Author Topic: Multifamily property under contract- To close or not to close?  (Read 836 times)

NorCal

  • Pencil Stache
  • ****
  • Posts: 787
So I'm under contract to purchase a 9 unit multi-family property in Aurora (just outside Denver).  We went under contract in February, and are supposed to close this Friday.  My numbers show the property to be a ~5.5 cap, depending on assumptions.  My realtor thinks my assumptions are a bit conservative, so they might be slightly better if the economy recovers in reasonable time.  I expect the property to generate ~$15K of cash flow annually.

Other relevant data points:
-2 units were recently updated and are still unoccupied.  We negotiated a 30 day credit for the rent on these units before the world turned to crap.  The property manager thinks she can still get them filled, but that is a risk. 
-No tenants have yet reported any job losses to the Property Manager as of this morning.  Given the situation in Denver metro, I'm fairly confident we will end up with some tenants that can't pay the bills over the next few months.
-We cut our emergency fund pretty thin to make this purchase (we now have 2-3 months of emergency funds), assuming we would replenish these funds rapidly after the purchase.  We still have $100K of index funds in taxable brokerage accounts, but selling at these prices (if necessary) would sting.
-We were extremely confident in our ability to maintain a 50%+ savings rate up until this week.  I am currently a stay-at-home dad.  My wife is an attorney.  A number of my wife's clients are either not going to pay their bills, preparing to close shop, or pulling back on investments (which is what she works on).  Our income is now at risk, and  we expect it will take much longer to rebound than the isolation orders.
-We would lose our $25K security deposit at this point.  On the bright side, selling stock to generate the down payment saved us about $70K in market losses this month. 

While I have very little confidence in my ability to predict such things, I don't see any scenario where this rebounds in 2-3 months.  I think it will be more like 2-3 years.  I'm optimistic is will recover and will improve.  I'm just skeptical that this moment is the right one to add a highly leveraged investment (for my personal situation).

I'm honestly considering giving up the security deposit and not closing.  What would you do and why?

waltworks

  • Magnum Stache
  • ******
  • Posts: 3678
Re: Multifamily property under contract- To close or not to close?
« Reply #1 on: March 24, 2020, 06:41:15 PM »
I probably would not close because of your overall financial situation. Landlording in bad times is not something you want to tackle without a very, very solid oh-shit fund. If you think your wife's income is going to go way down or dry up... yeah, run away.

-W

iluvzbeach

  • Bristles
  • ***
  • Posts: 322
Re: Multifamily property under contract- To close or not to close?
« Reply #2 on: March 24, 2020, 07:06:05 PM »
Any chance last minute approval from the lender could fall through, if they were to know about your wife’s business (income) slowing down considerably? If lending were to fall through, would you get your earnest money back?

I am highly risk averse and would want to get out of the situation, even if it meant losing the earnest money.

NorCal

  • Pencil Stache
  • ****
  • Posts: 787
Re: Multifamily property under contract- To close or not to close?
« Reply #3 on: March 24, 2020, 08:45:52 PM »
Any chance last minute approval from the lender could fall through, if they were to know about your wife’s business (income) slowing down considerably? If lending were to fall through, would you get your earnest money back?

I am highly risk averse and would want to get out of the situation, even if it meant losing the earnest money.

No issues with the loan.  As a 9-unit multifamily, the property is underwritten based on the P&L of the property itself, and has very little to do with our income.


Another Reader

  • Walrus Stache
  • *******
  • Posts: 5183
Re: Multifamily property under contract- To close or not to close?
« Reply #4 on: March 24, 2020, 09:45:49 PM »
If you can't carry this at 50 percent vacancy and significantly reduced rents for a year, you would be giving it back to the lender anyway.  Make the sensible business decision and move on.

Papa bear

  • Handlebar Stache
  • *****
  • Posts: 1341
  • Location: Ohio
Re: Multifamily property under contract- To close or not to close?
« Reply #5 on: March 24, 2020, 10:06:30 PM »
I’m not a fan of a 5.5 cap rate on a multi family property.  I would walk based on that.  Plus you’re spread pretty thin on this.  I know collecting rent is going to get ugly the next few months.

But, is there a 3rd option here? Can you renegotiate with the seller?  If you back out, sure they get the earnest money. But given the current climate, is that place really going to sell? What is there risk in you not buying? Maybe use that to your advantage if this is something you really really want.




Sent from my iPhone using Tapatalk

FINate

  • Handlebar Stache
  • *****
  • Posts: 1600
Re: Multifamily property under contract- To close or not to close?
« Reply #6 on: March 24, 2020, 11:08:08 PM »
Don't close.

Your emergency fund is too small and there's a good chance that the property goes negative cash flow in the months ahead, which would be the death knell for your already shaky finances.

The $70k in losses avoided by pulling money out for the deposit more than makes up for the earnest money. Consider yourself extremely fortunate, you have the option to come out ahead instead of financial ruin. Why wouldn't you take that option?

Retreat and live to fight another day.
« Last Edit: March 24, 2020, 11:10:31 PM by FINate »

iluvzbeach

  • Bristles
  • ***
  • Posts: 322
Re: Multifamily property under contract- To close or not to close?
« Reply #7 on: March 24, 2020, 11:14:40 PM »
Excellent point just above by FINate.

Thanks for clarifying how things work, based on my original response. Clearly, I don’t own this type of property and should therefore keep my mouth closed about things for which I have no knowledge.

Best wishes in whatever you decide.

NorCal

  • Pencil Stache
  • ****
  • Posts: 787
Re: Multifamily property under contract- To close or not to close?
« Reply #8 on: March 25, 2020, 03:46:30 PM »
Thank you everyone for the responses.  You've confirmed what I was thinking last night.

It's amazing how fast the world changed from this being a reasonable risk with ample reserves to an extremely risky venture.

I cancelled the contract this morning.  After talking with my agent and reviewing the contract, there's actually a decent chance of getting the earnest money back.  The seller may fight me for it, but there's more of a chance than I expected yesterday.

Dicey

  • Senior Mustachian
  • ********
  • Posts: 12075
  • Age: 62
  • Location: NorCal
Re: Multifamily property under contract- To close or not to close?
« Reply #9 on: March 25, 2020, 04:05:30 PM »
I have a friend who's selling a duplex in Napa, CA. Her buyers are working with a mortgage broker and they've had two lenders pull completely out of the mortgage business. They've missed two closing dates because of this. They're trying a third lender now. The next option is an installment sale. Ugh.

I think you have made a good decision.

waltworks

  • Magnum Stache
  • ******
  • Posts: 3678
Re: Multifamily property under contract- To close or not to close?
« Reply #10 on: March 25, 2020, 06:26:12 PM »
Good choice, man! And hey, you accidentally successfully market timed!

-W

JM26

  • 5 O'Clock Shadow
  • *
  • Posts: 2
Re: Multifamily property under contract- To close or not to close?
« Reply #11 on: March 26, 2020, 09:22:17 PM »
Instead of starting a new thread, I am going to put my situation in here as it is similar concern. My wife and I went under contract on a house in SLC, UT at the beginning of this pandemic. The SLC market has been extremely strong over the last few years, may I say inflated, with yearly growth rates as high as 14% last year. We are buying house from friend of friend off market for 340k and got a mortgage rate of 3.375 with 10% down. The house is move in ready on a double lot on the edge of a very desirable neighborhood. Before all of this, this house likely wouldn't have gone for under 400k, and my realtor is convinced at the worst it would have gone for 380K had it hit the market. We plan on being there 4-5 years and hopefully holding onto it as a rental if we can. My wife and I are both in healthcare so we have secure jobs with a net monthly income of approx 10-12k. We don't have much in terms of safety funds as we are fairly fresh out of school and put most of our money towards the down payment. My family is recommending I bail on the deal in light of the situation, but I am still wanting to move forward as I feel as if I am getting a great deal, have an incredible mortgage rate and won't have to worry about a dip as long as it doesn't last super long or go to low. Plus, I find a great amount of solace in the fact I will have projects to do for the remainder of this lockdown.

Any thoughts or things I am not considering?   

waltworks

  • Magnum Stache
  • ******
  • Posts: 3678
Re: Multifamily property under contract- To close or not to close?
« Reply #12 on: March 26, 2020, 09:37:16 PM »
Instead of starting a new thread, I am going to put my situation in here as it is similar concern. My wife and I went under contract on a house in SLC, UT at the beginning of this pandemic. The SLC market has been extremely strong over the last few years, may I say inflated, with yearly growth rates as high as 14% last year. We are buying house from friend of friend off market for 340k and got a mortgage rate of 3.375 with 10% down. The house is move in ready on a double lot on the edge of a very desirable neighborhood. Before all of this, this house likely wouldn't have gone for under 400k, and my realtor is convinced at the worst it would have gone for 380K had it hit the market. We plan on being there 4-5 years and hopefully holding onto it as a rental if we can. My wife and I are both in healthcare so we have secure jobs with a net monthly income of approx 10-12k. We don't have much in terms of safety funds as we are fairly fresh out of school and put most of our money towards the down payment. My family is recommending I bail on the deal in light of the situation, but I am still wanting to move forward as I feel as if I am getting a great deal, have an incredible mortgage rate and won't have to worry about a dip as long as it doesn't last super long or go to low. Plus, I find a great amount of solace in the fact I will have projects to do for the remainder of this lockdown.

Any thoughts or things I am not considering?

I'm assuming it's in/near the Avenues or 9th/9th area? How much could you reasonably get in rent? I sold all my SLC rentals a few years ago when their values inflated to the moon - at current prices, I've seen nothing interesting in years.

If you want to live there and you're confident in your job security, go for it. There's a decent chance you can get a way better deal (though let's all hope not) in 6 months. There's also a chance that you won't.

Given your income, I'd personally just keep renting and wait/build up some spare funds. But this is at least half an emotional/QOL decision, which nobody but you can answer.

Forget the "hold onto it as a rental" idea, though, unless rents go through the roof in the next few years.

-W

FINate

  • Handlebar Stache
  • *****
  • Posts: 1600
Re: Multifamily property under contract- To close or not to close?
« Reply #13 on: March 27, 2020, 10:46:16 AM »
Instead of starting a new thread, I am going to put my situation in here as it is similar concern. My wife and I went under contract on a house in SLC, UT at the beginning of this pandemic. The SLC market has been extremely strong over the last few years, may I say inflated, with yearly growth rates as high as 14% last year. We are buying house from friend of friend off market for 340k and got a mortgage rate of 3.375 with 10% down. The house is move in ready on a double lot on the edge of a very desirable neighborhood. Before all of this, this house likely wouldn't have gone for under 400k, and my realtor is convinced at the worst it would have gone for 380K had it hit the market. We plan on being there 4-5 years and hopefully holding onto it as a rental if we can. My wife and I are both in healthcare so we have secure jobs with a net monthly income of approx 10-12k. We don't have much in terms of safety funds as we are fairly fresh out of school and put most of our money towards the down payment. My family is recommending I bail on the deal in light of the situation, but I am still wanting to move forward as I feel as if I am getting a great deal, have an incredible mortgage rate and won't have to worry about a dip as long as it doesn't last super long or go to low. Plus, I find a great amount of solace in the fact I will have projects to do for the remainder of this lockdown.

Any thoughts or things I am not considering?

I think it helps to break this out into two separate questions:
1) Given your personal situation, does it make sense to buy a house?
2) Is it a good time to buy a house in SLC?

For the first question: You both have secure well paying jobs that will survive the pandemic fine. Your emergency fund is small, but your high income (relative to mortgage payment) means this shouldn't be a problem for long (seriously though, whatever you do, you need to save up a good EF ASAP). You're getting a great mortgage rate. You like the neighborhood and (presumably) the house and you plan to stay there 4-5 years. This isn't an investment property, it's a place to live. IMO, the main variables here are: Do you want to be a homeowner, and is the cost of homeownership compared to renting worth it to you? In other words, in your situation for this specific house I think this comes down to a personal preference.

For the second question: Are SLC prices overvalued? Will they drop soon? It's true, many housing markets have greatly increased in value over the past several years. But this doesn't necessarily mean they're overvalued. I bought a house in Santa Cruz in 2003 after a huge run up in values and worried I was buying at the peak, but was proven wrong. I'm not saying prices won't drop in SLC, just saying it's impossible to predict. IMO (and for reasons I won't go into here), I think the mid-sized cities of the Mountain West are very desirable and have a lot of long-term upside potential. Real estate isn't liquid so prices don't move as quickly as stocks. This virus will jam things up for a bit, but we don't yet know for how long. If we get through the major lockdown/flatten-the-curve in ~2 months and then pivot to smaller scale interventions (extensive testing, contact tracing, isolated quarantines) then I don't expect housing values to be greatly impacted. After all, many markets are still experiencing housing shortages, and this virus doesn't change the fact that people need a place to live. If, however, lockdowns drag on for more than several months (6 months?) and the virus kills millions then housing will take a big hit. But by then, you'll have much bigger things to worry about than your house dropping in value.

If I were in your situation I wouldn't worry about closing. But that may just be me. For my primary residence I focus on finding a good value (at current market) on the house I want in the neighborhood and city I want and don't sweat the rest. If I like where I live and plan to be there for 5 years, why worry about short term value fluctuations?
« Last Edit: March 27, 2020, 11:49:37 AM by FINate »

better late

  • Bristles
  • ***
  • Posts: 384
Re: Multifamily property under contract- To close or not to close?
« Reply #14 on: March 27, 2020, 10:59:25 AM »
During the last downturn a couple I know pulled out of a contract to buy a SFH. The seller ended up suing them for the difference between what their contract stated and what they eventually sold the property for months later. $50k from the “buyer” couple. Wife told me it was due to how the contract was written.

JM26

  • 5 O'Clock Shadow
  • *
  • Posts: 2
Re: Multifamily property under contract- To close or not to close?
« Reply #15 on: March 27, 2020, 08:51:55 PM »


I'm assuming it's in/near the Avenues or 9th/9th area? How much could you reasonably get in rent? I sold all my SLC rentals a few years ago when their values inflated to the moon - at current prices, I've seen nothing interesting in years.

If you want to live there and you're confident in your job security, go for it. There's a decent chance you can get a way better deal (though let's all hope not) in 6 months. There's also a chance that you won't.

Given your income, I'd personally just keep renting and wait/build up some spare funds. But this is at least half an emotional/QOL decision, which nobody but you can answer.

Forget the "hold onto it as a rental" idea, though, unless rents go through the roof in the next few years.

-W

I would imagine prior to current events I could rent the whole house for 1800 no problem (mortage is about 1600). Its about 10 blocks south of 9th and 9th. It has enough space for an ADU, or if I add kitchen to the basement I could have two separate units by the time I'm ready to move. Also has big fenced backyard that could be dog friendly which is often an issue for SLC renters. In 5 years with full recovery I would imagine rent would be at least current prices if not a little more. As you know, SLC home prices have sky rocketed, but rent has remained fairly affordable. In my own head if I were to "hold onto it as a rental", my thought is I would rent it with minimal to moderate return until its worth to sell at a much higher price. I can easily rent it to medical residents for 2-3 years at a time through my hospital and several coworkers do that which is very convenient. Also, the Mormon community have lots of kids, and native Utahns are generally quite attached to Utah, so I could definitely see Salt Lake turning into somewhere like Seattle or San Fran 20 years down the road (less geographic restraints will probably prevent it to some extent).

FINate, to answer your questions

1. Personally, yes it made sense. I had pretty cheap rent, but lived with roommates in a great location but somewhat dumpy duplex with my wife and roommate. In terms of wanting home ownership, I think it is hard to truly know having never owned a house, but it is move in ready and all the projects I hope to do will not be because I have to do them, but because I want to do them. Also, I do feel like owning a house will make Salt Lake City feel more like home rather than a temporary stop. I can also remain mustachian in that I can continue to get to work on either bike or bus which is a huge deal to me as I despise commuting.

 In terms of emergency fund, yes I hope to increase this soon. I had been putting money aside just a few months before this house fell into my lap. Any recommendations on about what I should aim for?

2. At a price of 340k, I felt I truly got one of the last "good deals" in Salt Lake. Even with a 15% correction, I would say it would end up being a fair deal. I would say for the last couple decades homes here were undervalued from what I have heard, as Salt Lake was generally a moderate-sized LDS city, but the secrets out and tons of transplants are ending up here with the strong job market for healthcare, engineering/tech/software and extremely close access to the mountains. Until now, the market was definitely seemed to be to be overvalued, but there are so many solid middle class first time home buyers (and Californians) every house in the 370 to 400k range was getting multiple offers and bidding wars were bringing most houses up 30k from asking.

Ultimately I am probably going to go for it, I may have to suppress my desire to look at it as an investment property, but I do think it has a ton of potential. I am also concerned available listings will significantly decrease over the next 6 to 8 months as people wait for things to recover, but obviously that can only occur for so long before people are forced to sell if they are losing jobs.


FINate

  • Handlebar Stache
  • *****
  • Posts: 1600
Re: Multifamily property under contract- To close or not to close?
« Reply #16 on: March 27, 2020, 09:40:15 PM »
1. Personally, yes it made sense. I had pretty cheap rent, but lived with roommates in a great location but somewhat dumpy duplex with my wife and roommate. In terms of wanting home ownership, I think it is hard to truly know having never owned a house, but it is move in ready and all the projects I hope to do will not be because I have to do them, but because I want to do them. Also, I do feel like owning a house will make Salt Lake City feel more like home rather than a temporary stop. I can also remain mustachian in that I can continue to get to work on either bike or bus which is a huge deal to me as I despise commuting.

 In terms of emergency fund, yes I hope to increase this soon. I had been putting money aside just a few months before this house fell into my lap. Any recommendations on about what I should aim for?

2. At a price of 340k, I felt I truly got one of the last "good deals" in Salt Lake. Even with a 15% correction, I would say it would end up being a fair deal. I would say for the last couple decades homes here were undervalued from what I have heard, as Salt Lake was generally a moderate-sized LDS city, but the secrets out and tons of transplants are ending up here with the strong job market for healthcare, engineering/tech/software and extremely close access to the mountains. Until now, the market was definitely seemed to be to be overvalued, but there are so many solid middle class first time home buyers (and Californians) every house in the 370 to 400k range was getting multiple offers and bidding wars were bringing most houses up 30k from asking.

Ultimately I am probably going to go for it, I may have to suppress my desire to look at it as an investment property, but I do think it has a ton of potential. I am also concerned available listings will significantly decrease over the next 6 to 8 months as people wait for things to recover, but obviously that can only occur for so long before people are forced to sell if they are losing jobs.

It sounds like you've thought through the issues and have a solid plan. And it sounds like you're getting a great deal. Don't think you should be worried about going for it.

Full disclosure: We recently closed on a house in Boise so we will be one of those transplants to the Mountain West :) We're eager to fully embrace our new city and state. Went into contract before everything blew up and thought about pulling out but decided against it. We've been planning this relocation for ~2 years, did multiple road trips around the western US, and then did multiple trips to Boise to get a feel for the neighborhoods. We narrowed our search down to a handful of areas that checked our boxes, and closely watched the real estate market for about a year before finding the right house. Like you, we didn't want to pull out of the deal and potentially have a 2 month period where we wouldn't really be able to house hunt, which would be problematic for moving this summer. Also worried about supply drying up for a number of months because the supply was already super tight with only a small handful of units coming on market in our target neighborhoods. At this point I just don't care if the house drops in value over the next few months, just happy to have this part of the process done.

ETA: Regarding emergency fund: minimum 3-6 months expenses. I'm FIRE so I try to keep more like 12 months expenses in cash and short term bonds. As an adult this current situation is the 3rd major recession/panic I've experienced...have never regretted having a plump emergency fund.

Also, you're smart to choose a bikeable location with short commute. Real estate really is location, location, location. Even though we're retired, we were adamant about picking a location near downtown, parks, and mountain biking trails, but in a quiet bikeable neighborhood with little thru traffic.
« Last Edit: March 27, 2020, 10:15:21 PM by FINate »

Dicey

  • Senior Mustachian
  • ********
  • Posts: 12075
  • Age: 62
  • Location: NorCal
Re: Multifamily property under contract- To close or not to close?
« Reply #17 on: March 28, 2020, 01:24:57 AM »
As long as you believe you'd be comfortable waiting it out if the market dumps, and you stay at least five years, preferably seven, I'm inclined to vote yes. If you're not an experienced DIY-er, you might consider buying a home warranty for the first year or do until you build up an EF. I personally despise them, and wouldn't take my own advice, but DH is a DIY Jedi Master and we have sufficient reserves. Do your homework. Prices vary and some companies are decent, while others are complete scammers, IMO. You might make another post here on that topic and see who has a company they have had success with..

waltworks

  • Magnum Stache
  • ******
  • Posts: 3678
Re: Multifamily property under contract- To close or not to close?
« Reply #18 on: March 28, 2020, 09:21:48 AM »
Yeah, terrible rental but fine deal for a place to live. Go for it. Build the ADU and house hack while you live there - should be plenty of GCs out there looking for work soon! We're going to do a basement apartment fit-out soon, once the shelter in place orders are lifted.

If you'll be there 5+ years, you can make the rent/sell decision down the road when you want to move.


-W