The House I Did Not Buy Monday

townhouse

This is the story of how I spent six hours on Monday deciding not to buy a property advertised on Craigslist. It was quite an adventure but I ultimately had to pass on it. It all started on Saturday night when I was browsing some properties and noticed a townhouse advertised as two separate units with separate utilities and addresses. I thought, “Wow – this multi-unit could be a major rent producer.”

Here’s what happened.

On Memorial Day this year I decided to use my time wisely and try to get in some reading and family time. We had a great day remembering those who gave the ultimate sacrifice for our freedoms. I am so thankful for the great service of our armed forces and their dedication. As an aside, I recently read an interesting book on how U.S. Army Special Forces aided Hamid Karzai in his quest to unite Afghanistan and overthrown the Taliban: The Only Thing Worth Dying For. I recommend it but it is a little gruesome.

We also celebrated the birthday of our second oldest son. We had a nice breakfast and then went and bought him a new bike! It was truly a wonderful day and I’m hoping that we made a memory together.

But… I also did a little work on my investment portfolio. Actually, I spent over six hours in a somewhat maddening adventure to research a property that I had seen advertised by a wholesaler on Craigslist the weekend before.

As I often do, I was looking at houses for sale on Saturday afternoon. I have started broadening my search for houses lately. Rather than only using the typical websites to search the MLS, like REDFIN, I have started to look at “for sale by owner” websites and Craigslist. Some of the best deals will likely not be found by using the typical approach. I’ve also recently signed up to be on distribution lists of houses that wholesalers are offering.

These investors put a house under contract but don’t actually own the property.  They then market the right to buy that house and collect a fee. It ends up being a nice situation where the wholesaler does the work of finding good deals for investors who are looking to get discounted property but who don’t want to be involved in the extensive marketing efforts to find them.

When I saw this multi-unit property I was immediately interested. Many houses in this area are attached properties and some of them are very nice. Many of them are not very nice though! In addition, the smaller older houses in crime ridden neighborhoods can sell for $30,000 or less even when they are completely renovated. These properties will never appreciate in value significantly. But the cap rates are off the charts. For roughly $30,000 you can collect $800 – $1,200 per month in rent depending on the area.

There are big risks involved in doing this. You still have the maintenance of the house and the risk that your tenants will destroy the property. These are much bigger risks in these areas of high crime. Many of the tenants are responsible and wonderful. But there is a large population of tenants you would never want and it is a dangerous game trying to differentiate them. That is one of the reasons I use a property manager so that I don’t have to agonize over those decisions. Property managers usually have years of experience dealing with screening tenants.

I did a little research on the house by simply typing the address into my favorite search engine. This brings up several helpful websites, Zillow, Trulia, REDFIN, and various others. There have been a great deal of these helpful websites developed over the past few years. I like Zillow and REDFIN because they usually go out on a limb and estimate the value of the property.  These estimates are highly variable and may be very far from the true value depending on the area. Trying to use an algorithm to estimate the worth of a unique piece of real estate is not the best approach. However, it’s a great way to get sense for what similar houses are selling for in the area and what the property may be worth if it is in good condition.  The interesting thing about Trulia is that it shows a heat map of crime. This is particularly important for investing in urban areas. And this was a major consideration in the house I was researching.

Researching? Yes. You have to “spend time at the library” to understand the background of a property you are interested in. These days that ends up being internet research. Here are a few items you should research when interested in a property that will save you from making a transaction you regret:

  • Tax records: these show you the assessed value, the square footage, the current owner’s name and address, and indicate the type of dwelling.
  • Property records: this will show you how the deed for the property has been transferred and is one of my favorites! There are so many interesting things that can be learned by looking at the deeds and understanding how the ownership of the property has transferred over time. You will often uncover times when the house was in disrepair and it was transferred at a low value, foreclosures on the property, and rehabs of the property. You can see this when a developer buys it for a low price and resells it months or a year later for a much higher price. You can also see the history of financing done on the property which could help you understand how much the owner has remaining on their mortgage.
  • Real Estate websites: I already listed a few of these. These websites will show pictures of the property, former or current advertisements of the property for sale, school information, and general information. They also try to aggregate information from the tax records and property records but they sometimes charge a fee to see all the data. If you are motivated to succeed in real estate you should get access to the free records online and not rely on these websites for that. They will often post the information late or it may be at a summary level which could cause you to miss important details.
  • Craigslist, Facebook, LinkedIn, and others. These websites can be a goldmine of information about the people who own or are living in the property you are interested in. We’ve used them in the past to locate properties and research the associated people. We did this mostly with prospective tenants and found a goldmine of information.

When I typed in the address of the property the last search engine result was a website of a local wholesaler. This was very interesting. I realized that the property was not being sold by a typical owner but by a local wholesaler who sometimes takes ownership or does rehabs himself and then resells the property to other investors. I found many more pictures on his website and was able to get a little information about him and his approach. This made me more interested in the property.

I contacted him and by Sunday night I had been given the access code to the property. This was the first time I had ever been given access to a property for sale directly without the accompaniment of an agent. This was exciting for me because I had recently severed my relationship with my agent. The agent was doing a great job but we had recently lost two deals and I realized that I was probably better served by going it alone.

I was also happy to have the access code because I wanted to spend Memorial Day with my family and to make my son’s birthday special. I figured I would go down to the house at 6am and be back home before 9am when everyone was getting up.  The other plus of going that early is that this was a dangerous urban area and 6am seems like a good time to avoid some of the more dangerous people. I also didn’t really want a bunch of spectators either as I walked up to the house and tried to get in.

I reached out to a good friend of mine who also happens to wholesale properties and generally knows a lot more than me about houses and real estate and asked if he wanted to come along. It was so early and he thought I meant 6pm so I made the trip down alone.  The property was about forty minutes from my house but I was very interested and figured it was worth driving there once. By 7am I was at the property and looking for the lockbox.

I found it hanging from the water valve in front of the house and quickly put in the access code. This was so cool! I was looking at a property on my own for the first time and it was a great multi-unit investment. I pushed on the button to pop open the box and grab the key and it seemed stuck. I tried a couple more times and then thought I would just walk around the outside of the house first. Boy was I surprised.

When I walked to the back, the house looked two times as large as from the front!

townhouse

This thing was actually huge! The picture here shows a back door with glass but that had been replaced with a sold back door.  On the back door I noticed a piece of paper which was written on legal letterhead. It was an eviction notice for one of the two units and stated that the rent was $1,250 per month! That was a huge amount of rent. It did state that the lease term was only a few months so that probably wasn’t proof of what I could get on a one-year lease. But even so, it showed the power of the property to command fairly high rents.

I walked around the block a little bit to get a sense for the area. It was honestly a horrible area. I saw three to five properties that were boarded up or needed to be torn down. Many of the yards were overgrown. There were already people milling around on the streets. This is a strange phenomenon in my city. People walk around with nothing to do. They are waiting for liquor stores to open or to find people to talk with. They generally have no purpose and are often the same people who get involved in vandalism, public drunkenness, drug abuse, etc. Why aren’t these people working on their yard or going to their jobs? Do they have jobs?

I went back to the front and was determined to get the lockbox open and check out this property! I was really excited to see how the multi-unit was laid out and to see the condition of the property. The pictures looked really good and I was hopeful that I had found a diamond in the rough. I still couldn’t get the box open. I texted and called the seller a few times and even e-mailed him a picture of the lock box with the code correctly entered but didn’t get a response. I texted my friend and he said the lock boxes sometimes get stuck and need to be jostled or tapped with a hammer. I picked up a rock and banged on it, tapped it with a board, and even got my ice scraper to try to unjam it. Nothing worked! It was past 7:30 and I still hadn’t entered the property.

I drove around the block to check out the neighborhood since I was already there hoping that the seller would get back to me. What a strange place! There were views of the water and every single type of house you can think of was present in this neighborhood. It looked like there were raised ranchers / trailers, attached homes, single family homes, and apartments. And there were examples of each of these types of homes being boarded up, in disrepair, or in perfect mint condition with beautiful landscaping. This helped me understand that I couldn’t use Zillow or REDFIN to estimate the value of property in this area. Each one of these properties would need to be carefully evaluated individually to understand their true value.

I went back and tried the lock box again. I even tried different codes but had no luck. By this time I had been at the property an hour and I sent a very frustrated message to the seller and drove home.

And can you believe it, he got back to me a few hours later and said, “sorry I sent you the wrong code.” He sent me the wrong code?!? What kind of professional does that? I mean can’t you check it once or twice before you send it just to be sure? This was a major disappointment to me and a red flag. If this guy gave me the wrong code what else was he screwing up? The correct code was only one digit different from the code he had given me but it didn’t happen to be one of the ones I tried at the property.

I did a little more reading about the house though and just couldn’t get around the fact that it seemed to be a good deal. So I texted my friend again and he said he would really like to see the property. With about three hours already invested in researching this thing earlier in the day we went back down to the property.

Thankfully by this time I had had a wonderful breakfast with my family and already purchased the new bike for my son. He was off and riding it with his brothers and sister and everyone was having a good time. Except me because of this annoying situation!

We went back down to the property with the correct code and the lock box popped right open. That was so easy – it made my previous attempts even more annoying. We went in and found a very interesting multi-unit property. There was an upstairs unit and a main floor unit. The main floor unit was two stories and had its own internal staircase to the basement where the kitchen was. The upstairs unit had everything on one floor and was 1 bed and 1 bath. The downstairs was 2 beds and 1 bath with an extra room. The property did have two of everything, two furnaces, electric meters, gas meters, and mailboxes. Everything was in working order, the power was still on, the windows were all in good shape, there were no leak stains, everything had just been painted, and all that was needed was a couple of kitchen appliances. Those could easily be picked up at a scratch and dent place or an outlet. This thing looked good to go!

I was ready to put an offer on it when we left. We saw a guy sitting at the end of the street drinking and he looked like he had already had too much. There were liquor stores and bars all around.  What a rough place. I didn’t yet realize how rough it was though.

I got home and prepped to give this guy an offer. My wife wasn’t too excited about the property. But me and my friend had discussed it and it seemed like a decent option. Buying in rough areas can result in good cash flow and using a property manager would hopefully shield me from dealing with the tenants.

Based on my wife’s concerns, I decided to do a little research on the neighborhood and try to get a better estimate of the value of the house because of the things I saw when I was there. One of the things I noticed was that the house was sitting in the middle of a dark red zone on the crime heat map. I was using Trulia and there was a list of the crimes. Nothing seemed too surprising, vandalism, theft, domestic violence.  Hey this is the city right? I didn’t see any arson, murder, or rape.

The guy was asking $50,000 and I was thinking of offering $40,000. I decided to see if I could get some information about the neighborhood. I found a summary of the neighborhood and was absolutely shocked. This was one of the worst areas in the entire city! It wasn’t known for the most violent crimes but from a real estate perspective it was bad. This neighborhood had one of the highest rates of vacant properties, highest number of renters, lowest income, lowest property value, lowest education level, lowest number of car owners, and the list kept going on and on. This was scary. Would I even be able to find tenants for this?

I then went over to a website that gives estimated rents called rent o meter and tried to estimate how much rent I could get with this house. The rents were very low. The problem was that I would probably end up having a much higher vacancy rate than I am used to. Having a vacancy on a multi-unit isn’t too bad. If I had one of the units rented and one vacant I could still be cashflow positive. But the neighborhood was so rough I wasn’t even confident I would consistently have one of the units rented.

On top of that I would need to buy appliances for the kitchen and possibly replace the furnaces.  Those things were 46 years old and still running strong! With two furnaces of the same vintage that is a potential $10 – $15 thousand dollar maintenance cost coming soon. I was very quickly settling on an offer as low as $30,000.  Now the funny thing is that the seller had said he was willing to give me $250 off the purchase price because he had given me the wrong key code.  Are you kidding me? Why would he think I would be giving him full price in the first place? Wasn’t he expecting me to negotiate on price? I took this as a strange sign. He kept saying “let me know if this property is for you” and “if the property isn’t for you then that is ok.” With these kinds of statements and the miserly offer of a $250 discount (which is a little bit insulting) I was doubtful he’d drop $20,000 off the price. I was also doubtful he would even get the price correct and remember our negotiation based on interactions we had.

I was left with the prospect of offering $30,000 for a multi-unit that needed some attention (and frankly which scared me) or walking from the deal. I am a very patient man. I don’t need a rental property right now. I am very active with my hobbies and my job is very demanding. I love spending time with my family. What is the cost in time that this seller, who seems incompetent, and this property is going to cause me? Is it worth it?

Ultimately, I decided it just wasn’t worth it to deal with the seller, the preparation of the property for rent, and the hassle of owning a property in such a horrible neighborhood. I ended up spending at least 6 hours researching and investigating this property but ultimately had to walk away from it.

I learned a couple of things:

  1. do your neighborhood research using google maps and other tools FIRST before driving to the property
  2. confirm the access code and arrange for someone to be available if you have problems getting into the property
  3. tell the seller what you are thinking of offering before going to the property so you can get a sense for how willing they are to negotiate
  4. try to work with sellers who won’t waste your time and who are known to be good professionals; real estate seems to be littered with people who don’t know what they are doing or who are otherwise unprofessional
  5. get your research process down to a few repeatable steps that can be done relatively quickly

This was a somewhat anti-climactic result but it is one that I am very happy with! I avoided getting into a bad situation and now have a property on my radar that may become desirable if and when the seller drops the price. I recently read that highly successful people say “no” to almost everything and am trying to be disciplined and put the “no” principle into action.

Author: Patient Wealth Builder

I live in the Mid Atlantic region with my wife and children. I am a finance manager for a Fortune 100 Company with over 10 years experience and have an MBA and CPA – but my true passion is investing!

6 thoughts on “The House I Did Not Buy Monday”

    1. I am just glad I learned some good lessons from it. I’ve never worked with wholesalers before and now I know to be on the lookout to avoid that particular neighborhood. I also have a hunch that the house will need to be significantly discounted. If that happens I may become interested again. I’m looking on the bright side – that is six hours to learn some lessons but at least I avoided the greater time involved in buying and then having to try to sell it etc. Thanks for stopping by.

  1. Good call on skipping this one. Even with a property manager and no matter how good they are, they’re going to have a very tough time filling such a property with qualified tenants. Chances are there may not even be a qualified tenant pool to select from so you’d be enduring an extra long vacancy and in the end, the PM may just fill it with so-so tenants just to get it filled. The other point I want to share is that most reputable PM’s that I’ve talked with don’t even consider managing in properties in such bad areas. Which makes me wonder about a PM that is willing to take on managing such a property.

    You’re right, some wholesalers frankly don’t know what they’re doing or how to price their properties. Not to mention, in my experience the rehab numbers are almost always underestimated and the ARVs well overestimated.

    On lesson learned #3 though, I’d say hold off on sharing any price point until after you are able to see the property and determine an initial estimate of repairs needed. You don’t want to misjudge how much rehab is really needed and often there’s a lot missing that can’t be assessed in the online pictures. I know you don’t want to waste time, but if you fill their head with a price point from the get-go, then negotiations will be much tougher later on after seeing the property and realizing that your offer needs to be much less. Just my 2 cents.
    OB @ Out of State Investor recently posted…My Monthly Cash Flow Report – May 2016My Profile

    1. Interesting point you make about a property manager who takes on a property in such a bad area. They’re probably just looking for the quick fee on the front end, the finder fee, and don’t mind if the tenants continue to turn over or if they don’t treat the property well. I am trying to find the right balance of areas where the houses have a good cap rate but where I can find decent tenants.

      I like what you said about price point. I did get to view the property with my friend who is a home remodeler so he gave me the high-level understanding of the property condition. But there is really nothing like getting a home inspection. I read your post about the house you didn’t buy while in Japan and had to laugh about the stolen AC unit. Glad you got the inspection and were able to avoid the electrical worries. I’m truly convinced I may need to consider 50 – 100 properties before finding the right one.

      I’m honestly a bit more oriented towards stock investing but am sure there are real estate opportunities out there. I’m now getting e-mail blasts from various wholesalers and will bide my time to find the right deal.

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