In August 2014, we were in the final stages of purchasing the 2 for 1 property. I had recently talked about. This was in a new area for us that had low property taxes, new developments (such as all the big-box retail stores), and was only about 25 minutes to a major metro area.
I started including this new area in my real estate searches. I noticed a few interesting properties were all owned by the owner:
- A ‘00 doublewide, a mid 90’s singlewide, and an older 70’s singlewide on about 2 acres. This had an asking price of $35k.
- Two mid 80’s singlewides on about 1.5 acres had an asking price of $30k.
- Four older singlewides (mostly 70’s models) on about 2 acres had an asking price of $40k.
- Five older singlewides (mostly 70’s models) on about 2 acres had an asking price of $45k.
The 3 unit and 2 unit properties were in solid areas and just a couple of streets from the other. The 4 and 5 units were in subpar areas but just a few streets over. The 5 unit was considered a mobile home park; all the others could be subdivided.
The properties had been listed with an agent for four months with very little interest. I had a feeling that the owner would be motivated to sell and felt that if we made an offer to buy all of the properties, he’d be willing to give us a large discount.
With a total asking price of $150k, we made offers of $82.5k cash or $101k with $10k down and the owner financing the rest at 0%.
Amazingly, the owner countered at $85k cash and we immediately accepted, beginning our due diligence. We came to find that the owner had some medical problems in the family and was just looking to get out of the real estate business.
The owner was collecting around $4,000 per month in rent with a couple vacancies and average rents of $350 per month in the older homes and $450 per month in the newer ones. We believed that we could push the older homes to around $400 per month and $500 per month for the newer ones fairly quickly.
The 3 unit and 2 unit properties had one well on each property. Because of the condition of the older home on the 3 unit property and the closeness of all 3 homes to each other (imagine three homes immediately behind each other), we were basically treating this as two 2 unit properties. We would eventually need second wells to split off the properties.
The owner was paying for city water for the 4 and 5 unit properties. 2 homes of the 4 unit property were supplied water off one meter. All 5 homes of the 5 unit property were supplied water off one meter. We would eventually want all of the homes to pay their own water.
**Side note: A few months after the purchase, we bought 4 extra water meters for the five unit property and 1 extra meter for the four unit property that cost us $3,000. We had to lay new water piping that one of our handy tenants did for us for about $2,000 including material. $5,000 is a lot of money to spend, but now all of the tenants pay for their own water and we have a more valuable property when the time comes to sell it.**
Back to the due diligence, the owner was also paying for a dumpster for the 5 unit property at $100 per month. All of the homes have their own septic tank.
The due diligence stage took us several weeks because the owner had very little written records so we had to piece together an income and expense statement with various water bills and dumpster bills as well as signed estoppel letters from tenants as to how much they were paying.
I mentioned in a recent blog post that we were working with a hard money lender (link to blog post) during this time to refinance several of our properties that would free up 95% of the cash we would need to purchase this package of properties.
To keep a long story short, we were able to close the hard money loan just days before the properties closing. The hard money loan took 3 months to close from start to finish and it’s a good thing we started this process before we actually needed the money.
The property closing had a few dramatic moments.
First, the closing was on the 15th of the month and the rents were to be prorated. The seller hadn’t collected rent from a couple of tenants that month and didn’t want to prorate rent for those tenants. To my knowledge proration should be based on the rents that should have been collected not actually collected, but we eventually compromised on a solution that cost me about $200 from where I think the proration should have been and gave the seller permission to collect that month’s rent from those tenants.
Second, the seller had a couple of the mobile home titles in his children’s names. The children hadn’t signed the back of the title and would need a week to do so. I asked to hold $2,500 back in escrow that would be released once the titles had been delivered to me. We negotiated again and agreed on $1,500 to be held back.
A couple weeks after the closing, I got a call from the seller. He had collected a rent check from one of the tenants. The tenant issued a stop payment on the check a day or two later because the tenant knew that the seller no longer owned the property and could no longer evict him. The seller asked me to pay him the rent money even though I had never collected that month’s rent nor would I try to. I pleasantly told him “no” and that was the end of my dealing with the seller.
This hard negotiating over a few hundred dollars struck me so oddly as the seller had left so much money on the negotiating table. Keep in mind that the total asking prices of his properties was $150k. I offered him $82.5k and he countered at $85k. I would have gone another $10k higher without even thinking about it.
Once we bought the property, we went to work to try to fill the one vacant property and get the 12 current tenants to sign our paperwork and sign up for our electronic rent system. This took several weekends to meet with everybody. The seller had collected the rent in cash by going to door-to-door at various times of the month so it took the tenants some getting used to the electronic payment system.
We waived a lot of late fees early on, but after a month or so, we had gotten everyone set up to pay electronically.
All of the current tenants were encouraged to do our rent-to-own program. We kept the rent the same as what the tenants were currently paying. Several weren’t as happy about this as I thought they would be, but agreed to do it anyway.
A little over a year later, we only have 5 of the 12 original tenants still with us. Several were evicted due to non-payment and a couple just left randomly in the middle of the night. We’ve had a lot of turnover from the 4 and 5 unit properties due to the lower-end nature of these homes. The 5 unit has had a lot of drama the past year as well, but I’ll save that for another post.
Amazingly, we still averaged a little over $5,000 per month from all these properties in 2015. All of the turnover was offset with a lot of late fees and new tenants paying higher rent.
This has been a great cash-flowing property for us but has been the most management-intensive, with the 5 unit park being the heaviest consumer of time. Our assistants bare the brunt of this work and I’m very thankful for them as I probably would have been burnt out by these properties. I believe that we’ve finally gotten good tenants in and that 2016 will take less of our time to manage these properties.
Thanks for reading,