Hi everyone! First time poster, just found this forum the other day and it is very informative and I hope to post a lot more in the future. Anyway, I am posting today because I am in a very tough situation. To be honest, I am frankly embarrassed to even post this. But, hopefully it can help other investors that are just starting off, and also can help me get an informed unbiased opinion from a myriad of knowledgeable investors.
Here is my situation. I have been investing for about a year now. For the first 7 months I didn’t do a single deal, I was just mainly beating the bushes and constantly looking for something, but had little luck. Then in late November of 2007, I found an ad in my local paper about an investment property for sale that was offering owner financing. I think the deal was advertised something like this, remodeled 5 unit investment property, $220,000, $5,000 down, balance on a note @ 7.0% on 40-year amortization and a 5 year call. I call the number, and find out more information, the property is vacant now was being rented out for $500-$550/Month Etc. So I do some basic calculations, and realize the GRM is in the 80-88 ballpark range.
This looked really good to me. Most properties I was looking at had GRM’s starting at a minimum of 100, occasionally I could find something in the 90’s. Also, of note in the area that I was concentrating in you could easily find GRM’s in the 200 ballpark, and the average being in the 140-160 range. During my first few months I was concentrating on a specific neighborhood in my city and looking at a lot of MLS properties. The neighborhood I was looking in was one of the nicer areas of my city and thus the high GRMs. (My city is probably like every other city where in low income, to war zone areas you have GRMs from 60-90, middle of the road areas you can maybe get something for 90, but the average is probably from 100-130 and nice areas where it is usually at least 140. And of course, there are variations between each of these three main areas.)
I go see the property, and it is not really as advertised. They were in the process of renovating it but the work that is being done is not of high quality. I walk through all the units and remember thinking at the time this is a no go. I talk with the workers there a little trying to get any information that I can. The property was vacant for a few years, owner has a lot of rental properties that he has sold off lately, has about 40-50 more left that he will be selling off, is old and wants to retire. I also was asking about the work and what was done etc.
While I am there, another investor is also looking at the property. Eventually we get to talking and he tells me is a luxury spec. builder, but times are tough right now and he needs to do some other projects. I ask him about what he thought of the property and he tells me it is not as advertised, LOL. (Just of note, I do NOT know anything about remodeling or repairs, I can hardly hold a hammer.) He pretty much says that cosmetically, the sheetrock is horrible, and he would fix that, it needs to be repainted, he would put on vinyl siding, (it has some kind of wood exterior), probably put down new floors, and make any other minor repairs that are needed to plumbing, electrical, etc. Said the roof looked pretty good. Said total repairs to do everything right one time and make it look good was $25-$30K. At this moment, I remember thinking no way.
We kept talking, and I tell him how the numbers look pretty good, that the GRM is in the 80’s and if you run the cash flow projections it is also good as far as cash flow goes. He agreed with me, and said he was considering buying the property and fixing it all up then renting it and putting in tenants at $575-$600/Month and then selling it fixed up and therefore at a higher GRM. He called his sheetrock guy to come look at the property and give him an estimate. His sheetrock guy came and looked at it and gave an estimate of $7,500.
At this point somehow we all started talking about a partnership. The sheetrock guy was Hispanic and was going about how you could get $600 for rent no problem. By the end of our time looking at the property, we had roughly agreed to a partnership with the three of us. We would all put up the same amount of money, about $10,000, ($5,000 for down payment, rest to repair) and then manage the property for two years and resell it. Also, the builder said he could probably cut the costs of the rehab to around $15,000 because he and his siding guy could do a lot of the work themselves. So we could possibly be looking at only putting $6,000 to $7,000 each into the property. I thought this would be a great way to get my feet wet in investing.
First, like I mentioned, I know nothing about fixing up stuff, so I would have two experienced rehab specialists to partner with who could show me the ropes some, and also, to me this property looked like it had very good cash flow potential, something I consider strongly when doing any investment. The builder, sheet rock guy and I had worked out a plan that we would from an LLC and all be equal partners (33.33% each). I was getting excited, and was ready to be in on my first investment. The builder and I exchanged calls over the next couple of days going over ideas, etc. Then after about 2 days I stopped hearing from him. Called him a few times with no answer, and left him a couple of voice mails but never heard back. Even tried calling the drywall guy but never could get in touch with.
So hear I thought the deal was dead. But, the more and more I thought about it I was thinking maybe there was some hope, if the builder thought it was a good deal, and again the numbers, to me looked very strong. So, after about two days of not hearing back from the builder I went and met with the owner. I met with him and give him a real low offer, in the $160,000 range. I got this number by using a 10% cap rate and a 45% expense ratio. The owner pretty much laughed at that offer, and said he couldn’t accept an offer like that. I then said, ok, I will agree to your price, but I would like to have a 1 month period for my due diligence and I can back out at any time during this time and for any reason. After that time if I decide to go forward I will put down the earnest money and the closing proceeds as normal. He wouldn’t go for that either, but did say he would hold the property for one week so I could make a decision. He even typed up a little form that pretty much said, I will hold this property until this date, etc. This was actually one of my objectives when I was going into to meet with him. I felt if the builder thought it was such a good deal and the drywall guy also maybe I could convince another investor to pursue it with me. This deal was out of my comfort zone when I got started I wanted to buy a SFH, or duplex that didn’t need a lot of work and that could cash flow. That is what I was looking for. But if I could get another investor who was experienced to go in with me I could do a pretty big deal and learn a lot at the same time.
So, that is what I planned to do. I set up some meetings and gathered all my notes I had on the property and met with some investors. The first guy I met with is one of the biggest investors in my city, who is local. I pretty much showed him all the numbers, he asked some questions, and I went over all my thoughts with him on the property. He said it looked to be a good deal, it would take some work to get up and running but other than the numbers seemed to work. I then asked him if he would be willing to partner with me on it. (I think he thought I had only been asking him for advice and was taken aback here.) He pretty much said that at this stage he had other projects he had to concentrate on and felt this deal was too small for him to form a partnership. (He owns many, many properties.)