On Monday, I am meeting with a RE agent whose client is the out- of- state owner of a nice looking duplex. Each side of the duplex is approx. 600 sq.ft and has 2 bedrooms/1 bath. This duplex is located in a decent Class C neighborhood where I have other rentals located. I know the neighborhood well.

One side of the duplex has been fully rehabbed and rents for $400.00/month. The other side has been gutted down to the studs and I would estimate $15K to get it rehabbed to the level where it would rent for $400.00 also.

The asking price is $40,000 for this duplex in "as is" condition.

Not really. Taxes? Insurance? Maintenance? Water sewer? Heat included or no?

NE,

When I meet with the RE agent on Monday, I hope to get answers to the Taxes, Insurance, Maintenance etc issues. However, since most of the agents in my town are incompetent in dealing investors, I may not get all of the information that I ask for.

7 years ago, I met the current owner of this duplex. He was a newbie RE investor who seemed to have more money than brains. 7 years ago, his rehab crew gutted both sides of this duplex down to the studs. I was there when his crew was dragging the old toilets out the front door! His 'plan' was to rehab both sides to 'Class A' standards and charge top rents for each side. Apparently, after rehabbing one side, he ran out of money and just left the other side completely gutted. It will need everything (plumbing, electrical, flooring, ceilings, HVAC, etc.)

Now, 7 years later, the realty agent has told me his last tenant has trashed his only rental unit. And I feel sure he has had enough and wants out of this business.

My Offer:

$ 25. 127.00 ( I don't need it, Cash Offer )

Find out if this is a Tired / Motivated Seller.

Way to go JR(ME) !

The calculations (crunching the numbers) that I have scribbled on a yellow legal pad are EXACTLY the numbers you provided! Like you, I was using the 2% rule also and came out with an offer of $25K.

I just hope I did not under-estimate the rehab cost on the gutted unit. It needs everything.

"What you haven't accounted for is the risk of rehab costs being higher than you anticipated."

I am probably not the most experienced person to ask but my general opinion is this. If it is a B property, it would be worth a 100 x potential rent. So max value would be 80K. You say it is a C property and needs to be totally renovated. Maybe max value of the property would be 60K because you need to get extra money upfront via the rent because the # of people that want a C property is less than a B or A property. So I'd try to budget for all possible considerations and it is easy to drop a lot of money - roof, windows, water heaters, flooring, etc. into this duplex. It might be a small property but you want it to be problem free and it costs $ to make it that way. I think you could spend 30K in quick order to bring it up to "nice" condition. This is a different way to come around to the 25K max offer since if you paid 25K and spent 30K you would have only 55K in it and it would cash flow at 800 / month and be profitable. You could still sell it for a profit I think. What would a duplex in your area go for that was fixed up nice and rented with long term tenants?

Ken,

The owner, if he is a professional, should provide the necessary information. In addition, I always do my own due diligence though. On Monday, I will get to go inside both units and see what really needs to be done here.

Without having all of the answers here, I think the owner of this property is just trying to re-coup his losses. He probably over-paid for the property and under-estimated the rehab cost, however, this is not my problem.

$25,000 is too high.

If I recall your rehab strategy correctly you will do some of the work yourself. Factor in your time and sweat and reduce the price accordingly.

Consider holding costs while Side B is vacant. Subtract those as well as your time and labor.

There are not many buyers for duplexes (investors only)...in Class C hoods (brave investors only)...that are HALF gutted (brave investors with rehab experience). My guess is YOU are the only one presently.

If you think rents are low, that's nice, but I bid based on what they ARE, not what they WILL BE.

Thanks Sid.

In my town, people who rent one side of a duplex are generally people who can't afford the rent/utilities of a single family house. Would this be an accurate description of a duplex renter in your neck of the woods?

Another thing,...90% of duplexes in my city were originally built as SFH and later on converted into a duplex by chopping the house in 2 parts and doing a sloppy job in the process.

people who rent one side of a duplex are generally people who can't afford the rent/utilities of a single family house. Would this be an accurate description of a duplex renter in your neck of the woods?"

Yes and no, Roy. My town has a mixture of older duplexes, ranging from the "chopped in half house" (I have one of those, but separate electricity/gas...joined water), and also those built as duplexes with all utilities split (I have one of those too, built in 1912, but updated nicely about a decade ago!).

I also have a house with a detached 2 car garage that was converted into an apartment. Not really a duplex...more like 2 houses on one lot. The variety is endless!

Renters who choose these places can also afford a cheap SFH rental, but the reason they choose duplex is location/what's available when they start looking. My 2-bed duplex units rent for maybe $15 less per month than what my similar size 2-bed SFH's do, so there's not a big difference.

I would agree that MOST duplex renters would never buy a duplex to live in one half and rent out the other to someone else. That happens occasionally, but it's rare. I still think you're going to be one of the only people interested and able to make this deal work. Bid accordingly. If you "lose" it...no worries. More fish in the sea.

Bottomless money pit = opportunity because even FEWER buyers will ever be interested.

Let's make it a Roy-house-flip! $5K cash offer. Next week, the offer is $4K....the next week, $3K.

Get your money back by renting out the one side for a year, then sell it to someone else for $10-15K to do the full rehab.

I do this totally different. I need to know what I can sell if for. So in our example, if it is worth 60k fixed up and rented. Then I say 25k plus rehas is 40k. I found it, rehabbed and rented it out, is a 20k uptick on net asset sheet a good move?

I also sort of say if I had to drop the price 10% and 10% sales costs could I get out and still feel I did ok?

Roy,

If the guy is in trouble, take over payments?

Roy... come on man! You buy $5,000 houses. How can this be a bottomless money pit?

It's only a bottomless money pit at the price he's asking or the price your thinking of offering.

Yes, I would pay $5K (in heartbeat) for this property but when there are 2 RE agents expecting to get a commission, I seriously doubt a low-ball offer will get accepted. Today, I learned the seller (who lives in Atlanta) is a licensed RE agent also! Geesh,..I have them coming from both ends!

All of my best past deals resulted from me dealing directly with the seller, who was not a RE agent. So, I will put this Duplex deal on the 'back burner' for now and if the listing expires, I may then contact the seller directly. I will not go behind the listing agent's back.

Roy, forget the grapevine nonsense, call the seller yourself. You're primed to steal it when no one else wants it.

NE,

I am not desperate to buy this property. I have pending offers on other properties right now. Last Friday, I made a $5K offer on a house with fire damage.

Now, when a listing agent has shown me a property, I do not go behind their back and try to cut a inside deal with their client. That is a very unprofessional thing to do. It may not be illegal, but it is unethical.