Multifamily...Hardly Any Documentation, No Leases.. Deal Breaker?

21 Replies

Hello All,

I have an 11 unit under contract. I will admit this is new territory to me, only dealt with SFR in the past. But it's time to step up my game!

This place needs a make over, owner has left it to deteriorate. It is fully rented and in the rent roll provided it seems like they are staying tenants are paying close to average rent for the area, but I just can't see that being possible with the the shape of the place.  

I have requested copies of all leases, last 3 water bills and copy of insurance (just to get an idea of what the rate would be for the place). However it would appear getting that documentation is going to be tough. This is an older lady who is selling due to health reasons and seems to have no preparation for the sale at all and has no documentation, I feel like this is a red flag or it could just be she is too old to keep track I'm not sure.

So my question is, would getting no up front documentation during the DD period be a deal breaker for you?

Thanks!

T

Yes, it's deal breaker for most people; so, it's a potential gold mine for you and other savvy investors.  It should not be too hard to create your own P&L for 11 units.  Regarding rents, maybe you can put your hands on bank statements showing monthly deposits or look into getting estoppel certificates from the residents.  I have not had to go the estoppel route; so, maybe others can chime in on it.

bank records.... she is depositing checks right?

water and insurance... you should be able to get water bills from the city,,  and insurance, just get a quote or 2 from local agents.

worst case... take her estimates, knock 20% off, and go after her at offer and closing time.  Keep her in contract and just say unless you can prove otherwise, the property is worth X... desperation on her part is good for you.

@Tariq B. What is the condition of the property? I took over a 12 unit with similiar circumstances but it needed a ton of repair, so if you know the market you should have a good estimate of what rents 'should' be once you've done what you need to do.

@Mike Dymski @Carson Wilcox Thanks for the replies I am set up to meet with the seller on Sat so we're see how it goes. 

@Zach Quick it's tough to gauge so far I have not been in the units yet looking to do that this weekend but if the outside is any representation of the inside (and it usually is) then not great shape this is def a value add play. Asking was 350 and she accepted 285 without even countering...that usually sets off my red flag radar. Avg rents right now according to her is 700 per unit 

no counter tells you a lot. Either she is DESPERATE or has a dope realtor, or both. Not countering at all on the initial is a weak move.... good for you. take ALL your days of inspection and contingency... let it go pending on MLS... all good things.

That's 26000 per unit at 700 per month rent. That's 2.6% gross return before taking off all expenditures. So, given that we don't know actual expenditures needed, repairs, fees etc. Sounds doable especially with further negotiations but I would be very jumpy about other developments.

@Tariq B. It’s not a deal breaker, but you do have to risk-adjust and have A LOT of reserves for the first year. I’ll go out in a limb and say gross projected rents ($700 per month) are WAY different than collected rents. If I was in your shoes I’d use a PM company for the first year (at least) as they understand the market (likely) better than you. They have standard leases, can recommend how nice you want to make the place, etc. From what you’re saying, you’ll have your hands full with the rehab. And I’d bake-in that PM cost into your pro-forma. Although, if you have a signed contract it might be a moot point. 🤷🏻‍♂️

What ever info you do collect make sure you do not move forward without signed esstopal letters.

Every tenant has a lease, possibly verbal, hopefully M2M.  

If condition is at least "ok" and not falling apart and you're not in a war zone, even $500/mo/unit would probably cash flow if you buy for $285k. Probably is the key word. 

If all contingencies above are true and they rent for $700/mo/unit, it sounds like a hell of a deal IMO.

No deal-breaker

It's a sign of miss-management, and gives you valuable insight as to why she's selling it.

As other members have mentioned, you can verify the income by getting your hands on the bank statements. Depending on the State, the landlord is required by law to deposit all rental income in a non-commingled account

@Carson Wilcox @James Canoy @Andrew Johnson @Thomas S. @Dustin Beam  @Daniel Sitler

Thank you all for the replies.

Well I walked the property today and let me tell you...I hate the word slum lord but holy heck her face should be in the dictionary next to the term. 

The places are in such bad shape is hard to believe people live there, like not a thing updated in 10 years or 20. Painted hardwood floors. All new cabinets are needed paint inside out all new windows like 60 plus windows to replace they have window AC units (but again that might be the norm for the area and yes I agree on the PM idea) and then she has a drug dealer living there, she is cool with it. Dogs of leashes roaming around and collects rent in cash and cooks her books...she kept asking the hole time on what I grade her as a landlord...I just kept saying it needs work... 

also the listing was 1983...bit the case it was built in 1941!!! And had the original septic tanks...am I crazy to still be considering it though? Thinking about countering back less

You’re still considering taking this investment on? The things you observed during your walk through, plus the fact that the seller lied to you about the year the property was built should be all the info you need. I can only imagine what major repairs await behind and beneath the walls of this place. Sounds like you’re falling in love with the property.

Can you find what the cap rate of the area is? If it's in a decent area, you might be able to "flip" it. Of you have the stomach and funds for it, that is.

There are plenty of people that love finding neglected property so they can value add, as long as the sale price properly reflects it. If it's in a decent neighborhood, it could be a gold mine. 

What kind of area is it in? Is it worth the capital you will need to put in besides the purchase price. Do you understand what that capital expenditure will be? For septic, it is not something people replace if it works but it is something you need to inspect seperately. what is it and what issues does it have. Understand if the town will require you to upgrade septic if you do alot of work on the property. If you also have well that is something you should inspect seperately. In general worry less about the things you can see then the infastructure of the property, that can sink you if you dont understand and account for the costs.

Depending on the area the condition of the property likely simply reflects the tenant base. Landlords do minimum upkeep on properties in areas where the tenant base deserves no better. C/D class communities generally attract a tenant base that does not value or appreciate other peoples property. If the community is boarder line and updating would attract a higher class of tenant it may be worth the effort. However if upgrading will result in having the same tenant base the present owners business approach may be close to what is necessary to survive in the business.

Do basic repairs to maintain safety and no more if the area does not warrant better.

Originally posted by @Kenneth Williams :

You’re still considering taking this investment on? The things you observed during your walk through, plus the fact that the seller lied to you about the year the property was built shoulda be all the info you need. I can only imagine what major repairs await behind and beneath the walls of this place. Sounds like you’re falling in love with the property.

 Yeah. If someone lies to you about one thing then they are lying about another. Who knows what else or who else is buried there? 

Suggest seller to issue lease with info on terms, deposit with stipulations that the new owner will honor it.

I would be very cautious about moving forward with this deal. With that said, you may be able to counter again for a better price with all the new information you now have. 

I would definitely recommend having a reputable contractor walk the property with for a more in-depth inspection. If the owner balks at having this done that should be your final warning to walk away. 

Best of luck. Keep us updated on what happens!

the only thing wrong with it... is if you are thinking of offering more $ than it is worth.  Everything is a good investment at a certain price.  The only issue is finding a seller who is on the same page.  I would walk it with a contractor... who can give you a ballpark to turn things over budget your turnover and holding costs and ALL that....  then talk value...

as for the rent... You will likely clean out the tenants when you turn it, for repair issues, and them all being dirtbags... So you need a PM to tell you rent and vacancy in that area... then you use that.  

Have you asked to see the tax returns from the last year? 

Originally posted by @Leanne Kreps :

Have you asked to see the tax returns from the last year? 

 This is good advice IMO. She appears to be exactly the type to lie on her tax returns, which gives you lots of leverage when negotiating (if she did lie). What you can be pretty certain of, is that people will not report more than they made.

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