Need advice on a "methy" problem - fourplex deal

[Lisa S.]

Sorry to jump the forum like this with no history here, but I'm desperate for advice.

I'm under contract to buy a fourplex in salt lake city (hot market), and the inspections have been a little nightmarish. I can still get out, and am wondering if I should.

-One unit is above legal limits for meth and needs remediation. Another unit is borderline.

-Built in 1915, very old wiring in attic ($5,000+ to fix)

-150 square foot addition not on foundation ($5,000+ to fix)

-Portion of sewer line underwater, found by using a camera to inspect the line (? to fix)

Should I walk away or negotiate? How much of a discount should I get?

Thanks in advance!

[Steve Theobald]

@Lisa S.   I am an agent who works primarily with investors in Salt Lake.  Congratulations on being under contract.  I have had lots of deals with meth contamination and have helped with many rentals as well, so I feel qualified - though probably my advice will be discounted by others.  There are lots of opinions out there!

Every single old property will have issues.  Therefore, it's all about controlling risks and balancing this with the cash flow and quality of life for your tenants.

1.  Was the testing company a certified meth remediation company?  If not, then you can get someone to clean it for under $5k.  If it was a certified company, then the property will now (because of regulation) be on the county's "contaminated" list, and you will need to pay $7k to $10k to remediate.  

2.  Meth detection is amazingly precise, but the collection is not exact.  Therefore, if there is a borderline unit, I would be sure to clean that one too.  If you decide to sell later, the end buyer may do another test and it may actually be higher than 1.0 micrograms per 100 square centimeters.   But besides this, the health hazard is real.

3.  The old wiring may be fine.  But to be safe, it would be good to get it replaced.  Not knowing the extent of needed replacements, $5000 may be high or it may be low.  I have a guy who charges 50% as much as most licensed electricians.

4.  This foundation issue is outside my experience.

5.  I don't like the sewer line in water, although this is probably much more common than I am aware of.   The water table is clearly high.  Is there a sump pump?   Did the inspector think that the sewer line was needing to be replaced?  This issue needs more discussion.

So what should you do?  If you have professionals giving you legitimate bids, then you trust those numbers and discount the property by that exact number, showing the bids to the seller.  If they won't budge, then you walk.  Easy.

THERE WILL ALWAYS BE ANOTHER DEAL.   Don't throw good money after bad.  Just because you paid for an inspection doesn't mean you need to now buy the property!    

But before you give your final "price reduction request" double check all your numbers and make sure your Cash on Cash Return and your cap rate are real and acceptable, being sure to factor in vacancies, utilities paid by the owner, property management, taxes, maintenance, and the elusive "capital expenditure reserves" fund for when the roof or furnace, etc need to be replaced.

Let me know what you decide to do!

Steve Theobald