When we left off last week, I had found a great property in a great neighborhood with a minimum of 13.64% cash ROI… but now I had to try to get it for a great price!
As I mentioned, the property was a very nice duplex in a working-class neighborhood listed at $84,000. I had recently bought another duplex in the area for $65,000, but it was a smaller property (two two-bedroom units versus two three-bedroom units) that rented for less. On this property, one unit was occupied for $600, and the empty unit (previously occupied by the owner’s daughter) should rent for $700 to $750.
The property had previously been under contract twice, and had fallen through at the last second both times. I knew that the seller was hurting, because it was now mid-winter, a thick layer of snow was on the ground, and the local real estate market had slowed down to a crawl. My agent spoke informally to the seller’s agent, and he came back with good news: The seller was willing to accept an offer of $80,000, but not a penny less.
Of course, I love to push my luck, so I asked my agent to prepare an offer for $77,500. Based on $1,300 in monthly rent, this would bump my cash on cash return up to 14.20%. My agent sent the offer over, I signed it, and he submitted it. It was the week of Christmas.
Then came the tough part. Stuff operates much more slowly in the midwest, especially when dealing with some sellers, and doubly so during the holidays. Technically speaking, offers are time-sensitive, but in practice, they often aren’t. Since I was offering a price a few thousand below the seller’s stated bottom price, I didn’t want to betray my eagerness to get the deal done. I had to wait for the seller to respond, no matter how long it took. Six days later, I got word that the seller had accepted my offer. I guess he was tired of holding a half-empty property and was willing to drop his price another few percent to get the deal done. Just like that, I had improved my projected cash ROI by over half a percent!
I got on the phone with my property inspector immediately to ask him how quickly he could get into the property. Before we could talk, he expressed how grateful he was to me for referring him to my property manager, who had been recommending him for most of their inspections since our first deal together. He mentioned that as a result of that referral, he had his best-ever year, and offered to give me a pest inspection with my home inspection, free of charge. In real estate, we are often concerned with forcing others to perform, but I wanted to share that anecdote to show that it’s just as important to reward those that take care of you with continued business and referrals. It can pay off in unexpected ways.
My inspector went in a few days later, and returned his reports very promptly. As expected, the property was in excellent physical shape, but there were a variety of small- and medium-sized issues. I got on the phone with my inspector to discuss his subjective opinion of the property.
My inspector shared with me that while the property was in good shape overall, the tenant in the occupied unit was clearly a problem. He shared further pictures with me of the garbage and clutter that filled the unit and exterior, and opined that I should ignore my profit targets for the first few months and focus on getting both units occupied with good tenants. This is what I love about my inspector in this market: he isn’t afraid to share what I need to know as a landlord.
While some investors would see the existence of a problematic tenant as a deal breaker, it’s important to also see it as an opportunity to get a better deal. I called my agent up and asked him to write up a release of the inspection contingency, but to ask for $1,000 cash back at closing to compensate me for the cost of repairing the damage caused to the unit by the tenant. We also added a condition to the ROC: complete cleanup of all clutter outside of the property, and in the garage. In essence, I was using the seller’s poor tenant screening as leverage to get a better deal, and to have the property delivered to me in improved condition.
When the seller responded to the release of contingency, they offered $300 in cash back at closing, and agreed to all of the terms requiring cleanup of the exterior grounds. That was acceptable to me, so we both signed the release of contingency. With that, we were committed to complete the deal.
It’s always a little bit of a gamble when you take on someone else’s problem, however minor, but it’s a calculated risk that can pay off, too. I knew right away that I would be moving the existing tenant out. The tenant was on a month to month lease, and while there was the possibility for them to stop paying or otherwise force an eviction, I had a few ideas about how to incentivize them to do so with minimal difficulty. I’ll discuss those efforts more in the coming weeks.