Help! I bought a bad deal, but now I might have a good one.

[Christopher Kolasa]

BAD DEAL:

I signed a purchase and sale agreement for a home in Chattanooga, Tennessee, Orchard Knob, on the southern end. The property is a single family, 1300 SF, 3BD/1BA, got it for 65k, anticipating $1000/mo in rent, budgeting 20k rehab, 110k ARV. I think I may have jumped the gun! Upon further digging and talking with more property managers, probably not the best area, and appreciation may be further away than initially anticipated (4,000 new apartments coming online in Chatt in next 2 years). Also I didn't get anyone into the property (I am out of state) till after negotiations. My Property Manager went it and informed me it looks like more problems than the photos let on and the neighborhood doesn't fill you with the warm and fuzzies. Anyway, now running through the motions (and emotions) of buying a deal and working through the due diligence. I got a home inspector in there today, and looking to a few contractors for a few bids on a rental rehab... Likely rehab will come with a heftier price tag then initially budgeted and will likely cancel the deal. Also, the rent may not match initial analysis, especially in a demographic which tenants may struggle to pay. Mistakes made, lessons learned. The house may work long term but the margins are getting slimmer by the day.

GOOD DEAL?:

New day, new deal. The above actions have not been in vain, progress has been made, and lessons learned. I've connected with a ton of local people in the market with insights to share and ultimately it's landed me with an off-market deal which looks like it may have legs from afar. The deal is: (2) - 3plexes, nearly identical 1600 SF buildings, built in 1945, each of the units are 1bd/1ba, listed by the agent (off market) for $75k each, I'm estimating $120k ARV. The buying opportunity arises as the seller is an elderly man, no joke, 100 years old who looking to unload them to pay for living expenses. Located in a slightly better neighborhood than 'bad deal' above; lower socioeconomic, blue collar neighborhood, service oriented jobs, green lawns, lots of pride of ownership single family homes in the zestimate range of 70k-120k. Upon conversations with property managers, I'm getting a rental range of $1,200 - $1,500 total per building, pending apartment conditions of course. Let's say I can get $1350 rent per building, or $2,700 for the pair. The units will need some work according to my PM, who will be checking the place out Monday. So far I know there are new roofs and they reside on level lots but no dryer/washer hookups, no central air. One building has 1 of 3 units vacant, and pulling in $750 right now.

How to structure the deal?

1. Offer price - All things considered, pending the current conditions, how would you go about making an offer? If I were able to get the properties for $60,000 each, numbers would be a lot more attractive. How can I create an win-win offer to the seller in his current situation.

2. Financing - Initially I had financing issues with 'bad deal' because the loan was only $48,750 ($65k purchase, 25% down), so many mortgage brokers wouldn't offer a loan that small (below $70k-80k), ended up with an interest rate of 5.75%, 30 year fixed, probably not enough shopping around? Would a blanket mortgage be a consideration, would putting both properties together make sense or would it make sense to split the mortgages? Would this save on fees? Would it make sense for more money down, shorter terms? 

Please Advise!

Would love to hear any and all advice.  I've attached my initial analysis so please critique harshly! What am I not seeing? I will revise analysis as more information becomes available (more to come Monday). Again both units are nearly identical so values may be doubled where appropriate. Assumptions are as follows: $75k purchase (no discount), $1350 rental income, $15

k rehab budget, 30 year mortgage at interest rate of 6.0%. Hoping to improve on these assumptions.

Thank you, Chris.

[Brandi Pearl Thompson]

1. Do they unit have central heat and air. (I don't believe they do.) Why does that matter? Just a cap on rent, also affects a tenants utility cost and could produce higher turnover. The area has high turn over for 1/1. Pretty sure one is in much better condition than the other one. I think 1350 is a little high unless you are going to up your rehab budget

2. Has the power been on in a different name. In Chattanooga city limits, if a duplex or most multi-family has had power off for over 100 days it converts to r-1 and you now have a 2/2  building. 

3. Rehab cost seem low. based on my experience should be closer to 20k if your including exterior and interior and your wanting quality tenants. You are also managing from afar which usually means it cost a little more (Keeping it real). 

4.  Can you offer to have owner finance (pay you initial cash downpayment to allow him to pay for living expenses) till you rehab and then do a refi and get your initial invest out and put it on a 15 year fixed at 5.75%. (You need to call a local bank. I suggest Ryan Henn at TVFCU. Great guy knows his stuff and 1-4 are considered single family and you can get a 15 or 20 year fixed rate with no escrow required and you can refi if you show improvements)

5. This seller has others to sell. Have you asked this question? You could potentially structure a better deal getting some of the other properties.

6. Putting the properties all on one mortgage would be my initial reaction because it would save on loan fees. Depends on your goals long term whether I would. What is your long term thoughts for the Chattanooga Market?  

Hope this helps