Updated: May 27, 2020
An old adage in real estate states that every deal begins with a motivated seller. While in its absolute form, its not 100% accurate, a motivated seller is a great place to start. Poor marketing, value-add opportunities, and picking the right market at the right time also help, but your motivated seller is a great place to start.
I was vetting a tenant to fill a former barbershop at a property I had acquired, when he mentioned that his old landlord was looking to sell the building. He gave me the number and I left a message for the seller, but didn't give it much further thought. About two weeks later, while working on a construction budget for an NYC development, my phone rang, and the owner, John, gave me his terms. It was a five unit building which required some TLC, but with only one vacancy. He told me that he was leaving the next day for Phoenix for two weeks to look for a retirement home, and that we should speak once he returned. I offered to meet him that day and we set a time.
I probably stuck out at the Polish Cultural Foundation when I came to speak with the seller that night. He told me that he and his brother had inherited the property, and that his brother had since passed away. His sister-in-law was unhappy with the way he was managing it and took over. She didn't pay the taxes for years, and when foreclosure began, John covered the bill for $20,000 out of his own pocket, and began managing it again. He had a successful career as a chemist for a S&P 500 company, didn't need the money, and just wanted to retire. He also wanted to detach himself from his sister-in-law to say the least.
He also told me that he had signed a contract on the property for $120,000 with one of the tenants, but she couldn't get the financing. We settled on $100,000 with no contingencies, and signed an LOI there and then, with the understanding that we would draft the contract while he was away and would view the property once he got back.
When John returned, with a contract in place, we walked the property. While there was some deferred maintenance, the three commercial spaces and two apartments were in serviceable condition. With the capex number in hand, the property was better that a 40 cap once repaired and filled, and I felt it would appraise upwards of $400,000. The closing took place two days after my son was born, but I made sure to show up in person.
I bought the property and got to work immediately. Within three months, the work was done for under $25,000, and the vacancy was filled. I had the asset preforming above my expectations and began the refinance. The banks wanted seasoning, so it took about 14 months to get close on the refinance, but the property appraised for $600,000. The bank gave us 65% LTV and I was able to take out $390,000. Not bad for $125,000 in equity in under two years. It all began with a motivated seller.