Dilapidated fourplex worth it?

Question

What I found:

I've been looking for my first 2-4 unit building in the northwest suburbs of Chicago for a little while now. I came across a fourplex in McHenry that looked like a good price but it had been sitting on the market for over a year so i knew something was up. I talked to my realtor and he said that when he looked into it he saw that it was not only vacant but had a laundry list of city violations.

My concerns and thoughts:

Obviously if a property has been on the market for a long time I'm not the only one who has looked into it and shied away. The list of violations includes everything you can imagine from foundation cracks to roofing to caulking to graffiti. My agent said it was the longest list he's ever seen (about 4 pages). I don't want to shy away from the deal but I might be getting over my head if I go through with this deal. I know the #1 way I'm going to screw this up is by not estimating rehab costs. It's going to basically need new and repaired everything but the ARV will probably be a ways north of $400,000. I'm trying to plan out the costs and I imagine them being hundreds of thousands of dollars but I think the owner would probably let it go very inexpensive because of all the issues. I guess my thinking (which might be flawed) is that repairs might be in the 200s but even then there is still money if I get the property cheap enough. That budget could even be low it's just hard to imagine spending that much on repairs. My exit strategy would be to sell with the back up of renting.

My questions:

What is the best way to estimate rehab costs on a building in such disrepair? Any advise on doing a renovation this large?

Samuel Pavlovcik · Answer

@Daniel Winsauer, I definitely agree with @Martin Vehlow's comments. The best way to get a fair estimate would be to get a few contractors to walk the site with you, and also send them over the violations list. From that, they should be able to give you a relative ballpark number for their estimate. Many contractors will say that they can not provide a final price until they have drawings from an Architect, which for the scope of this project, you may need anyway in order to obtain the building permit; however, don't let them write you off too quickly since you cant provide drawings. The list of violations and a quick site walk should be enough to get an estimate started.

Additionally, use caution when selecting your contractor; there are a lot of great ones out there, but also a lot of dishonest people looking to take advantage of owners and make some quick money. While the pricing you receive from your bids can vary greatly, just remember that not all contractors are the same, and I would recommend trying to do some vetting before you fully bring someone on. I'm sure there are a lot of people on this forum that can definitely provide some good contractor references as well. If you hire a full-on GC they should be able to provide their own licensed trades for the job, but if you want to be the GC on the project and hire your own sub-contractors, by the sounds of it you will likely need Electrical, Plumbing, HVAC, and Roofing at a minimum.

Martin Vehlow · Answer

I know the exact buildings you're talking about. I would NOT recommend these ones for an inexperienced investor. Those 3 four-plexes need so much work, and their asking price is still pretty high IMO. They also prefer to sell them off as a package deal for all 3 buildings. They also all share a driveway, so it'd get complicated if you are trying to only buy one.

Martin Vehlow · Answer

@Daniel Winsauer, I would recommend you take a contractor or two and go through the buildings to get an idea of cost. It's going to take some very experienced contractors to get these buildings up to par, esp with all the city violations.

Martin Vehlow · Answer

Or, send the list to a contractor to get a ballpark idea.

Crystal Smith · Answer

One of the challenges you're going to face is not controlling property and asking contractors to walk the property & give you an estimate. The time he spends with you could be spent with someone who actually controls property and has the possibility of closing. I.e. Where can he make money. So what do you do in the meantime? Options are:

• Get the property under contract and use the inspection period to nail down the renovation costs. You'll at least control the property by contract, which could reduce some contractor concerns. Some, not all. Some contractors want you to own the property outright before they'll walk it w/ you.
• Establish a relationship w/ a contractor and pay him for his time to walk the property. Whether you purchase the property or not what you learn can be used for the next deal. You'll have to build that into your budget.
• Before we built up our own database of renovation cost we used Homewyse.com to get us in the ballpark for a renovation. You're still going to have to develop some knowledge of construction but we found it to be an excellent tool.
• Attend your local REIA meeting (virtual) and find an investor who has done a project like yours. Get a ballpark on what it costs.

Daniel Winsauer · Answer

@Martin Vehlow

I'm trying to find someone who can come see the property with me to help me estimate the repair costs. After I know that I can know where the purchase price needs to be to make it a good deal. I agree that as is the price is to high. With my experience and access to capital I could only do one building right now but if it went well I could repeat on the others.

Dilapidated fourplex worth it?

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