

Any advice on how a more seasoned investor would handle? I would love to hear.

Thanks!

[Anthony Dooley]

Those numbers are incorrect. 2175- 1614= 826. 826 x 12 = 9912 NOI. At a 6% cap rate that would give a value of $165,200. If you bought it for $85K, that puts it at an 11.6% cap rate. This means it's in a pretty bad area of town, but it is a great return. I would buy it, fix the water problem, and make gradual improvements for the next 10 years, then sell it for $165,000 after enjoying the income for 10 years, then buy something better.