Cold Feet, Should I Run?
My first deal on a rental. Put $200 down as earnest money on a .66 acre parcel with two rentals on the edge of a small town. Escape clauses could get me out of the purchase agreement. Houses circa 1920, rundown but apparently functional rentals. Cosmetics are shaky, foundations are OK. Price $65,000, sub to $13,000 mortgage. $49,000 Contract for Deed, $3000 cash. Rents are $950/mo, a bit above market. Both tenants are renting mo. to mo. with no lease, and appear unreliable (they are related, too). Houses and yards are messy. Net cash flow seems good at $250-$300 a month (if it comes in), but...
This month this small rural town (pop. 600) starts rental inspections, probably the sellers motivation. City Administrator tells me they've had complaints about my seller from neighbors, tenants, police and he is in fact part of the reason they've passed the ordinance. They are "very concerned" about these houses' condition and future. Seller disclosed nothing, though he did mumble something about rental inspections starting this year. Administrator knows I may buy them, and she likes my approach and interest, but I don't want to have to end up subsidizing them beyond the cash flow just to stay on her good side.
Advice from anyone who's been in this situation? Should I run from the deal and lose my $200? Negotiate better terms? Borrow further to rehab, then try to sell them individually? Thanks.
For the good news with the renters on month to month you can get them out in 30 days. Tell the present owner you will not accept the properties until they are vacant. Try to negotiate a price in the $40,000.00 range,then rehab and bring in better tenants. The worst case is you lose $200.00.
It's time to change the purchase price. You've done enough due diligence to know that the seller is in a tough spot. If he was in a tough spot because of health problems or he was forced to relocate, I'd say have a heart. But he's in a tough spot because he's pretty much a rural slumlord. So I say go for the throat. If you have the time, patience, and money to rehab this place, and if the Administrator is willing to give you some time to get things in order, then offer this guy FMV minus 25% profit margin and the expected cost of rehabbing, including potential lost rent during rehab period. If he doesn't take it, sit back and wait for the town to shut him down. Clearly he won't put in the money and effort to rehab the place. So he'll end up having to sell it for peanuts. He'll either do it now or he'll do it after having received numerous visits from various town officials and possibly a trip or two to court. It’s in his interest to get rid of the place now. The town obviously doesn’t consider him a desirable sort of landlord.
Good luck
[addsig]