Getting My Feet Wet with Condo Investing!

[Padric Lynch]

Investment Info:

Small multi-family (2-4 units) buy & hold investment in New Bern, NC.

Multi-family property with a full size 1000 sqft unit and an adjacent 250 sqft "lock-out" unit, each with their own entrances and back decks. Adding some diversity to my portfolio by branching out of my town and crossing into different building types.

What made you interested in investing in this type of deal?

I had my eye on this development of condos for a couple of months prior to getting under contract on this property. I had submitted an offer on a similar unit in the summer, but couldn't meet the sellers price. After talking to the HOA, POA, and a brokerage who dealt primarily with the development, I felt like I had the information I needed to make an accurate evaluation of the condo units, in the event that any others came on the market.

How did you find this deal and how did you negotiate it?

This was on the MLS. I had made an offer 1 day after it had been listed. The sales price was 75k. I was able to negotiate it down to 71k. After the home inspection, I asked for a credit of $1,500 towards closing costs due to deferred maintenance on the HVAC unit. I also requested that a new dishwasher be installed. All negotiations, for better or for worse, were done through the RE agents.

How did you finance this deal?

Financing was received through a local bank, utilizing a non-conforming portfolio loan. The bank was able to overlook my high DTI after they conducted an appraisal that included an Operational Income Analysis (basically underwriting the deal as an investor would). The interest rate was 6.75, which is reasonable, historically low, and a cost of doing business in my eyes.

How did you add value to the deal?

The value-add will come from reducing expenses by adding a utility fee to the leases as they expire. Increasing the rent to market rent will also improve the cash flow. Additionally, the smaller 250 sqft "lockout" unit has room on the deck for the interior to be extended. This would allow enough room for a kitchenette and laundry room to be installed. This renovation would increase the rent by 350-400 a month for that unit alone (based off of rental comps who have executed this type of renovation).

Learning Opportunities/Challenges/Memorandum:

This deal gave me a higher awareness of how I should be interacting with my agents, lenders, and property management and what areas I need to be more vigilant in moving forward.

Lessons learned:

-Have a tenant occupancy addendum drawn up for every deal. Period. This way you know exactly how the property will be conveyed to you and you are not left to your own assumptions. I was under the ASSUMPTION that the smaller unit would be vacant when we finally closed. However, the seller's property management had placed a tenant with a year lease under the same below-market rent. They thought they were doing me a favor, but now I will have to wait a year before I can implement my own lease.

-Use an investor friendly agent. I was using a retail agent, with a different mindset. Don't get me wrong, she is an amazing person and had many redeeming qualities, but she wasn't seeing the property as a business. 

-Make sure that you have all of the due diligence documents you need before closing on the property. I have found myself still requesting utility bills from the seller that I need in order to charge an accurate utility fee. Closing is done, and they have no incentive to provide me anything. 

-Ask for the financing criteria from your lender and do the math for them (if you have to). My lender and I were not seeing my financials in the same light. After haggling over the phone, I just decided to take all of my financials and break it down into an easy-to-read pdf that included all of my bank statements, closing disclosures, and emails from the lender that specified reserve amounts and approximate funds for closing. This helped move things along.

-Closely review your HUD-1! The real estate agents from both sides didn't provide the closing attorney with the addendum of the contract that credited me $1,500 from the seller. This almost went unnoticed by everyone, including myself before I had caught it at the closing table.

-Coordinate a warm handover of the utilities. The sellers cut the utilities off before closing had occurred and before the deed had recorded. This left the tenants in an unfair position. 

If there are any questions about the deal please comment or PM me. Thanks

-Paddy