BUYING DUPLEX WITH OLD AC UNITS/WATER HEATER/FURNACES.. SMART?

Question

Hello All,

I'm in the process of purchasing a duplex. My offer has been accepted and the the home inspection was just completed. Everything is in pretty decent shape, although there are some minor things the seller will need to fix. My concerns are more focused on the two old AC units (Trane - 1996) and the old water heater (Trane - 1996) - the other water heater was replaced in 2013. The inspector couldn't determine the age of the two gas furnaces.

My question as a buyer is knowing that these appliances are in theory going to "burn out" within a few years (maybe months), how should I approach the situation?

For reference purposes, I have a 203k loan so I can wrap repairs/renovations into the loan:

1. Try to get the purchase price lowered, so that I can have more money for renovations and use that money to purchase new appliances? *Would only replace what isn't broken as of yet because of the type of loan I have. My thinking is to replace it now when I have access to the money instead of waiting until they break and having to dig into the emergency fund.

2. Get a thorough inspection of the appliances to see if they are in good shape or need any hidden repairs that I can hopefully get the seller to fix?

3. Take a risk and budget for potential repairs hoping that the cost of repairs or replacement won't exceed what was budgeted for it ?

4. Other?

Thanks in advance.

Account Closed · Answer

My 24 year old low SER AC unit worked better than brand new AC, go figure. New Equipment more energy efficient, less durable, would not assume an old AC unit will break anytime soon all depends upon how well maintained, quality and so forth.

Ben Wilkins · Answer

@Marcus Isaac - it's a known capital expense that will need to be replaced soon after purchase. Since you're in a business of purchasing investments, you have two options:

1) Negotiate a lower price to make it a good investment based on the fact that you'll have to replace the units soon.

2) Decide that it is not a good investment based on being over-priced between the purchase and the repairs

There is always option #3, which is that this is still a good investment even if you pay asking price plus CapEx repairs. I can't answer that one without knowing more about the property.

What are the comps in the area for other duplexes?

What are your calculated expenses and income?

What is your expected cash flow?

With those details, it'll be easier to estimate what the duplex is worth.

Marcus Isaac · Answer

@Zachary Hendricks With a 203k loan, it allows you to wrap your renovation cost into the loan, which is why would I rather pay for it now if possible so that I don't have to come out of pocket $5,000 in a few months or a year because one or two appliances go down.

@Ben Wilkins My thinking is like yours in that I should be able to negotiate a lower price because of the fact that there are multiple units 5+ years passed their life expectancy. My agent is saying that if the units aren't broken then I can't consider them an item that needs to be replaced and the seller won't feel obligated to come down because of an old appliance that isn't broken. What are your thoughts on that?

Thank you for all the responses

Ben Wilkins · Answer

@Marcus Isaac - with deferred CapEx items that I am aware of, I would negotiate a lower price. When you're buying a property, you have to take into account the purchase price plus the repairs. Since you can't reduce the cost of repairs, you should reduce the purchase price.

1. As a CapEx item that is in need of replacement, you should have some bargaining power for reducing the price.

2. Your due diligence should include a thorough inspection, so your second point should already be covered.

3. Do not take a risk. REI is educated investing. While there are certainly risks when it comes to investing, this isn't one of them.

4. Use the items that you found as a negotiating point, lower the purchase price, and replace the critical items ASAP. If you want, you could probably get away with not replacing the AC units and have the tenants use window units (depending on the building, what type of tenants you're marketing to, etc)

Zachary H. · Answer

I don't know much about the 203k loan, so I don't want to muddy the waters there...

As far as A/C and water heaters go... Water heater is going to need replacing if we are talking about a typical water heater--20 years old is amazing. A/C unit, you can probably get by with the originals for a while, but I typically try to budget $5k or more depending on size of house if A/C unit is over 15 years old. Granted I've seen A/C units last 30 years or more, but typically you will be spending a lot of money on maintenance and burned out motors, etc etc...

You will eventually have to pay for these units one way or the other. Might as well do it at the beginning to save time, money, and frustration down the road...

Hey, if you can negotiate those costs to get the price down, by all means do it! Always ask. 100% of shots are missed that aren't taken. Might as well try. I always push to lower the price when needed. Just be courteous in your dealings...

Good luck to you!

Zac

BUYING DUPLEX WITH OLD AC UNITS/WATER HEATER/FURNACES.. SMART?

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