I like multi-family properties. I like single family properties as well. Both are great investment properties and I have bought both. While both can be good investment properties, the procedure to review and make an offer on a multi-family property is a bit different due to multiple units and tenants. In this article I will present some tips and contract language to help you when reviewing and making an offer on a multi-unit property.
If you are interested in a particular multi-family investment property here are some things you can and cannot do when making your initial investigations.
- You can do an initial drive by, maybe even drive through the property, but little else.
- You should never go and walk around the property without the owner, their agent or with their permission. Be respectful of someone else’s private property.
- You can never, ever talk to the current tenants unless the owner has given you permission to do so. The owner may not want his tenants to know that the property is for sale and if you spill the beans you could create a sort of “bank run” for the current owner as tenants scramble to get out. That could kill your deal.
- You usually cannot view all of the units on the property before you make your offer to purchase. You can likely view one or two vacant units. The owner is simply not going to disrupt his tenant’s personal space over and over again for “potential” buyers.
After running your numbers, doing a drive by and viewing a couple of the rental units you decide you want to purchase the property.
Here are some clauses to place in your purchase contract to protect yourself.
- Offer subject to inspection of all rental units and other common and private areas on the property,
- Offer subject to a review of all property expenses. I like to ask for at least two years worth of expense statements. It is even better if you can get the current owner’s Schedule E from their tax return.
- Offer subject to a review of all leases. I also use an estoppel agreement, but that is a subject for another post.
- Offer is subject to the prorating of all rents and security deposits as described in the aforementioned leases to the day of closing.
- Offer subject to buyer receiving appropriate and acceptable financing. This is your out clause if you need it. Do NOT use it unless you absolutely have to. If you make an offer on an investment property, please do so with an intent to close.
That’s it, some subtle but important differences. Once you make an offer, you may want to re-negotiate your offer price based upon the results of your inspection of all units and the review of the expense reports. If you find something that was not expected, such as major damage, then by all means go back to the negotiating table. If the owner will not work with you, then use your out clause.
Have an awesome Thanksgiving everyone!
Photo: Ken Zirkel