To Continue or Walk away from a deal...

[George Bruton]

One key item I have learned so far in my pursuit to build a real estate portfolio is finding deals takes time and energy, and to find great deals almost comes down to being in the right place at the right time.

With that said I found such a deal, I'm currently in escrow on a 9 unit property in California.

PROS - Fantastic location, Rents have not been raised in 15-20 years. Significant selling upside.

CONS - The building is very old and has been neglected.

Once I take possession of the property I can go in and invest around $50,000 for new appliances and small maintenance issues and raise the rents to current and it will cash flow $58,803 after all expenses. If we make some additional changes to make the building more efficient turning some 2 bedrooms into 3 we are confident it would cash flow around $73,000 and has the potential to be around $98,000.

The current interest rate is 6.5% and that is being carried by the owner due to the bank not being able to qualify the property due to the low rent roll.

Owner terms are 6.5% - with a 10-year balloon over 30 years amortized.

Once I refi I can save around another $1,900 a month.

The purchase price is $2,000,000 and other properties around it that will have the same cashflow are selling for $4,200,000- $4,700,000 but our plan is to buy and hold.

I know many of you will ask for more details and I have no issues answering those questions, but to keep this post somewhat short I'm going to jump right to my challenge.

The big challenge is this. I have had two contractors come look at the property. With the deferred maintenance, one recommended demoing the entire building and start from scratch.(to build this building new would be around $2.7M+) The other provided a bid for nearly $600,000 to fix all the KNOWN issues.

I had budgeted $250,000 when I first looked at this deal and had no plans to tear down and build up. Still, do not.

The last item that is concerning is the property does not sit fully on a concrete foundation. The back part of the building has sunk into the dirt and will eventually need to be addressed by being lifted and pouring a new foundation. I have been given a very large range of what this could cost.

So my questions are these.

In the excel spreadsheet when you take in all the numbers the property looks amazing. Cashflows very strong and upside sales opportunity is significant. But with so many issues with the building what would you do?

1. Close - Fix little and enjoy the cash flow - Worry about the big items later or sell?

2. Close - Enjoy the cash flow but fix items over the long term and hold.

3. Walk - To much risk with so much deferred maintenance + the unknowns.

My overall question is: Does this much-deferred maintenance scare anyone or do you feel this is just part of the deal/process for opportunities like this?

I should add the owner is in their late '80s and as some here might have experienced it can be difficult to justify/explain/work with someone in the mindset of "I do not care".  I have tried to get additional drops in the price due to these issues and it is a nonstarter.

Thanks,

GB