My first REO, here we go

[Paul Stern]

It has been an exciting week. My w-2 job takes 10 hours a day so I have the other 14 for family, investing, managing, etc. When a good deal shows up, the order for those other activities takes a different precedence. On Monday a 12-unit two building multi-family showed up on Loopnet. Its an REO, two 6-plexes with 40% vacancy, only 2 of 5 vacancies are rent ready (~$20k repairs needed for the other 3) and unknown operating expenses. There are a couple of gems hidden in all that uncertainty. Rents are below market, estimated expenses seem pretty high, per unit cost with repairs considered ($25k) are $10k below the next best deals I could find. To put it in perspective, my first deal closed last June (4-plex) per unit cost was $37.5k and cash flows $800/month.

Found out yesterday my offer was accepted. There was one offer already, so I offered $7k over asking price. When the bank came back and asked for my highest and best offer I added $212 (probably just overbid myself to get my lucky number (12) into the deal :). Due diligence starts now. I have quotes out to get vendors lined up and better handle on expenses.

I am going for conventional financing with my bank also financing 80% of repairs (back to me at closing). Total project cost is $300k, $70k cash needed. Current gross income $74k, Estimated Expense with 10% Vacancy $47K (monthly cash flow is $770). Gross income at market rate $82.1 with same expenses gives monthly cash flow of $1,500.  Cap rate goes from 10% (purchase estimate)  to 13% (proforma)

First things first, I will bring rents up to market (maybe turn over some undesirable tenants). Next will be closing vacancies in rent ready units. I work in a seasonal business and by closing some of my colleagues will be available to help me make repairs. I have lined up a carpenter. Monday I talk to a carpet layer. I still need to find a good handyman and someone for windows, so I am getting the word out to my friends at work and my REI network.

What are your thoughts? Been in a similar situation, do you have any suggestions on how you handled the deal?

[Brett Snodgrass]

@Paul Stern 

Hey Paul congrats on your first deal that's awesome I'm very excited for you.  One thing that I would add is to get an inspection done... From experience I think an good inspector can find things that your contractors won't and then It will give you a list of items to fix in the properties that might be hidden. 

From experience, I did a fix and flip and I didn't have it independently inspected, I just had my contractor looking at it thinking that he would find everything that we need to fix.  But he didn't find some issues with the crawlspace and when we went to sell, the buyer hired an inspector and found the crawlspace needs some work and it cost us about $5000 unforeseen.  So I would recommend getting an inspection done so you know exactly what you're getting into. 

Thanks.  Good luck, 

Brett