Should I move forward with this deal or not?

Question

Hi BP Team,

I recently came across a deal for a 4 flat multi family property on Chicago's South Side. The owner of the property is willing to sell the property at $115K with a $3,500 closing cost credit, along with an additional $2,500 for repairs.

Overall the place is in fair condition (No new appliances or Cosmetics) however, it's already fully rented with one vacant unit for owner occupancy. The building however has old fuses in the electrical box panels and the entire HVAC system is outdated and will probably have to be replaced soon. The apartment has 3: 2bed, 1bath -$700 each and 1: 3 bed, 1bath approx $800. So gross income will be around $35K (Best Case Scenario). Its a frame building also which will more than likely need to be sided in the next 5-8 years or so.

I was curious to see what the BP community about this deal and if should I move forward at these numbers? If not, WHY and at what price would you buy this building as an investor OR would you pass completely?

I would sincerely appreciate any insight and or advice in advance!

Kind regards,

Tim

Blair G. · Answer

Love the numbers.  In my opinion you have a low price for the great education you will get if you pull the trigger...and might actually get paid to go to school!  Check out crime rates for the neighborhood and make sure you validate the rents.

Juan Reyes · Answer

Tim have you done gotten any comparables from local realtors? I would suggest speaking with a realtor in the area to figure out how much this property is worth. When it was purchased for $40,000 was there anything else to the deal?

I wouldn't get too discouraged about the public records do not get paralyzed over how much they are making on you, it can still be a good deal ego aside. However, I would suggest getting a good honest plumber and electrician to give you an estimate on the concern areas.  Most deals will have something to worry about, its about learning to account for it.

Tim Sutton · Answer

Happy New Year and thank you all for the feedback. I had the building under contract and the inspector raised concerns about the HVAC, Plumbing, and Outdated electrical work. During the inspection there were several issues that come up with mix matched wires behind the socket outlets and there was even one instance where the lights in one apartment started flickering once we turned them on.

Also, outside of new hot water tanks and some copper piping in the basement the owner hasn't done many upgrades. Public records show that the building was purchased for $40K not even 6months ago. It just seems like I'm overpaying for a building with a lot of unknown issues. Thoughts?

Thomas S. · Answer

It is defiantly a good deal but you need to have access to $20K in reserve when you take ownership. Electrical or HVAC will be expensive and you could end up paying for tenants hotel rooms.

Alex Chin · Answer

@Tim Sutton - I think a lot of the numbers look very solid, if there are no major defects in the building such as weird layouts, or missing elements, then your next step should be to get a close inspection of the plumbing to make sure you won't be replacing all the pipes in 5 years, check the electrical to ensure you have good electrical panels and modern wiring, get a timeline on the life of the roof, and make sure the foundation gets a good look.

If these major ticket items are fine, then I would say to get this one under contract and start moving forwards. Numbers look good, even if the repairs quadruple, then you're still going to be cash flowing well in the long run, don't worry about a temporary loss on your books initially.

John Leavelle · Answer

Howdy @Timoteo Guy

As others have mentioned it is hard to give you a good analysis of the deal since you have not included enough information.  What is ARV?  What is the financing?  What is the market rent rates?  What are your expense numbers?  Etc... etc...

Be sure to have the property inspected and have a GC submit a bid for everything so you know what you are getting into.

Come back with the full analysis data and we can provide a better opinion.

Anthony Giannette · Answer

Jump on it !!

or wholesale it if the future repairs look difficult.

Jay Dewberry · Answer

Hi Tim. I tend to agree with @Timoteo Guy as far as the repairs. Your repair costs
 can get out of hand very quickly if you’re not prepared. If it were me,
 I would definitely get some GC’s out there to give me some estimates as
 well as general advice on your major expenses such as that HVAC system,
 electrical system, and siding. You may find that it may not be worth it
 after a thorough estimate has been drawn up. The last thing you want is
 to have tenants and a fire occurs only to find it was due to faulty/old
 wiring.

What is the ARV? What kind of neighborhood is it in? Is 
that market stable, declining, or improving? Financing numbers? Just 
some thoughts. But if you feel this could work for your particular 
goals, get the property under contract. Make sure to include your 
contingencies in case you discover it’s a nightmare property and want 
out. Then analyze, analyze, analyze.

Hope it all works out. Keep us posted as I would love to see the before and after in the success stories forum.

Timoteo Guy · Answer

My first question are you ready for the repairs that will surpass that initial $2500? Also are you going to be renting out that extra unit or living their yourself?

Being that I am in Seattle, $115K for an operational multi is amazing. Without knowing your market my opinion is solely based on the numbers and the current occupancy.

I would go ahead on the deal.

@Tim Sutton Goodluck sir.