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4 Plex Short Sale Experience So Far…

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4 plex short saleMy one financial goal this year is to expand our rental property holdings and acquire a 4 plex. This is a lot tougher than I thought. We started looking in February and I went to see 4-5 places and finally found a property I liked in March. This is property #1 in the 4 plex search update I wrote back then.

Here is the 4 plex recap

Asking price: reduced from $375,000 to $350,000

Rent roll: $2,800 per month

Location: Good location next to a major shopping area and freeway. There are other plexes and apartments on this street, but one street over, the neighborhood is much nicer with all single family homes.

We made an offer to the bank at $325k + $5k toward closing cost and signed a bunch of papers. This property is a short sale and the bank took their sweet time with it. They took about two and a half month to do all their analysis and paperwork and we finally heard back from them earlier this month. They accepted our offer! Yay! (Oh so I thought.)

Once the bank accepted our offer, we scheduled an inspection and found quite a few problems with property. Here are the major issues.

  • Standing water in the crawl space! This is terrible news. There is some mold and the vapor barrier needs replacement. We got a quote to fix the crawl space by adding drainage and a sump pump for $5,000.
  • Spots of dry rot on eaves, trim, exterior siding. These all need to be fixed and painted.
  • Toilets loose in 2 units. Need to replace wax ring and resecure. There might be some dry rot damage to the floor board under one of these toilet. This sounds like an expensive fix as well.
  • All the fireplaces need cleaning and new caps. Water is dripping into the inside of the fire place during rain… The chimney chases are in bad shape and need repair.
  • The roof is in good condition, but it needs demossing and some flashing repair. Gutters and downspout needs repair and maintenance.
  • Old style Federal Pacific Stab Lok circuit breakers. These breakers has a poor reputation and probably will need to be replaced at some point. $5,000+
  • The appliances are old and will need to be budgeted for replacement, but that’s expected. We’ll probably get appliance insurance to cover this issue. It would have been great if we could qualify for free appliance from the government, but we don’t.

OK, this doesn’t sound like a good investment anymore… No wonder their maintenance cost was so low last year. After seeing all of these issues, I got a bit scared and we sat down to figure out if we should go forward with this. Eventually, we decided to make a counter offer because there are so many costly repairs. We made a new offer to the bank for $300k + $5k toward closing cost. Unfortunately, the bank will have to start the process all over. Does this mean it will take two more months to hear back from them? Hopefully, we’ll get a quicker response this time because they have all the documents already. We gave them 3 weeks to respond and we’ll see what they say.

By asking for a $25,000 reduction in price, we will save $6,250 in down payment. We’ll use that money to repair the crawl space and fix the other water issues before the next rainy season. There are other issues as well, but I think the rest can be fixed as the tenants turn over.

Here is my calculation with the new offer.  I increased the operating cost from last year’s $7,000 to $9,000. I haven’t add the $5,000 crawl space repair in here yet though. I should probably lump it in with the 25% down payment.

cost $300,000.00
25% down payment ($75,000.00)
mortgage loan $225,000.00
operating cost (repair, maintenance, lawn, etc..) ($9,000.00)
management 7% rent ($2,352.00)
property tax ($4,000.00)
insurance ($1,068.00)
yearly cost of operation ($16,420.00)
Rent $2,800.00
vacancy rate 5%
Yearly rental income $31,920
1st year
Monthly calculation
Rent $2,660.00
debt service at 5% ($1,210.00)
monthly operating cost ($1,368.33)
cash flow $81.67
estimate monthly depreciation $530.00
depreciation value @ 28% tax $148.40
money to principle $300.00
Monthly net worth gain(cash flow + depreciation value + money to principle) $530.07
Yearly net worth gain $6,360.80

Well, what do you think? I know we have at least one real estate expert reader – Krantcents owned quite a few rental properties before and he can probably give us some pointers here. The monthly cash flow doesn’t look very good in the first year, but I’m 90% sure the rent can go up once the place is spruced up. I checked the rents on the same street and I think a 4 plex in a better condition can bring in about $3,200 per month.

Anyway, if the bank declines our offer then we’ll keep looking. I think I’m done with short sales, though. The wait is just too long. Our real estate agent told us the market is actually pretty good recently. There are only a few properties for sale so inventory level is only around 4-5 months.


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{ 31 comments… add one }

  • cashflowmantra June 29, 2011, 2:40 am

    I don’t see any maintenance costs in your calculations unless I am missing it. I guarantee that as soon as you buy it, the water heater in one of the units will need to be replaced or something of that sort. I would prefer to see a larger cash flow cushion, but I suspect you are on one of the coasts where real estate costs are higher. I wouldn’t be paying anymore than about $250,000 for this in Indiana.

    • retirebyforty June 29, 2011, 8:48 am

      That’s part of the operation cost. I edited the post and added it there. We’ll get appliance insurance for at least the first year. The appliances are quite old and need replacement soon. Yes, we are on the West coast. It’s tough to find a good deal around here. I know there are better deals in the mid west, but I’m pretty sure the Mrs. won’t go for out of state properties.

  • 101 Centavos June 29, 2011, 4:15 am

    I don’t much about rental properties, so this is very interesting to me, following the process. What is the long term for your local market, are more people projected to rent rather than buy?

    • retirebyforty June 29, 2011, 8:50 am

      The area is projected to grow so I think there will always be renters. That’s what I think anyway… I’ll keep updating the process. 😉

  • Matt June 29, 2011, 4:32 am

    I hear ya on short sales. I’m done with them. There are too many hands in the cookie jar when you have to deal with the bank and the owner. I will only look at foreclosures and regular sales after waiting six months on a deal that the selling Realtor ending up winning (I think there is an ethics violation here). Anyway good luck and I will enjoy reading about the process.

    • retirebyforty June 29, 2011, 8:52 am

      Really? When I was signing paper work I thought there was something about the realtors not being in cahoot with the buyer. That sounds like a violation to me too. We’ll only look at foreclosures and regular sales after this as well. The wait time is opportunities wasted.

  • Diana June 29, 2011, 7:29 am

    I hope you’ve included time and stress costs in your calculations…I know quite a few people who’ve gone in for the duplex/4-plex investment and they unanimously say it’s a /nightmare/ and not worth the time you put in. My mother had one as part of her retirement plan, and got rid of it to focus more on commercial properties.–much less hassle. With her 4-plex she had to deal with 4 tenants, at least 2 of which were always late late late. Eviction fees add up, and there’s little hope of recovering the lost months without more time and money. Not to mention tenant damage to property. My mother has run her own businesses for years so is used to dealing with stress–but this one property just ran her to the ground!

    Just wanting to put that out there…in case no one else has. If you’re going through with this, you need to REALLY know that it’s going to be worth it.

    Good luck!

    • retirebyforty June 29, 2011, 8:54 am

      We are going to hire a property manager. Hopefully that will shield us from most of the issues. We have two rental properties already, but we have really good tenants so far! We haven’t had to deal with a tenant from hell yet! If it’s too much problem we’ll probably sell it in a few years and make our exit. Thanks for the comment, I’m sure the Mrs. will appreciate this.

  • Krantcents June 29, 2011, 9:49 am

    Although short sales and foreclosed properties (bank owned properties) stretches out the process, finding good properties is hard to do! There is always something to consider such as age of property, maintenance, deferred maintenance and operating costs. Your approach is good, but be patient. Acquiring a bad property will kill you desire to own income property. The adventure continues after you own it anyway. Put yourself in the shoes of the normal seller, and think about why they are selling. Either they located a better property or they are tired of the problems they have.

    • retirebyforty June 29, 2011, 10:06 am

      I’m pretty sure the seller is having a hard time getting this property to cash flow. They purchased it in 2005 for 380k. Assuming around 20% down, their debt service would be around $1,800. That’s quite high with rental income at only $2,800.
      Thanks for the advice. If we don’t get this property, we’ll be a lot more patient.

  • RT June 29, 2011, 10:15 am

    Standing water in the crawl space…..this is not a property you want. Walk away. There will likely continue to be over time issues with water, mold etc. You get a tennant allergic to mold, and thats going to cause big problems for you. Walk away.

  • Jeff @ Sustainable life blog June 29, 2011, 1:10 pm

    That’s quite a bit of work for just 1 property, but good luck getting the bank to accept your offer!

  • LifeAndMyFinances June 29, 2011, 4:03 pm

    Great recap of your experience! This property does have some potentail, but it sounds like a lot of things could present huge problems. If I were you, I would move on.

    • retirebyforty June 30, 2011, 9:42 am

      You guys might be right about this property…. It’s difficult to find a positive cash flow property locally. We might have to put this off for now. I know there are much better cash flow properties in Texas and other states.

  • Paula @ AffordAnything.org June 30, 2011, 10:42 am

    Stick with it!! I bought a 3-plex in a short sale, and while the wait is long and sometimes agonizing, the approval is ultimately worthwhile in the end!

    As for your estimates: you may want to verify that you can get insurance at such a cheap rate. I couldn’t find a company to give me residential homeowner’s insurance — the company said that because it’s a 3-plex, it qualifies as a “commercial” property, not a residential one. The result is that I have to buy commercial insurance for $3,000 a year.

    Look into that when you’re doing your estimates … and if you CAN get homeowner’s insurance for a 4-plex, please email me and let me know whom you got it through!!

    • retirebyforty June 30, 2011, 1:24 pm

      I got a quote from my agent at Country Financial. It’s still a residential insurance. They had an apartment owner policy tacked on, I think it was just another $200 extra.

  • Hunter June 30, 2011, 12:01 pm

    I read recently that short sales take forever, especially when there are secondary lien holders. I think you are being prudent with your calculations and use of an independent inspector. I’m looking forward to learning how the bank responds? Good luck.

  • Ginger June 30, 2011, 12:48 pm

    I have been looking for another multifamily property as well and finding a good deal and a good property is hard. I have been looking for six months and have not found anything I like, in my price range. However, it took us about 6 months to find our current property and we were looking every night and weekend. If I do not find a decent place in 6 months I’ll start working harder at it but for now I am fine with being extremely picky.

    • retirebyforty June 30, 2011, 1:26 pm

      We are working with a real estate agent and there are just not many multi family housing up for sale. The inventory is pretty stagnant, I haven’t seen a new entry for a few weeks. I want to get in pretty quick because of the low interest rate, but I guess I’ll have to be patient.

  • Spruce Up Your Finances June 30, 2011, 7:21 pm

    The long wait is always a big problem with short sales, there are just so many unknowns and surprises as well. It is good that you are working with an experience real estate agent who knows the ins and outs of short sales.

  • BeatingTheIndex July 1, 2011, 5:10 am

    While the 300k counteroffer provides you with some breathing space in terms of reparation costs, make sure the water issues doesn’t tax your income in the long run and keep looking for deals!

    • retirebyforty July 1, 2011, 9:53 am

      I think the crawl space fix should address the problem. There were little puddles down there not big pools so they should be able to fix it. I’ll keep looking while waiting to hear back from the bank, but I don’t see any great deals right now.

  • FP Guys July 1, 2011, 6:21 am

    Sounds like you have a lot of work ahead of you. I think it was wise to go back with a counter offer; granted it may be rough waiting for the process to take several weeks but in the end I think it will help your overall expenses. Perhaps the list of trouble areas has kept potential buyers at bay giving you a chance to swoop in and purchase at a lower price than what has previously been asked for. Other than that, be lenient with your calculations and I think this endeavor will be successful on your end down the road!

    • retirebyforty July 1, 2011, 9:55 am

      Thanks! I don’t think being lenient with the calculation is the way to go. I did some research and it seems many property owners underestimate the operating cost.

  • Money Reasons July 1, 2011, 6:29 am

    Thanks for sharing you struggles with this short sale! Sounds like a time eating battle all around.

    As a non-rental property owner, I live vicariously through your posts 🙂

  • Kellen July 1, 2011, 10:34 am

    This is really interesting to follow. I’m still not sure whether I think real estate investment is for me or not… It can be so dependent on the tenant you get.

    Is 5% vacancy a safe guess? I was just reading an article about the best places to rent out property, and the lowest vacancy rates quoted were still around 7%. Especially if you have low-income renters, and I don’t know if that would make them more/less likely to move, but it may affect what you can expect the vacancy to be like compared to average.

  • Nate July 13, 2011, 2:52 pm

    I love your blog, btw!

    I don’t know anything about the real estate market in Indiana but here in North Texas, I would really hesitate to do the deal (based on the numbers you’ve published).

    You’ve probably heard of the 50% rule, which says the the expenses for an income property approach 50% of the gross income over the long term. This includes taxes, management, insurance, maintenance, vacancy.. everything.

    For this deal, this looks to be about 16,900/year which puts your net operating income also at 16,900/year.

    With your total outlay of 75k + closing costs (we can ignore them for this discussion) and a monthly income of $190 (the 50% rule was more generous then your own numbers, which could be more accurate), that’s a cash-on-cash return of 3%.

    When I evaluate a property, I ignore principle pay-down and appreciation since to me, that’s just icing on the cake.

    Like I said, I don’t know anything about your real estate market so maybe deals like this are typical. Either way, good luck and good investing!

    • retirebyforty July 13, 2011, 9:21 pm

      We are in Portland, OR. The real estate on the west coast is generally expensive. It’s tough to find a cash flow positive deal around here. The monthly income would rise as we increase the rent so I’m not too worried about that. 3% isn’t a bad start and most rental properties get better as they are more seasoned right?
      Thanks for your comment!

      • Nate July 14, 2011, 6:50 am

        I’m sorry, I don’t know where I got Indiana! haha

        The west coast is a very expensive place to invest, that’s for sure. Before you put the money down, you might consider the alternatives (though i’m sure you have).

        With a 4 plex, your only exit strategy is to sell to another investor (condos and single family houses can be sold to the general public). So i would consider a *-plex them even less liquid.

        Alternatively, there are a dozen stable companies which pay dividends yielding more than 3%. Johnson and Johnson, for example, is currently yielding 3.38% and has increased their dividend every year without fail.

        The rental market is certainly hot right now in terms of the huge pool of potential renters. We only own a couple of houses but the leased up quickly. I’m sure you will have no problem finding tenants in this market.

        But the bottom line is, do the potential benefits (depreciation, principle pay-down, and possible appreciation) make the lower return worth it?

        • retirebyforty July 17, 2011, 4:46 pm

          We have a rental single home and a condo right now so that’s why we’re looking into a 4 plex. The single home price locally is still very expensive. A single home in the same area as the 4 plex cost around $200k. The 4 plex I’m looking at cost $300k for example. In our market, the single home rental doesn’t make sense unless you own it for a long time.
          I am invested in some dividend stocks like AT&T and Intel so I want to diversify into more real estate. I need to look into REIT. It’s probably easier than dealing with a 4 plex.

  • Matthew Dean March 29, 2016, 9:33 pm

    What are the comparables?
    What is the going rental rates in the area?

    Better returns can be had in other states with better landlord favoring laws.

    Maybe you can fix and flip it. Figure 30-50% in maintenance.

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