Commercial Real Estate

Why I Walked Away from This 118-Unit Apartment Complex Deal [Video!]

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apartment-deal

My partner and I recently made the decision to pass on purchasing a 118-unit multifamily apartment complex.

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There were multiple factors that led up to us not making the deal, including very expensive roof replacements that was discovered during our due diligence.
Some of the most important steps in evaluating a multifamily purchase include lining up contractors to place bids as soon as possible and delegating due diligence to qualified members on your team.

As much as we wanted to move forward with the deal, the numbers told us to pass. Yes, it was difficult to walk away, but the best deals oftentimes are the ones you walk away from.

What I Learned From Turning Down a 118-Unit Apartment

Related: 5 Reasons Single Family Investors Are Turning to Multifamily Apartments

We’re republishing this article to help out our newer readers.

What deals have you evaluated then passed up lately? What did you learn?
Let’s talk below!

Sterling is an multifamily investor specializing in value-add apartments in Indianapolis and other Midwestern markets. With just under a decade of experience in the real estate industry, Sterling was involved with the management of over $10MM in capital, which is deployed across a $18.9MM real estate portfolio made up of multifamily apartments. Through the company he founded Sonder Investment Group, he owns just under 400 units. Sterling was featured on the BiggerPockets Podcast and has been contributing content to BiggerPockets since 2014, with over 200 posts on topics ranging from single family investing and apartment investing to wholesaling and scaling a business.

    Ken Konecny Real Estate Agent from Davis, California
    Replied about 2 years ago
    Hey Sterling, Great tips. The last one is easily forgotten. I worked on an apartment deal earlier in the year and of course the inspections took all day. Did you try to renegotiate price with the seller in light of the roof repairs?
    Sterling White Rental Property Investor from Indianapolis, IN
    Replied about 2 years ago
    Yes I did. The seller was and still is very firm on his asking price.
    Emeka E. from Houston , Texas
    Replied about 2 years ago
    What price was the seller asking?
    Sterling White Rental Property Investor from Indianapolis, IN
    Replied about 2 years ago
    4.7M
    Sterling White Rental Property Investor from Indianapolis, IN
    Replied about 2 years ago
    4.7M
    Kindrell Hutchinson Investor from Gainesville, Florida
    Replied about 2 years ago
    Could’ve mentioned more about this deal. Seems there was more to be said
    Sterling White Rental Property Investor from Indianapolis, IN
    Replied about 2 years ago
    Great point. What additional details would you like to know, Kindrell?
    Kalyanii K. from Oregon
    Replied about 2 years ago
    Thank you Sterling! Great tips as usual! Always love reading your articles here in BP! I also like that you mention bringing a snack as it’s easy to be all about business or numbers and you forget to take care of yourself.
    Sterling White Rental Property Investor from Indianapolis, IN
    Replied about 2 years ago
    No, thank you for the kind words. I am glad you found value from the experience.
    Emeka E. from Houston , Texas
    Replied about 2 years ago
    Pretty strange reason to pass up on a deal…just the roof? Could the purchase price not have been negotiated to where it makes sense? How’s the location? CAP? Thanks,
    John Casmon from Chicago, Illinois
    Replied about 2 years ago
    If there were 10 buildings that needed roof replacements, that’s a pretty big expense if you didn’t plan on it in your underwriting.
    Sterling White Rental Property Investor from Indianapolis, IN
    Replied about 2 years ago
    As John mentioned there were 10 buildings. Each roof needed a replacement, which the cost was near 400k. The seller would not fix the roofs or provide a credit. The location is a solid C/C+. CAP a little over 8.5% on actuals.
    Jessie Niu from Columbus, Ohio
    Replied about 2 years ago
    8.5% cap, even with $400k repairs on roof, the cap can still be 7.8% though. Not that bad although I usually would like my cap to be at least 8~8.5. The seller is not willing to negotiate at all?
    Gulliver R. Rental Property Investor from Seattle, WA
    Replied about 2 years ago
    Sellers that don’t work with you on reasonable requests such as taking care of deferred maintenance on a huge cap ex item like roof replacement is a big reason to walk. I’ve done the exact same thing on a multi fam where the seller was not willing to lower purch price or take care of the 40-year roof. Oh well, onward and up! Thanks for sharing!
    Nathan G. Real Estate Broker from Cody, WY
    Replied about 2 years ago
    If the Seller refused to replace the rooves for 18 years, there’s a good chance they cut corners on other necessary repairs or improvements. I wouldn’t buy it even if he were negotiable on the price.
    Ian Tuttle Investor from Crawfordville, Florida
    Replied about 2 years ago
    Agreed. The roof was the most noticeable problem right away. 400k was just the beginning in necessary repairs to keep the property from falling apart.
    Luz Davila from Minot, North Dakota
    Replied over 1 year ago
    That’s exactly what I was thinking, Nathan. Perhaps the building had faulty wiring, a the foundation was not stable/solid, etc. You never know. Maybe he was trying to sell before he would have to pay that $400k to replace the roofs *and* whatever else it was that he cut corners on.
    Garrett Spear Property Manager from Lexington, KY
    Replied about 2 years ago
    Great advice, thank you Sterling for sharing! I also like point number four. It takes careful discipline to stick by your investment criteria and pass on deals that don’t make the cut.
    Mary Hirsch
    Replied about 2 years ago
    This is a great point. I passed on an opportunity with a property that I had known well for a long time, and would loved to have taken forward as a profit enterprise. But I also knew well that the seller had deferred maintenance on absolutely everything. What she had been forced to replace over the years she did on the cheap. She didn’t face up to the effect on the property value then, or when she was selling.
    Brenda J.
    Replied about 2 years ago
    Sterling, thank you for your video. There is a property that I really want to purchase. the seller is (HUD-Regional Housing Authority). I had an appraisal done to try and make a better decision about the purchase. The appraisal cited many things that was wrong with the property, but the final appraisal was based upon the After repair value (ARV), which was basically the same amount as the purchase amount the seller is asking for. I don’t know much about real-estate and I feel so helpless because the neighborhood is not that good, most of the homes are vandalized, yet the appraisal cited none of those properties as comparisons, but found homes that had sold (in other areas) after being fully repaired and used those as comparators. I have another property on the same street where I raised my children and a vacant lot that I purchased from the State and really wanted the property I am talking about. But, listening to your article, I understand that sometimes you have to “walk away.” To purchase and fix the property would nearly wipe out my budget. The seller is convinced that his Executive Director will take nothing much less than the asking price and I know in that neighborhood, I would never be able to recoup my money. My heart is broken and I am disappointed with the appraisal because I know its not worth the dollar amount that’s on that paper, let alone the hidden costs of repairs that I can’t see. Anyway, thanks for the video.
    Sam Shah from Poughkeepsie, New York
    Replied about 2 years ago
    Hi Sterling, I have a quick question about this. Since you found this out during your due-diligence, this deal mean you lose the money for inspection as well as any earnest money you put up? I’m not sure. I’m asking I guess. I’m guessing you do lose something. It’s not completely free to walk away. Correct? If so, how do you avoid this going forward? I can imagine that the cost to walking away from a deal can also add up overtime. Though, I do understand that in this case, there was no other option.
    Sterling White Rental Property Investor from Indianapolis, IN
    Replied about 2 years ago
    Funds and time was lost on the deal. Cost towards real estate tuition. The way to avoid in the future is points #1 & #2 in the video. The deal was very appealing initially and this led to due diligence fundamentals being side stepped. Lesson learned. Hope that helps.
    Ian Tuttle Investor from Crawfordville, Florida
    Replied about 2 years ago
    Sterling do you know if you could have brought the roofers out for inspection before working non financing? Do you mind sharing the address of the property you are speaking of in this video? Unless the building you are in front of in this video is the property you are talking about. Thank you 🙂
    Account Closed Investor from Philadelphia, Pennsylvania
    Replied about 2 years ago
    Bring a snack?? I would suggest a video camera to take a video as you’re walking the property. When you enter a unit, say out loud the unit number so you know which one you’re looking at when you go back to review it.
    Ian Tuttle Investor from Crawfordville, Florida
    Replied about 2 years ago
    Sorry to ask this question here but how do I upload a profile picture?