Need Some Help Analyzing My First 4-Plex Purchase

[Ben Tilbury]

Hello Fellow BP Members,

I am from California and live on the Central Coast in San Luis Obispso, so I have been looking in more affordable areas inland to find cash flowing multifamily properties. I recently came across a    4-Plex which I feel may be just what I am looking for. It's a short sale 4-plex priced at 225,000 which has 3 of the 4 units rented currently. This property does need a new roof, fix roof leak damage, some interior fixes, new A/C units and eventually a resurfaced driveway. My idea was to move into the vacant unit and manage the renovations on the complex and that unit during the week, until it is ready to rent out.  The real estate agent I've been working with is trying to encourage me to put in an offer at full asking asap, but I'm a bit weary so figured it best to post on here first, plus I'm still looking for financing although I have a few investors I can approach for cash. 

Rough Estimate on Repairs (Since I have not done an inspection on the property yet)

New Roof: $15,000

New A/C Units: $5,000 (Not sure yet how many will be needed hoping its not all 4)

Interior Repairs: $10,000 (Drywall, paint, texture where necessary from leaks) 

New Resurfaced driveway: $7,500 (Hopefully a high estimate)

This property is currently bringing in $2100 in while the 4th unit is vacant but has the potential for $2900/month.

I am new to this and want to get some other opinions on my best plan of action. Should I offer full asking price or come in a little low even though it is a short sale? The current RVM (Realtors Valuation Model) for this property is $353,000 so it does appear to be a deal if purchased at the right price even if 40-50k in renovations is necessary. I will also be looking for investors who may be interested in this property or other multifamily properties for flips and Buy & Holds. I am still trying to figure out if this would be best for a flip or a buy and hold myself but I guess lender terms or if I JV with someone on this we can determine that once an offer is accepted. Please give me some helpful feedback, I have to quiet this voice that gives me doubt, and forge forward into getting my first multi under contract. Thanks for your help in advance!

-Ben

[Max Gradowitz]

@Ben Tilbury  I know exactly which property you are talking about.  I have been eyeing this property for the last couple days (the fourplex on Fairfax).  Quite a coincidence you brought this up!  I've crunched the numbers and I agree with @Allison Escovedo that it is a good deal, maybe not a home run, but a good deal nonetheless.  Obviously needs a lot of work, so even if you hold on to it I'd still consider it a flip because of the amount of work versus the instant equity you'll get.  Given the condition of the property, the most important thing is getting accurate estimates as to what it will cost for the roofs, ACs, and asphalt repairs to determine the equity.  I had higher estimates than you did (but I like to estimate on the high side to stay as conservative and low-risk as possible), I thought the repairs would be closer to $80k.  But I also valued the property higher after repairs, closer to $375,000.  I guess either way, you are looking at around $40k in equity in either of our estimates, so it probably doesn't matter.  Either way this looks like instant equity and fairly decent cash flow once it's fixed up.

As for what to offer, I'd just offer anything at this point to get the ball rolling.  It's a short sale.  I've been doing this for a long time and trust me, the bank is probably going to counter higher than your offer anyway, even if it was full price.  The bank did not choose that listing price, as if that's what they want to get out of it.  The listing price on a short sale is essentially a random number generated by the listing agent as to what their opinion is of it's value, and the bank has to approve it no matter what number it is.  I'd say it's more important to get locked into negotiations before anyone else does, rather than sulk over full price versus a bit lower, because I don't think that's going to matter in the end.  Then again, I'm not your agent, so you should ask them for procedural advice, not me.

One final thing, financing is going to be difficult for this. You mentioned FHA, which would require you to move into the property (which I see you are considering). If you are willing to move from the beach to the central valley where it gets 105 degrees in the summer, go for it! This fourplex is in a nice area of Bakersfield actually. Anyway, the best financing for this in my opinion would be a 203K loan (which is an FHA rehab loan). It's FHA, so you gotta live in there obviously, but it also allows for the low down payment of FHA and allows you to pick a contractor that is approved by your lender to give an estimate of the repairs needed. There is a 30 day escrow to purchase the property (say for $220,000) and an additional 30 day escrow to complete the repairs (say for $80,000). Then you close escrow with one big loan for $300,000 and you have a completely fixed up fourplex! And in this case, the property should be worth a lot more than that. Just make sure your agent is experienced with the FHA 203K loan process and how it effects escrow procedures, because it's not like a normal escrow so the agent has to draft the escrow portion of the contract properly and deal with the escrow company accordingly. The FHA 203K loan is perfect for this kind of project: it's not easy, it requires more time and effort on the agent's part and yours, but if you both know what you are doing and stay diligent it's a great option and you won't need any partners to help you financially (unless you need a cosigner to qualify for the total loan amount of course).