Philly Triplex: Part 1
Each week, I spend a few hours looking through various lead sources such as Craigslist, email, and Facebook. While I generally believe that most good deals won't show up on Craigslist, I check there anyways because every once in a while you can find a pretty good deal if you get creative with it.
This time, I happened to see a triplex listed at market price in Philadelphia, an area that I am heavily invested in. While it did not immediately look like a great deal, I decided to reach out to the owner. I asked to learn more about the property, letting him know that I was an investor who would be able to close quickly with cash. I knew it was important to establish rapport with him as a serious buyer who could close in cash. I did not expect much, but contacted him anyway.
I learned that the buyer was in a tight spot and was looking to sell the property. He told me that he was having credit issues, so could not refinance the property, and had purchased another duplex recently that he needed some of the cash for. I was kind of surprised he was sharing that information with me, as that would hurt his negotiation ability. I also learned that the property was currently fully rented out, with one of the units being occupied by the owner (who was planning on moving out soon). At this point I was getting pretty excited, as this could represent a great opportunity where I could help him out of a tough situation while also allowing me to get a solid deal.
At this point, I wanted to learn as much as possible and with as little up front cost before making an offer so I did the following:
Facetime walk through of the property with the owner
Private "unofficial" (discounted price) appraisal of the property through an appraiser that I have established a relationship with through my other investments ($100)
Professional inspection of the property, again through a company I trusted and have done lots of business with in the past. Included radon and termite inspection as well. ($700)
Looked up zoning and tax clearance on the owner, using a zoning attorney ($350)
The walk through revealed that the property was in pretty good shape. I was guessing it'd need a bit of cosmetic work to get ready (maybe $1-3k).
My appraiser came back to state that the property, as a triplex, would be valued around $175k, which was the list price.
The inspection came back pretty clean, with maybe $1-3k in repairs.
The tenants were all on month to month leases.
There were a few interesting things that I learned during my due diligence.
The first was with the water supply. There was no water meter, so the property had been using water without paying for it for who knows how long. We would need to make sure that this is clear before purchasing the property (title should take care of that for you, but it is good to know before investing more in the acquisition).
The zoning came back showing that the property was zoned for single family usage only, not for multi-family.
The zoning was the biggest issue, but it also meant that it was something that I could further use in my negotiations. I spoke to several zoning lawyers first to get an estimate on the cost, time, and likelihood that the zoning change would go through. They all came back saying that there was a very good chance that it would be able to be changed to multi-family. The cost would be anywhere from $3-5k, and would take around 1-4 months.
Knowing all of this, I decided to make an offer for $130k, which was an approximate 25% discount off the property valued as a triplex. I told the owner that it would be very hard to sell the property as is right now because it was basically being operated illegally due to the zoning problem, and that the property value as a single family home would be well under $100k. I proposed that I would take on the risk of paying for the zoning, and that the deal would only go through if the zoning was able to be changed to multi-family, and the owner agreed to this.
The monthly income for this property looks to be around $2600, which would put this property at a 54% ROI after refinancing the property.
It took several weeks to get through all of this initial due diligence. I then hired a lawyer to draft up the contract, which would have the following contingencies:
Zoning get's approved for multi family
Condition of the property after zoning change must reasonably match what it was during the inspection
All tenants would need to be out of the property within 60 days of the zoning approval
There was one more hitch in the situation. When we went to make the contract, we found that the owner purchased the property under his LLC, which was not currently tax compliant. This meant that we could not even start the zoning process, nor sign the contract, until that was taken care of.
At this point, it has been about 2 months after initially reaching out to the owner. We are currently waiting for him to get compliant so that we can sign the contract and begin the zoning change process. Although this property has been a lot of work and has been a slow process, I am excited for the cash flow potential in this property and am looking forward to getting it under contract so we can begin the zoning change process. I'll update more once we go through that process.
Summary of Key Takeaways
Get some sort of appraisal before making an offer
Get an inspection before making an offer
Check the zoning on the property before making an offer
Check the tax compliance on the property owner before making an offer
If there are zoning issues, use that as leverage, but make sure to use a zoning expert (such as a zoning lawyer or zoning contractor)
If doing a for sale by owner deal, make sure you get a lawyer involved to draw up your contract
Present the offer in such a way that you are helping the seller solve his/her problem