So, in the summer of 1983 I began the search for my next building. Rather than spread myself out in different directions, I decided to work with a local real estate agent who had been recommended by some associates. The Realtor would pay attention to the listings that came up, and I would visit his office weekly.
I really had no money, as I was diverting my job income to upgrading Building Number 1. Also, my job in a precarious position, I was saving whatever I could for an emergency cushion. If I bought anything, I would have to do a “no money down” acquisition.
In November 1983, the Realtor called me and said he had just listed a four-unit building a little west of De Paul University, on the north side of Chicago. The neighborhood had some rough elements but was slowly gentrifying.
I drove by and arranged an inspection. My inspection went much faster than with my first building. I no longer used a checklist for every room and closet. I'd walk through an apartment to get a feel for how a tenant would view it – size, layout, light, and amenities. I'd check the kitchen and bathroom and the closets. I'd look for electrical outlets and inspect for water damage, peeling paint, and so forth. I'd also examine the major mechanical components of the building: roof, foundation, exterior appearance, plumbing, heating, and electrical. Being mechanically challenged, I still didn't know what I was looking at, but figured an inspector would tell me.
Ugliest Building Ever
I signed the contract that included having an inspection contingency. The four-unit had little curb appeal. It was a frame building with ugly gray asphalt siding. I believe it was originally a two-unit building that had been converted to four apartments. “Cut-up” is a term used for this in the business.
The first floor front unit had a large living room and kitchen and a very small bedroom. The bathroom was really small. It had a sink tinier than any I had ever seen – even smaller than one on an airplane. If it ever had to be replaced, I'd have no idea where to find another like it. The other bathrooms didn't even have sinks. The tenants used the kitchen sink to wash up and brush their teeth. The building was heated by individual space heaters dating back to the turn of the century. I later learned these contraptions were vented into the walls, as opposed to the chimney.
The first floor front unit was duplexed into the front part of the basement below. This could be used as a second bedroom. The area was quite unattractive, with a floor of poured concrete over dirt. Water would seep in during heavy rains.
The second floor front unit was what sold me on the building. It too was a duplex. The second floor was similar to the first floor unit in terms of layout. The building also had two smaller units in the rear. Neither was a duplex. They had large kitchens and living rooms and very small bedrooms. Closet space was limited. And, of course, the bathrooms didn't have sinks. I almost forgot, in the back of the structure was a small, weed-infested yard and a dilapidated garage.
How I Used Creative & Seller Financing
I had to get creative, after all I was broke and new at this. This is how I presented by offer…
The asking price was $79,500, and the owner was willing to provide some financing as long as the purchaser could get a conventional first mortgage from a bank.
Based on my financial analysis, I expected a $450 per month positive cash flow from the property. I figured the total rents to be about $1150 per month, and expenses including mortgages, taxes, insurance, and so forth to be about $700 per month, based on existing information.
I offered $79,000. I would get a first mortgage of $71,000. At the closing, I would put $8000 down that I borrowed against stock I owned. After the closing, the seller would give me a certified check for $14,000. This would pay off my $8000 loan and leave me an extra $6000.
I would owe the bank $71,000 and the seller $8000. The $71,000 was secured by the building and me. The $8000 was secured by the stock owned.
The terms of the note to the seller were as follows: no payment for the first ninety days, then 8% simple interest for five years (about $53 per month), and after that, I'd have to pay him back the $8000. The 8% interest was well below the going rate of 12% at the time.
The Seller accepted my offer. And I was on my way to becoming a Mini-Apartment Mogul.
So the next time you come across an ugly house, or find yourself unable to come up with the down payment don't count yourself out!