First investment property - fourplex (and appraisal nightmare)

[Patrick Menefee]

Investment info:

Small multi-family (fourplex) buy & hold in Gastonia, NC (35 min outside of Charlotte, NC)

Purchase price: $160,000
Cash invested: Estimated at $15,000

This is my first investment property, a 100 year old farm house that has been converted into a fourplex. All units are currently rented for a combined $1600, well below market value .

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

I love the idea of multi-family properties. Minimize overhead costs, minimize acquisition costs, minimize vacancy risk, and maximize returns. It would take 5 or more single family houses to see the return I’ll see from this fourplex.

How did you find and negotiate this deal?

I found this sitting on the MLS for 4-5 months. My agent got in touch with the listing agent and found that the sellers were "motivated", so I dropped my offer quite a bit and got under contract for $50k under list.

The sellers are an older couple with a massive self-managed portfolio that they’re starting to sell off, and this was the first (hopefully not the last for me either!)

How did you finance the deal?

25% down conventional financing (attempted through 3 different lenders...see lessons learned below)

How did you add value to the deal?

This part is just beginning as I closed last week. The inside of the units are in a state of disrepair and have been poorly taken care of, so there will be a lot of general repairs, painting the interior, replacing most doors, replacing kitchen cabinets and bathroom vanity, replacing kitchen and bathroom flooring, and doing some exterior touch-ups.

All four units are currently occupied by tenants paying well under market rent, but still allowing me to break even. They are all on month-to-month leases, so to minimize vacancy I'll remove one tenant at a time (or possibly two depending on a particular tenant) to update the units and place back on the market.

What was the outcome?

Each unit was renting for $350 with the previous owners. Due to the conditions of the units and the price relative to market value, I increased rent by $50/unit upon taking over. The goal was two-fold: 1) increase rent by a slight amount to cover all expenses, and 2) provide a bit of a test to the tenants. If they couldn't handle a $50 increase for a unit that was severely below market value, I'm not confident in their ability to pay. If they choose to leave, that allows me to start repairs on a unit.

Going forward, I plan to put roughly $15,000 into the repairs described above over the next 6-8 months. At that point, rent will increase to at least $2,400 and the ARV will be at least $205,000. Refinancing will allow me to pull out all but the rehab costs, at which point my COCROI will be ~40%. Not bad for my first investment!

Oh, and while under contract on this (forever), I also got under contract for another property consisting of 6 units (3 duplexes). So a week after close I was up to 10 total units...

Lessons learned? Challenges?

Oh boy. What a loaded question. As a short answer, I learned everything and can't capture it all here. This was my first investment property and every step taught me something. 

As a long answer, my primary lessons learned are the following:

1. Listen for clues and act on them: paying attention to what my agent told me in regards to the seller being motivated saved me from overpaying by about 15%. I acted on the information, dropped my offer, and ultimately saved a good chunk of change
2. Nothing matters without a signature: it was roughly 3 weeks between when we came to a verbal agreement on purchase price and when the property was under contract for that price. Additionally, closing was extended by nearly 2 months despite being just a step away the whole time (more on that below)
3. There's more to an appraisal than the dollar value: when I got my first appraisal back for $160k, I was ecstatic. Little did I know that there was a pesky condition rating in there, and the appraiser rated the condition too low for the first lender to lend on (initially rated a C5). Which takes me to my next lesson...
4. Appraisers and inspectors have different jobs-keep them apart: my inspector did a walkthrough of the house, but due to the age recommended I hire specialists to check the roof, plumbing, and electric. Unfortunately, he told this to the appraiser as well which is what he cited as his sole justification for the poor condition rating. Had they been kept apart, the house likely would've appraised the first time, closed 7 weeks earlier, and put nearly $2,000 in my pocket
5. Communication is everything-do it clearly and consistently: my second lender was awful. They understood my timeline and guaranteed a result from the start; however, they were impossible to get a hold of, didn't answer any questions, and a few days from close didn't have an appraisal scheduled (and showed no urgency to do so). Lender #3 had appraisal issues as well, but they kept me apprised of absolutely everything in real time and that made all of the difference
6. Be patient: ultimately, it took 3 lenders, 3 appraisals, and 4 closing dates to finish this thing. After the second appraisal took place, the appraiser fell off the face of the earth and everything was delayed yet again (nobody heard from him again). The third appraisal took place, but the appraiser submitted the report with missing/inaccurate information (including a wrong address...really???). We came down to the wire, getting all documentation finalized a few hours before close, and it tried everyone's patience
7. Confirm rent roll and other tenant information up front, and then check it again: the sellers kept no records whatsoever but self-managed the property (no leases, and the tenant sheets I received at closing were looseleaf pages with handwritten info). The initial rent amount stated for one unit was off by $100, causing serious heartburn when new leases were drafted. Additionally, there was no documentation or confirmation of the security deposits. I was given a check at closing, but when the property manager had the tenants sign a tenant argued that his security deposit amount was wrong and therefore wouldn't sign the lease. All of this needed to get sorted out with the sellers after close
8. Ensure sellers clearly communicate the sale with the tenants ahead of time: prior to close #3, my property manager attempted to get the leases pre-signed at which point he was told in no uncertain terms by one tenant that she required confirmation from the previous owner. A week and a half after close, she's still refusing to sign a lease until the previous owner gives the ok
   

The ultimate challenge came down to the appraisals. At the end of the day it worked out, but due to a series of unfortunate and unpredictable experiences with appraisals it was very close. I can also guarantee there will be additional lessons learned as I start the rehab process, which should be a lot of fun. That excitement will either be shared here or on a blog!

I'm extremely thankful to the BP community for the tools and resources provided. I've learned so much from podcasts, books, and forum posts, and the calculators have been absolutely invaluable. Here's to the beginning!