Shaky inspection report on first MF deal. Now what?

Question

Hey all, I really need some advice on my first deal. I'm under contract on an 8-unit condo town-home building (all 3/2s) that would be my first deal. It's a 2007 build in the Tampa, FL area that I found off-market and the price is $890K. My realtor tells me that the seller has a few backup offers as well, including one full price cash offer for $880K.

So the inspection just came back showing the following issues:

- Mold in a few interior rooms

- Evidence of rodents

- Original roof requires repair, replacement and/or evaluation - there are active leaks in the attic - 7 out of 8 water heaters need replacing at any moment ($5600 total estimated)

- 5 out of 8 A/C units need replacing at any moment ($25K total estimated)

- A bunch of minor things need to be fixed, i.e. Two dishwashers, some lights, screen enclosures, some inoperable cooktop units etc

My Estimates (note that the market CAP is 7-8%):

- WORST case scenario for rents ($1225), occupancy rate (88%) and high repair costs ($75K): 2.3% CoCr and 5.1% CAP

- BEST case scenario for rents ($1300), occupancy rate (95%) and low repair costs ($20K): 7.6% CoCr and 6.6% CAP rate

Even though I strongly expect the numbers to look closer to the best case scenario above, considering my out of pocket expenses are going up with all of the repairs and also that the stock market is tanking right now and money is becoming scarce, I'm not so sure about this deal.

Note: One other consideration is that the neighborhood has a bunch of similar 3/2s going up right next door (they're a bit nicer) and those are listed and selling quickly at about $180-190K each. Maybe I could shift gears and try to make this a flip by sprucing up and selling each of individual condo units one by one? With repairs I could be into each unit for around $130K and my realtor says I could get $165K for each.

What would you do??

Brandon M. · Answer

@Neil G. - I agree as well, there were way too many other negative factors in that deal that were much harder to rectify than leaking roofs and old AC units.

On to the next one!

Spencer Gray · Answer

Good call @Neil G.

Neil G. · Answer

Hi @Brandon M., they never revealed a reason. However, I did some more digging and eventually found out that they had next to nothing in their HOA reserve. So with all of the red flags, I eventually pulled out of the deal. Waiting to get my EMD back.

Brandon M. · Answer

@Neil G. - has your agent gotten an answer from their agent as to WHY they won’t disclose that info?

Neil G. · Answer

@Brandon M. yes, I'm still in due diligence period. I made a $5000 EMD, but it was contingent on inspection, so I don't think I should have a problem getting it back. I'd only be out the $2100 for the inspection.

The lack of transparency really scares me. The only thing I'm now really considering is coming back with a big reduction due to lack of transparency, required repairs and changing market conditions. And then switching from plan A to plan B and selling them off individually.

Brandon M. · Answer

@Neil G. - interesting about the hiding information, that does actually scare me more than the mold and AC. I find that sellers who don’t want to disclose everything tend to be hiding something, and you don’t hide GOOD somethings!

Where are you in your due diligence period where you can still get out and get your deposit back? Just curious what timeframe you are working with

Neil G. · Answer

Hey gentlemen, thanks for your input. @Joseph Cacciapaglia the building is not listed on the MLS. The seller reached out through their network to see if they could get it under contract without listing it. Not sure why. Also important to note, the seller is not releasing a P&L, even after being under contract. They're only offering convoluted account statements that have each of the 8 units separated, making it nearly impossible to get an accurate property history. They're stonewalling additional requests by my mortgage broker for information and won't disclose tax payments or insurance payments. The mortgage broker is telling me these are red flags.

Interesting advice regarding requesting mold and roof are fixed. I will consider this if I decide to proceed.

@Brandon M. yes, plan A was to buy and hold for cashflow, but this deal is looking less and less promising as a cashflow deal as the due diligence progresses. Considering property history isn't being released and repairs are adding up. I'm thinking that the building wasn't very profitable and they're trying to hide this. Either that or they were completely incompetent in running it and maintaining records.

The plan B is looking like a better idea, but based on advice I'm receiving here and also from my mentors, asking for a reduction in price due to the repairs and lack of transparency should be in order. Not to mention the fact that the market conditions are changing and they're likely to want to liquidate this thing.

Brandon M. · Answer

@Neil G. - I will come at it from a different perspective. As a contractor/house flipper myself, none of the things you mentioned that need to be repaired are THAT big of an issue and are typically things I find in all of the houses I come across. This just feels more painful because there are more ACs, more water heaters, etc.

Have you already spoken with the different trades to get actual estimates for repairs or are those just your estimates? The good news with having multiple repairs of the same type, you can ask for a discount for multiple jobs. I know with each of my trades, I would be asking the plumber and the AC guy and the mold remediation guy for a discount for them to do multiple repairs at the same location.

I don't think being all in on each unit for $130k is a bad scenario if you can separate the units and sell them separately, or even get them all repaired and cash-flowing and then hold it or sell it off as a turnkey property to someone else.

Am I understanding correctly that your ideal plan A scenario is to hold the property, and then the fallback plan B option would be to possibly resell the units 1 by 1?

If you want to chat in more detail feel free to PM me, I would curious what area you are in when you say "Tampa area".

Joseph Cacciapaglia · Answer

If it's "off market" how is there an agent and multiple offers? I guess that's somewhat besides the point of your post though. In this situation, I would usually request to have the mold and roof leaks repaired/remediated by the seller. It doesn't really matter that there were multiple offers, if this info wasn't disclosed to those other buyers, they probably would request the same things. As far as the A/C units and water heaters, it's difficult to negotiate based simply on the fact that they're close to the end of their useful lives. If they actually have problems, that's a different story. If the numbers are really too tight with the new information, then I might also request some additional seller concession. Having the ability to sell them off as condos provides some additional upside. You could always try flipping one at a time while holding the remaining units as you originally intended.