Help! Need Advice Whether to Close or Back Out of a Solid Deal!

[Vishesh Shah]

Hello fellow BP'ers, I have a slight issue at hand right now. A few months ago, I acquired a solid deal - 2 two-families that are adjacent to each other in Paterson, NJ for $125,000 each. They were off-market and I know a lot of other investors were trying to buy it even after I got it under contract, which was almost immediately. So my all-in price for both two-families total was $250,000. We are going to pay cash so no financing was needed. I had my contractor and handyman both go check it out and they estimated about $60,000 in repairs. ARV for each from my broker based on comps is $230,000 each 2-family, so $460,000 total. I never even went to go check it out, as I had my partner, contractor and realtor go check it out after I signed the contract. The numbers looked good and I trust all their judgment as they've never let me down thus far.

There were some title work issues that needed clearing so we still haven't closed yet, but I got notice last week that title was finally clear. Today, a few weeks before closing, I decided to go check out the property with my partner and handyman. Originally, I was told that both properties were vacant, but once I went there that both properties were indeed occupied, however, just 1 unit each. The first tenants were fairly nice tenants, mom and her two kids (both teenagers) who were very helpful, showed us around their place and got us upstairs (vacant) access; however, both complained consistently about the previous (still current?) landlord's neglect and how they were paying more in electricity (electric heat) almost than rent ($1,500/month), saying how they were given no fridge, heater, A/C, etc. and had to get everything themselves. 

Then we walked over to the next property and found out that nobody was home. The first 2-families downstairs tenants were nice enough to call their upstairs tenant neighbor and find out she was coming home in 20 minutes. She said she was just picking up the kids. Cool, no problem, we said, we could wait. 20 minutes later and she did show up, with 2 little babies, ages 6 and 2 she later said. Long talk aside, she too had the same complaints about the LL, how he was never there, promised to fix problems but never did, had heat loss, etc. etc. She said she had a lot of problems at home (just won a custody battle) and couldn't afford to move out, otherwise she would have (same as the first tenants). Her rent, however, was only $900, as her boss was friends with the current LL, so he gave her a break. Later, she also said that she heard a loud boom a few weeks ago (after my whole party had visited the space) and when she called the LL to find out what it was, he said "oh the ceiling just collapsed downstairs"!!!!???? We couldn't get access to see the downstairs space so we couldn't even see the damage or estimate repairs. We did, however, tell our broker and she said she could get us access early next week (before closing). My contractor however already estimated this house to take most of the $60,000 in repairs, as the first 2-family seemed like it only needed about $10,000 or so in cosmetics.  

All in all, she did seem fairly nice and both parties seemed like good tenants. However, we have an issue at hand. 1. We thought the properties were both vacant, so we could just close, rehab, then either rent & refi and get all our money out, as even a 70% LTV would be enough to cover our purchase + rehab. Plus, as we just found out, the first two-family (which I should say is even SMALLER than the second, more-damaged two-family) is paying $1,500 in month with cosmetics needed, so even that x 4 = $6,000 is great cashflow on our investment (2% rule!). However, if we keep the properties we would have to most likely switch over to gas, which would cost an additional $7,000/per unit approximately, as quoted by our GC, which would inflate our rehab costs by $28,000! Or we could just save the extra money & headaches and just flip the properties for $460,000+ (and our broker has not missed yet on comps anywhere in North NJ) and make a good 6-figure spread. Or should I just forget about even trying to evicting them, especially with kids I heard it can get messy (even though Paterson is said to be "sort-of" easy for eviction) and back-out of the deal, especially if the ceiling mess looks way worse than we thought (even though that was already considered a total gut-job) and since we put no deposit down, we technically have no loss (besides some damaged relationships w/ the broker)?

So fellow BP'ers, especially those who have been in similar situations, what do you think I should do? I think there is money to be made in this deal for sure, regardless if we decide to rent or flip, I just don't know how to deal with the whole evicting then rehabbing thing. Any advice would be greatly appreciated!