My eighth investment property was a bit more creative. It was a 4-plex, built in 1984 (i.e. no lead paint issues). All four of the apartments were three bedrooms, 1 bath. As with most of my properties, it was a distressed sale.
The neighborhood was in rough shape. This building was full of tenants, and of the four tenants, only one was paying rent on any consistent basis. The one that was paying rent, was not paying on-time, but was paying in full by the end of the month. Another was paying as much as she could, and was trying. The other two were deadbeats.
The seller was in foreclosure, and the sale was advertised as short sale. There were two mortgages, and two lenders, making the situation more difficult. A major plus side of this transaction was that it was next door to my previous purchase.
The year prior, the property was listed for $459,000. Seven years prior, in 12/2002 before the big run-up in housing prices, it sold for $430,000. It already had a previous offer on it for 269,900, but that offer fell through a few days before, due to the buyer being unable to perform. He could not prove he had enough for the 25-30% down payment.
The property had been on the market for almost a year, and already had an offer rejected, by the time my 269,000 offer went in. Once the offer was in, it was a waiting game. We put the offer in on 12/19/2008.
The bank approval letter was dated 4/1, over three months from the offer date, and the closing date had to be completed by 4/27. Less than 4 weeks to close a multi-unit investment property. The banks were going to settle for $240,322 to pay off the first mortgage that was originally $352,800. The second mortgage company was going to settle for $5,000 to pay off their originally $78,000 note. There was also some additional money for commissions and closing costs.
The banks were taking a major haircut on what they were owed, a total loss of approximately $180,000. I was hoping their loss would be my gain.
Once the offer was accepted, we had to work fast. An appraisal had to be completed. Funds to cover at least 25% or ~71,000 including closing costs were needed. Underwriting needed to be approved, this was a key thing. Tenants had to be notified of the changes coming. I had to plan how I was going to handle the three tenants not paying rent. I had already completed an eviction by then, from my first building in the area, so I was naive, but prepared.
We were able to close on-time Friday, May 15, 2009. As always, to make things happen fast, you have to provide documents to the bank ahead or time, or immediately after they ask for it. Waiting a couple of days until ‘you get around to it” will delay and possible derail a closing. In some cases, the statutory limit on the redemption will expire, and then you no longer have a valid purchase agreement, as the ownership may have changed.
About a week prior to the closing, the seller and I sent a letter to the tenants letting them know of the pending ownership changes. Immediately after the closing, we sent another letter to the tenants, letting them know the ownership change was final, and gave them new contact information. I had never bought a building with tenants, so this was a first.
I went around and talked with each tenant. I told the paying tenant, I needed a new lease signed, with a $100 rent increase. In exchange for the extra $100 per month, I promised, and delivered to them, a new refrigerator, stove and dishwasher. They also got new carpet and I provided them paint and painting supplies. I also fixed a few things that needed to be fixed. They didn’t like the rent increase, but it was necessary. Otherwise, they would have been stuck with the old stuff. They basically paid my mortgage while I was dealing with the other non-paying tenants. They are still living in my building today, after 5 years.
The second tenant that I dealt with was paying as much as she could, and was not too far behind. A decent person, with a job, but she had too many expenses and not enough income. I talked with her, and she promised to pay what she could, at the existing rent that she was paying. No improvements were offered to her. She continued to pay and stay, mostly. At one point, she was over $3,000 behind, but did catch up and eventually moved out not owning much, if any, rent.
The next tenant was a bit more of a challenge. It was a family, with two children. They had not paid rent in a while. I asked the husband how much he could afford to pay, and he had he could probably give me $700. I never received anything. An eviction was filed for him, on Monday the first business day after the close. I gave him until 6/30 to move out, almost 6 weeks. In hindsight, this was mistake.
This tenant was asking me for work. I asked him if he knew how to paint, he said yes. He asked me what the pay was; I replied it would be $0, as he owed rent. He replied he wasn’t interested. I asked him if he wanted to pull some carpet up, in his own unit, and he “had a bad back”. This guy was in his 20s, and was in decent shape to live on the upper floor which included walk up up two flights of stairs every time he went in or out.
The final tenant was maybe the worse. She initially asked if I was going to sign new leases with everyone. I said yes, but she needed to clear up her outstanding balance first. She replied “I need to see some documentation”. As if she didn’t know she owed any rent. When I came back later the next day, she did not answer the door, even though she was in the unit. I taped the letter to the door, in full view of God and everyone who passed by. The letter also stated that if an eviction took longer than 30 days, this was also her 30-day notice to vacate. She called the cops on me due to my posting the financial information on her door. Too bad, so sad; answer the door next time.
An eviction was filed for her, on Monday the first business day after the close. She settled for a move of on 6/30, and paying $500 which she fulfilled. In a way she was a bit more of a sadder case. She was a stage 4 terminal breast cancer victim, and I was evicting her. But I am not a shelter, and my mortgage still needs to be paid.
After the evictions, I took her Court and received a judgment which was never collected as she died about six months after the judgment.
I now had the potential for 12 tenants. And I was well on my way to the next building.
What was one of your property purchases that was interesting? Do you have any interesting tenant stories?