We just closed on our first out-of-state property yesterday (in Cincinnati, OH) and are excited to start turning this badly managed property around!
We made our offer of full list at $199,900 for a 5-unit with pro-forma NOI of $3485 (should meet the 1.7% rule) exactly 2 weeks ago, and we knew it was a good deal when we saw it. We had been following the market for about half a year, and dear husband had flown out there about a month ago and had toured multiple properties and met with dozens of local investors and property managers to have a good feel for the neighborhoods. When I called the listing agent (a wholesaler who lists her deals on the MLS), she told me she already has an offer, but I asked if we could be backup offer #1, and told her we could pay all cash and close quick. She told me if we do a 5-day inspection period, let her represent us, and close all-cash in one week, she would go with us versus the other offer that's over list but is financed. We agreed. The tricky thing was that she told us clearly that we would continue to market until she got our EMD, which is a non-refundable $4000. We didn't like the sound of that, and told her that if it's non-refundable, we can only do $500, in the meantime assuring her that we're serious buyers. We agreed on $2000, and we decided that our strategy would be to delay wiring the EMD at the risk of losing the property. Still, we'd rather lose $500 on plane tickets and inspections and have someone swoop in and beat us to submitting the EMD, than lose $2000 for paying a non-refundable EMD and having to back out if it turned out the property was in horrible condition. Also, the agent claimed that they had 8 people interested, but the property manager told us she had only been contacted by only one other interested party, so we knew there wasn't as much competition as the agent claimed.
So dear husband bought a last-minute plane ticket for the next day while I hustled to write up a loan agreement and obtain private funding. (We could scrape together enough savings to close but that would leave no money for rehab.) Over the next few days, he did inspections and arranged for a contractor to walk the property with him and do an informal inspection for $150. He also met the current and other local property managers, local investors, and city officials, while I was arranging meetings over the phone, running numbers, looking through the expense reports, and setting up an LLC and a virtual office/mailbox. We discovered that the property was terribly managed, expenses were off the roof and tenants weren't paying rents. Besides some deferred maintenance: 1) The massive basement unit was home to the person who maintains the grounds, and he was stealing electricity from the common areas and storing junk on the grounds. 2) Water expenses are double what we'd expect for a building that size. As an example, our contractor noted a leak in a faucet and said, "That's $200 a month going down the drain right there, guaranteed." 3) One unit with a long-term tenant with dogs smelled like a urinal except 50x worse. (they didn't want to let us in but we insisted and arranged for a separate walkthrough!) 4) Evidence of water leak coming from a unit above. This was visible from the unit they didn't want to let us into. 5) Multiple tenants not paying rent. NOI ranged from $645 to $2020 during consecutive 11 months and averaging $1480/mo over the last 12 months, a far cry from the expected $3000+ supposed rents. 6) The basement unit is unpermitted, which wasn't a big deal for us but it was a good card to negotiate with.
In the meantime, the wholesaler was impossible to get a hold of and was incredibly rude to us during the inspection period. We ended up negotiating the price down to $185,000, and she accused us of trying to get a "Rolls Royce for the price of a lawn mower". Since she was representing us, we made sure to look through the purchase contract carefully and asked to add that the security deposits should be credited to us at closing.
In the end, we were satisfied that we'd discovered 99% of everything that can be discovered about the property and we were able to close. Since it was all-cash, it was a relatively simple transaction. Currently we're working on getting insurance in place, signing the property management contract, and getting a mortgage. (If we bought the property with our own cash, we don't need to wait for 6 months to season the property before getting a mortgage with a local lender.)
Our plan will be to first send out a notice to tenants reminding them of late charges being enforced according to the terms of their lease. As of today (mid-month), 3 of the 5 units have not yet paid rent for November! Over the short-term, we will put low-flow fixtures for the faucets and showers and see if the water bill goes down. We will also have to rehab the urinal unit; that tenant doesn't have a lease but I'd like to be considerate and give them ample time to move, and not make them move in winter. Our longer term plan is to split the basement unit into 2 smaller units. The unit already has two entrances and 2 1/2 bathrooms, so it will be a matter of putting up a wall and adding a kitchen. Follow along on our journey!
Pictures below, more coming soon...
Driveway and retaining wall needing repair.
This unit was apparently completely remodeled 2 months ago. It's a shame they didn't pick better looking cabinets/flooring.
Basement unit.
