Questions to ask seller before purchasing rental property?

Question

Hi BP community,

I just got under contract and planning to purchase my second turnkey property in ohio from out of state. I’m still very new to all of this and how everything works. But I’ll be reaching out to the seller and I was wondering what questions should I ask the seller before purchasing the property? Also do you negotiate the price if the appraisal comes lower than the sales price? When do you do an inspection? On my first turnkey property, we had a closing coordinator so I didn’t really speak to the seller directly, but this time we don’t have one so I have to communicate directly with the owner.

Joe Miller · Answer

Congratulations! This is a loaded post with good questions.

Is this property an off market that you locked down or is this off the MLS using an agent? You do not negotiate your purchase price if the appraisal comes in lower. (If you are doing a cash offer or a high down payment this next part does not apply) If the appraisal comes in lower the bank is only going to give a mortgage for the appraised price and not the purchase price which can kill a deal fast.

People will write in their offers something called an appraisal gap which is to help with this. Say the offer has a 20k appraisal gap- the purchase price was 200k and it appraised for 160k. The bank will only loan on the 160k so the buyer will pay 20k out of pocket(new purchase of 180k) and the seller will either have to accept it or kill the deal.

You do a home inspection right after going into contract but before closing. I typically see within 10 days of acceptance. Have the home inspection done AS SOON AS POSSIBLE.

Samad Javed · Answer

Hi Cheza, that's exciting! Here are a few tips that come to mind:

Schedule a formal inspection from a local Ohio company asap and let them know you're an out of state buyer and need a lot of pictures to see what you're buying. I would even ask to speak with the inspector, generally they're helpful with describing the condition. Once you have the report, review it to see if the condition matches the sellers verbal description. If there are major issues, that could be a red flag and you may have to reassess the purchase.

Reach out to local Ohio property management companies that service the property type you have under contract and inquire about their services.

If there is a tenant, request a copy of the lease and an estoppal form to verify the rent/security deposit/tenant responsibilities.

Be upfront with the seller about the appraisal situation.

Good luck! Reach out if you want to discuss further, I'm happy to help.

Seth Young · Answer

Ask them for the scope of work for the renovations.

Account Closed · Answer

If the property is in Cleveland, sure to ask the property owner if the house is clear of all city inspection violations.

Ask for the latest city inspection report on the property.

Drew Sygit · Answer

@Cheza M.

If you’re considering buying a tenant occupied rental property, there are some documents you want to acquire for review prior to the closing. Once the closing takes place, the seller has zero incentive to cooperate with supplying them.

Not only do you want to obtain these documents, you also want time to review them well before the closing because unfortunately, there’s always the potential that one, or several, of the documents may be fraudulent.

So, let’s go over each document and why it’s important:

• Lease: this one should be obvious. A lease is a contract between the landlord and tenant. It spells out the monthly rent, when it’s due, the length of the lease (or term), should contain clauses required by the federal and state governments, and much more. Without the lease a buyer has no legal means to collect rent from a tenant or evict them for nonpayment.
• Rent Ledger: this is a record of all tenant charges and payments. It proves if the tenant is current on their rent and their history of whether they’ve paid on time or not. It should also show any security deposit collected, pet fees, cleaning fees etc.
• Tenant Contact Information: current phone number and email address are needed to be able to communicate with tenants.
• Tenant(s) Government Issued ID: typically, this will be a driver’s license to prove the identity of the tenant(s). Without, you have no way of confirming the occupants of the property are those named on the lease. Proper identification of tenants is also needed if you want any chance of having local code enforcement write tickets against the tenant and not the owner.
• Any Legal Action Documents: you’ll definitely want to know if the current landlord is evicting or suing the current tenant(s).
• Tenant(s) Social Security Number: this should have been obtained by the current landlord to do a background check during the application process. A new owner will need it if they want to pursue collection and garnishment for unpaid rent and/or property damages.
• Tenant(s) Employment & Bank Information: additional information useful for garnishment actions to collect unpaid rent and/or property damages. Usually collected as part of the application process.

Fraud: let’s not pretend it doesn’t happen. Desperate sellers do desperate things. We’ve seen fake leases and rent ledgers, even fake tenants - who were placed by the seller to backup the fake lease and ledger. So. it’s not uncommon to request proof of rent deposits via bank statements and corporate/LLC tax returns. Of course, it can be almost impossible to validate any rents the seller claims they collected in cash. So, sellers can also be asked to sign notarized affidavits personally guaranteeing the validity of leases and ledgers.

So now, let’s get to the clause to include on your purchase agreement to make sure you get all this information in enough time to review it.

Seller(s) agrees to provide the following to the buyer within X days of buyer’s satisfactory inspection, but in any case at least X days before closing: All rental leases, rent ledgers, tenant(s) valid phone numbers and email addresses, rental applications & supporting tenant identification, income and asset information, any documents corresponding to any ongoing legal actions pertaining to the property, leases, service contracts, etc., at least three (3) months of the most recent bank statements for any account(s) rental funds were paid into and any company or corporate tax returns for proof of income and expenses. Seller(s) also agree to sign an affidavit at closing personally guaranteeing the validity of all leases and rent ledgers.

Now that may seem like a lot for a seller to agree to, but if they have nothing to hide, why would they not agree?

As always, none of this should be construed as legal advice and we recommend you consult a real estate attorney.

Chris Clothier · Answer

@Cheza M.

My family owns a turnkey provider and I originally started investing passively back in 2003 in essentially turnkey properties before the marketing of the name really took off.  I wrote a book called the Turnkey Revolution and based a lot of it on advise I've given here on BP.  Here are some questions that I have posted many, many times that you should be asking a property management company and absolutely asking any Turnkey company you are going to do business with.

Two important things to remember.  One, if they don't have time to spend with you and answer your questions in detail and discuss them, in my opinion, move on.  Two, a key about asking questions is to ask a mirror question. A mirror question is where you ask what is the average vacancy rate each month. Write down the answer. Sometime later in the conversation you ask the mirror question of what is your average occupancy each month. Write that answer down.  Many companies have learned how to sell and how to market and certainly how to answer questions like this.  Often answers are scripted and your job as an investor is to ask the right questions in the right way to answer for yourself whether you can trust what you're hearing.  It is also important to remember that investors like myself always advise meeting who you're going to do business with.  That is important because it allows you to see for yourself if the answers you heard match what you see on the ground.  Unfortunately, great sales people can make great impressions over the phone and even in person, but if your eyes tell you that the size of an operation is too small or the conditions of the home aren't as expected or even the fact that someone can't be on time for a phone call or bother to be on item for a meeting is a red flag, then a face to face meeting will have been worth the cost.

Lastly, after you have their numbers research what you were told.  I'll never forget a conversation with an investor who was amazed that a turnkey company he had spoken with had a 1.5% vacancy rate and a 98.5% occupancy.  It sounded amazing.  He asked how many properties they managed and the answer was roughly 1500.  He then went onto their website online and researched their property management online and was shocked.  Their website listed 198 properties for rent.  They had an ad online for prospective tenants advertising 200+ vacant rentals.  Their true vacancy rate was roughly 13% not 1.5%.  But they felt like they had to market a low rate to "keep up with the Joneses".  So ask your questions, get your data and do your research.

Are you an investor?

Do you own in the exact neighborhoods you are selling?

How many investors do you work with?

Do you own all facets of the operation?

Do you offer rental or maintenance guarantees? If they answer yes, ask them why. Then ask them if they will put the guarantee on year three.

Do you defer maintenance?

How many properties do you manage?

Do you own the properties you sell?

How long have you been in the business?

What is your average vacancy rate?

What percentage of expiring leases will renew their lease each month?

What percentage of signed leases fulfill their full term?

What is the average number of days a property is vacant between tenants, move-out to move-in?

What percentage of billed rent do you collect each month?

What is the cost of an average repair bill after move-out?

What are your management fees?

What percentage of collected rent goes to yearly maintenance on average?

What is your average number-of-months occupancy per property?

What is your average occupancy rate?

What programs do you have in place to keep residents happy?

What customer service programs do you have in place?

Will you call me every month with an update on my portfolio?

How many team members are dedicated solely to providing service to your clients?

What has been your biggest mistake as an investor? How do you protect your clients from making the same mistakes?

Best of luck as you've forward!

Seth Young · Answer

@Cheza M. The scope of work will provide a list of all of the items replaced or renovated by the turnkey company.

Ronald Stephenson · Answer

If you have the opportunity to reach out to the inspector, inquire about the doors.

Water damage coming from misplaced (custom) doors, as if there is a step from the entrance and exits were outside weather can hit it, water may be able to seep in. (just a random thing)

I am learning this now.

Samad Javed · Answer

You're welcome! Is the seller the turnkey provider? If so, yes, ask them all your questions! If not, can you provide more details?

Ask questions that will help you gather information regarding the present condition of the property. This info can guide you on cap ex costs so you can bake that into your pro forma.

It may be tough to get a qualified/vetted tenant in there before you close, unless the turnkey provider is helping with this?

Cheza M. · Answer

Thanks Samad. I was actually wondering what are the important things that I need to confirm and ask the seller with our initial phone conversation?

Questions to ask seller before purchasing rental property?

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