Complex Dual Agent run deal in California

[Kevin D.]

We recently engaged in a deal on a duplex in the Bay Area and would love some feedback.  Here are some of the particulars.  

Duplex with 2 units, each 2/1.  Total SF is 1641.  Owner occupied unit is upgraded with new kitchen, appliances, and flooring in living room and kitchen.  Rental unit is tenant occupied at below rate rent with no apparent upgrades.  Inspections revealed mostly minor issues, the largest being water damage in bathrooms in each unit.  Damage was focused at the shower with expected repair costs ranging from $5k to $7k for each unit depending on the extent of interior damage.  

Seller was motivated due to three way transaction.  Duplex owner was under contract on a condo. That condo's owner was under contract on out of area new home.  Duplex and Condo sales were handled by same broker with two agents splitting as dual agents on each.  Duplex was not listed...we were the first offer and were accepted immediately as we were willing to go in without our own agent, accepting the dual agent set up and also due to the fact that we offered asking price of $910k.   Agent provided two comps, one at $1.03M and one at $1.07M.  Both roughly 6% to 10% larger in terms of SF.  Our expanded comps place duplexes in this area (all top rated schools, low crime, etc.) at $915k to $1,070,000.  This is the smallest duplex of all the comps in the area over the past year.  Cost/SF was $543 and was among the highest of all the comps we pulled which ranged from $470/sf to $588/sf.  The ranking of this duplex to the others led us to feel this price was too high and since the sellers were unwilling to negotiate on the repair costs as credits, we ultimately backed out of the deal.   

It pained us as this may be a good deal but we didn't have faith in how good the deal was vs. how leveraged we'd have to be (most of our capital would have gone to the down payment and closing costs).  

I have numbers from my property analysis and can add if folks are interested.  

Would love to hear some critique of this deal and of the decision to pull out. 

Thanks!

[Kevin D.]

Coming back to this for benefit of those following this post.

We did back out. The agent carried through on her statement that she had other investors lined up and closed a few weeks later. I have been told several investors (possibly including the brokers that were representing me) purchased the duplex, did significant work on one unit (removed wall separating kitchen from living room, upgraded all kitchen appliances, cabinets, fixtures, and countertops, painted, refinished bathroom with new tile, fixtures, and new flooring). They painted and updated some fixtures in the second unit plus refinished the bathroom with new fixtures, tile, and flooring. Tough to say what hey spent but hey did all this in roughly 2 months then flipped the property for $1.3 million. Pretty shocking gain of $.4 million but they put significant rehab work in and again, this is a highly desirable area with top rated schools and good proximity to big employers like Apple and many other Silicon Valley giants.

We would not have been doing all this work so the ARV in our plan was little more than the purchase price. For us, I still feel it was a decent decision to step away although we are now finding the inventory remains to be extremely tight in the Bay Area/Silicon Valley. Especially in the duplex market and even more so in desirable area so this one hurts a bit in hindsight.