When you say the words “I’m not a cop, I promise” to three guys in wife beaters you suddenly realize you might be in a bad situation. That’s how it all started at my first investment property.
The last article covered buying properties using FHA203K rehab loans brought up a lot of other questions regarding buying distressed properties. So I thought I would go over the details behind why I was able to purchase this property at a discount in the first place.
When I got the call on the apartment building in Ramona I wasn’t told much. I knew it was cheap, it needed work and that was about it. I should have been warned to be careful. The lower unit was occupied by wannabe gang bangers, someone was dealing heroin and the laundry room was the local tattoo shop.
Being an eager new investor shopping for his first multi-unit investment property I ran up to the place without thinking twice. Walking the perimeter and taking photos, trying to peek through windows all while my tinted black Ford sedan sat idling in the driveway. Part of me thinks me being so stupidly bold in how I approached the property is the only reason I didn’t get my ass kicked.
I was on site for less than a minute when three guys rolled out the front door of the first unit and introduced themselves to me. The conversation was pretty short and mostly consisted of me frantically announcing the following items with my arms up in the “don’t hit me” stance.
1. I’m not a cop, I promise
2. I don’t care what you are doing here and have no interest in seeing inside your unit
3. Someone’s selling this place and I’m planning on buying it
4. Does that rooster across the street ever shut the #$%@ up?
The last question actually got a laugh out of them and seemed to have diffused the situation. I later learned from Google that heroin addicts are the best junkies to encounter (lucky me!). They are usually lethargic, sedated and lazy… guess I won that round of drug dealer roulette. From then on the folks in unit one gave me space and let me move freely around the property so long as I was not in their unit or interrupting their business of supplying the neighborhood with drugs.
It was the most unusual scenario; there was a property manager who was an absolute scumbag. He’d place anyone in a unit without a second thought, make no repairs to the building and created questionable contracts that took advantage of the elderly property owners. From the moment we spoke I knew he was not to be trusted and I decided to get as much done prior to the sale without his involvement and he would be terminated the moment I closed escrow. Not to forget there was another two units on the second floor that were rented to the nicest and most patient tenants I’d ever met.
I just couldn’t understand how such nice people would tolerate living amongst all of this drama, drugs and violence below them. Turns out it was for a couple reasons, the main one being they didn’t believe they could get their deposits back from the sketchy property manager and they didn’t have enough money to move regardless. They were prisoners in their own homes to what occurred in the units below. My goal was to change that.
Now that you know the situation I walked into buying the property I’ll explain how I turned it around in under two weeks.
In California the laws aren’t too favorable for landlords this meant it was in my best interest to work with the tenants and find a mutually agreeable solution. Right from the start I sought advice from mentors. I was introduced to a former Los Angeles Police Officer who dealt specifically with these situations. I gave him the name “Mr. Green” imagining if there had been a seventh man in the film Reservoir Dogs he would have been that man. He was friendly, knew all the laws and all the ways to work around them… should I need to.
Mr. Green gave me a lot of advice and all of it was focused on taking care of the great tenants upstairs, getting the neighbors on board and eliminating the scumbags as fast as possible. Things began with a call to the San Diego Sheriff’s Department to speak with them about my issue. When I mentioned the names of the individuals I had their attention, one of them had been arrested a week prior for possession and was on bail. The other had a warrant out for his arrest and their mother who also lived there was well known for her involvement with drugs. I got lucky; most times I’ve heard that law enforcement isn’t that eager to get involved without huge amounts of evidence.
What I learned quickly was that even though criminals ignore the rules, law enforcement couldn’t. They had to have a warrant to search the unit and to get a judge on board they needed testimony from multiple witnesses. Convincing the neighbors was no problem, I chose not to involve the tenants and we all gave our input to the Sheriffs dept. I was warned that this would take several weeks or months to generate a warrant to allow them to search the unit.
In the mean time I needed to send a message to everyone that I was here to handle things. Tucked behind a huge bush blocking the view from the street was a window that was a drive thru for all of the drug transactions. People would walk up at all hours, tap on it and buy their heroin. So, my first order of business was to remove this bush at six in the morning, the second day I owned the place. If you were going to buy drugs you’d do it in broad daylight from now on.
While securing the vacant unit on the first floor the mother of the heroin dealers approached me about fixing some of the items broken in their unit. She complained about cockroaches (that they brought in) and broken doors (that they’d kicked in) I decided to ask a simple question. “If things are so bad here, why do you stay?” Her response was the same as the tenants upstairs. She couldn’t afford to move without her deposit. My next question “So, if you were certain you’d get your deposit back you’d leave?” She replied yes.
That made things easier than expected. In California, when you buy a property you are pretty much forced to give a full deposit back to existing tenants. Since you don’t have documentation of the condition of the property at the time they began their lease you cannot prove they caused all the damage. My next plan was simple, make an offer they couldn’t refuse and if they did they would really regret it.
The next morning I drove back to the building with my VP of Customer Relations (my dog) for protection and a 60 day notice to serve to the drug dealers. I couldn’t yet prove their illegal activity and needed to act on my plan regardless of the Sheriffs plan. My top priority was getting them out; I didn’t care where they went. When I served the 60 day notice I proposed an option to the dealers. “If you leave in 14 days I’ll cut a check for your full deposit to the new place you move into, covering your new security deposit and I’ll prorate your rent from the moment you leave and give that back to you on the spot. Or, you can stay the full 60 days and you get nothing.” It was a bluff, I owed them the deposit regardless but it worked.
The option sounded too good to be true, they knew dealing with me would be nothing but trouble. They started looking for new housing right away. Ironically in the meantime I did get a call from the Sheriff’s department to notify me that a warrant was obtained and they would be performing a search within the next two weeks and that I should plan to have a door ready to replace the one they would be kicking in if they needed to. I advised the Sheriffs that I had served them a notice and that they could be moved out in the next week. It was a race, to see if they would take the money and run fast enough to escape a raid from the Sheriff’s and I was content with either outcome.
In the end, they beat the raid by a day, talk about dumb luck. On day 12 of ownership they had found a new place to live and I went to the new apartment complex and cut them check for the $1,000 deposit I owed them for leaving whether it was that day or at the end of their 60 day notice.
The entire reason this property was offered at such a huge discount was because of this violent, dysfunctional family selling drugs. I’d guess it was discounted $30,000 to account for the potential headaches dealing with removing a criminal element from a building not including another $70,000 for the repairs.
By simply following the advice of Mr. Green, listening and using every resource available to me I had the property rehabbed and 100% occupied in just over 60 days. The tenants upstairs were thrilled, the neighbors loved me and the criminal element vanished from the street. I call it the “cactus” theory. When you have a huge cactus in your garden you leave it alone, why? Because it looks like a pain in the ass to deal with it and it’s not ugly enough for you to care to remove it. The bad people in the area knew whoever purchased this property would be a pain in their ass; they were better off finding a new place to hang out and cause trouble.
Here’s a video of the entire project.