A HUGE mistake avoided and a lesson in Due Diligence.

[Jonathan Avila]

Just wanted to share a quick lesson in Due Diligence and listening to people that have walked down the real estate path before you. So I got this property under contract for $12k (about 10% of ARV), which was originally listed at $40k. I thought that I was getting a great deal. So I started my due diligence, called 3 general contractors and asked them to give me bids. My biggest concern with the property was with the foundation. I had 2 General Contractors come out on Monday and the last one come out on Wednesday. The first 2 contractors were happy to give me bids ranging in the 70-80k for a total rehab including about 15-20k for the foundation. Which would have been ok, because i had planned on getting it leased up and selling it as a turnkey investment, the gross Rental income in that area was about 2k and i thought I could have made the numbers work, even if i was all in at 100k. giving me about 22% cap rate which is including a 10% vacancy rate. I WAS COUNTING THE MONEY. I had begun to line up financing and things were beginning to fall into place. I had reached out to @GeorgeFoster, who is also a licensed Home Inspector. I met him at one of our BiggerPockets meetups in Chicago and thought I would give him a call. He came out and was immediately amazed by the level water erosion that had damaged the foundation. It looked like a small sinkhole...haha. He highly recommended me to walk away from that property, because of the level of repair that was needed to reslope the property and get the water moving away from the property and also there no sewerage system for the water to drain into on the street, and the price of insurance for a house in that condition is way more than I had estimated. This was my first real potential deal, so it was hard to accept that I had to walk away. But I appreciate George Foster's honesty, despite it costing him a job to make some dough. Thanks George. Just a couple of things I learned that might help some newer investors....

1. If a property is listed on the MLS as a GREAT price for a long time and it didn't sell, you must ask yourself, "why hasn't this house sold yet?"

2.Listen to people who know more than you, and who are asking the tougher questions that you didn't bother to ask yourself. George has been around the industry a while, and knows his stuff regarding home building and construction.

3. The more people you have on your team, the better.  This applies to realtors, lawyers, general contractors, etc...Some folks might see what another person misses. 

4. DUE DILIGENCE IS CRUCIAL.  Nuff said.

All in all, this could have been a very costly mistake that could of knocked me out of the real estate game for a while.  Here is some pics of the foundation, nasty stuff.

[George Foster]

I am glad I was able to help @Jonathan Avila ! I care more about you being successful than I am about the money. I started the Chicago meetup for just this reason. If I have a skill that can put you on the right path then that is what I will do. Don't hesitate to ask for help again. I have learned my lessons in this business and I believe from learning from the mistakes of others. 

You will be on your way to making money on your first deal in no time.