I'm looking at purchasing a fourplex with the following numbers:

Asking: $225,000    (my research indicates he was asking $215,000 for the last two years)

Property Tax: $3560  ( non homestead)

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Built: 1977

Heating: water baseboard with natural gas boiler

Water: owner pays, single large water heater

Laundry: coin operated (owned)

Garages: 5 total

Separate electric meters

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Rent: $650 for 3, 2 bedroom 1 bath units 750sqft

Rent: $550 for 1, 1 bedroom 1 bath unit 600sqft

Total: $2500 per month

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My plan is to purchase using an FHA 3.5% down and owner occupy.

PITI: $1594.57

CAPEX: $200

Vacancy: $200

Maintenance: $100

Water/Sewer: $150

Garbage: $105

Total: $2349 per month + heat

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Yearly $30,000 income

Yearly $28,188 in costs + heat

Cash flow: $1812 per year

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Obviously this is not a deal I'm going to purchase, I'm looking to offer him an actual price that makes sense. When I owner occupy the taxes will go down temporarily but it'll need to make sense once I move on (I plan to occupy the $550 a month room). 

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My question is this:

I'm new to the business, I have a duplex already but this will be my first four unit. I checked the owner on the property taxes, ran a quick background check on him myself (has six or seven evictions in the last 4 years). I spoke to him personally and viewed the single unit he has open. He basically says he wants out of the game. 

He doesn't want the tenants to know he's selling and won't let me view the remaining units, even through my realtor. The fourplex is in a decent neighborhood B class. 

How would the more seasoned professionals approach this situation? What kind of process would you guys use? I'm not buying something I don't get to see and it's difficult to come up with an offer when you don't know what you are buying. 

Any help would be great, thank you.

That is pure genius @Account Closed

not going to be able to keep your duplex AND buy this one FHA. lenders will not believe you that you are moving into it. I know we would never allow it. going from a duplex to a fourplex is not something that is typically done.

@Mike McKeown ; thank you for the info, as with everything there's more to the story. I purchased my duplex cash about 1.5yrs ago and just sold my primary residence (closed December 8th). I'm couch surfing until I can close out a new multifamily. It's all above board. 

Hello,

@Lee Fahy  

I understand he doesn't want to spook his tenants, but, I would definitely want to get a quick peak at the apartments. Is he confident you are a serious buyer?

Things to consider-

How do the common areas look? 

Is the exterior in good shape-- it may help you assess the condition the rest of the place.

How is the location-- are his evictions the result of his management? 

We moved into one of our 4-plexs that was managed by a company-- it changes everything... it went from a "frat" house, to calm and quiet quickly.

Good luck-- if you have any more questions, please feel free to ask.

JJ

Originally posted by @Jean Jost :

Hello,

@Lee Fahy 

I understand he doesn't want to spook his tenants, but, I would definitely want to get a quick peak at the apartments. Is he confident you are a serious buyer?

Things to consider-

How do the common areas look? 

Is the exterior in good shape-- it may help you assess the condition the rest of the place.

How is the location-- are his evictions the result of his management? 

We moved into one of our 4-plexs that was managed by a company-- it changes everything... it went from a "frat" house, to calm and quiet quickly.

Good luck-- if you have any more questions, please feel free to ask.

JJ

I'm not sure if he's confident I'm a  serious buyer, I think I've covered the right questions to him and have a good start on my due diligence. 

Exterior is brick, in good shape, the common areas are tidy but worn. Garage doors have dents and are of an 80s vintage that should be updated. All in all the place is in tidy shape, but dated. 

Evictions are very likely on him, he indicated he just goes by 'feel' on who he rents to. Which seems insane to me. Location isn't bad, isn't great, a basic large apartment block area and a fourplex tucked in among them.

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Another problem I have is it's winter and I cannot see the roof condition. If it needs replacing this could hit me for 10-15k. 

@Lee Fahy Just my two cents, but I would not consider purchasing any property without touring all the units. Sellers have a whole host of reason and sob stories, but as an investor it is your duty to be a good steward of your capital. You can put the property under contract with the condition being that you will tour all units. If he doesn't bite, move on. With your drive and hunger, you will find deals. 

tell him you want a boiler inspection and inspections of all the radiators or whatnot... and go along.  If he doesnt believe you are serious... put an offer in as is with contingencies... easy.

It's very common to not allow potential buyers to see units prior to having the building under contract.
I own several 4-plexes- what I do is make some reasonable assumptions about vacancy & maintenance (btw your maintenance budget is way low - assume $125/unit/month), rents, insurance (you can get actual quotes on this), lawn care, and upfront renovations needed (I usually assume $2.5k/unit). Then make your offer based on these numbers, and subject to inspection. One you do the inspections and see what shape the units are in, you adjust your projected rental income and upfront renovation costs, and negotiate an appropriate change in your purchase agreement.

@Ryan D. so are your recommending $500 for his maintenance per month? I just wanted to clarify so I could fully understand. 

@Lee Fahy Hey Lee! Reading everyone comments below, I can see there are some different opinions & counsel given. Knowing the motivation level of this seller can be very useful to you. As for seeing each individual unit, you can always get to see those during the due diligence period, and the seller will just tell the tenants that you are "inspecting" the units. This aspect of the deal isn't a show stopper. 

Now, during your inspection, you should NOT expect to see all the tenants in the house anyways unless it is was a Sunday evening, right? So, at the end of the day, the seller shouldn't worry that all the tenants would move out after you inspect the units (hopefully you don't have that effect on people, lol).  

Still, on the seller's motivation, you can also offer him Seller Financing, yes, you just closed on your house and you can use that capital to secure FHA and you're good to go, but what if you make that capital stretch, and possibly deploy it to buy 2 small multifamily buildings instead of one. Something to think about.

Hope this helps. Good luck. Thanks! - Ola 

Hi Lee,

The information you posted is similar to a 4 plex I just purchased.  As mentioned, you definitely want to view the units.  In the past I have gone in as a contractor or as a person from the management company looking to take over to conduct a visual inspection.  You can look at the leases for the damage deposit amounts but if I had to guess he didn't do a move in checklist so you will not have grounds to keep any of it for damages.  In my case, the units were under fair market rent because the guy didn't know what he was doing, owned it for 20 years without increases, and a couple units have deferred maintenance.  I am at a point where a quick refresh will up rent $125-$150 per month.

Once you lock in on a price with him (if you can get there) you could view the units with an inspector assuming you are going to have an inspection completed.  I personally didn't however I was able to walk the units prior and it was party of my purchase strategy in purchasing it as-is.

One thing to consider with a property this age is that copper plumbing typically has a 40 year life.  Don't be surprised if you start to get pinhole leaks, etc.  The seller didn't disclose it to me but a tenant informed us before buying that our property had a leak under the foundation and they had to jack hammer up an area to fix it.  He even peeled back the carpet to show us.  When mentioning something on the back end I was told that they had a leak and ran all new Pex through the ceiling so it wasn't under the foundation anymore (I could verify this).

Just my 2 cents, we could talk over the phone or via email if you wanted to discuss further.

@Lee Fahy Hey Lee. Did you include “PMI” as part of your expenses?

The seller should be willing to let you look through the apartments, without causing stress to the tenants.  I have done this by driving up in my work truck, ladders in the back and accompanying the seller with a yellow tablet.  The tenants usually think they are going to get a new paint job.  I feel around windows, etc but get a decent look.  

You can see a lot with just a walk through.  I still would but a contingency on the radiator and boiler and if unsure of roof.  Most other items you will be able to handle and account for.  

You got a great tip on offering a good down stroke if he wants to back the paper.  Owner financing opens you up to more deals.  

Yes, I would recommend to budget at least $500/m (that's $125/unit) for regular maintenance for the building. This has been my experience on stabilised 4-plexes.

Originally posted by @Lee Fahy :

@Mike McKeown ; thank you for the info, as with everything there's more to the story. I purchased my duplex cash about 1.5yrs ago and just sold my primary residence (closed December 8th). I'm couch surfing until I can close out a new multifamily. It's all above board. 

 Hey, what made you decide to pay cash instead of leveraging ?

@Isiah Ferguson ; the condition of the house was "slightly" depressed. Take a look at the link below, I'm working on finishing the basement as we speak but the bank was accepting only cash offers. I'll BRRRR when the basement is done.

https://www.biggerpockets.com/forums/522/topics/46...

Update: I'm going to do a walk through in about two hours. I'll take some pictures and upload them shortly. 

@Jerome Morelos ; Yes the PMI is included.

@

Exterior is brick, in good shape, the common areas are tidy but worn. Garage doors have dents and are of an 80s vintage that should be updated. All in all the place is in tidy shape, but dated. 

Are you okay with dated? Besides paint and garage doors...are they rentable?

Evictions are very likely on him, he indicated he just goes by 'feel' on who he rents to. Which seems insane to me. 

We have been doing this a while now and it is best to do credit checks, but, we go mostly by referrals...and, we have much better tenants since we took over management and interview the people directly. Un- asked advice warning--Don't settle on tenants, it is best to have a vacancy than thousands in repairs or troublesome evictions.

Roof--

Straight up ask the owner the age of the roof-- if the rest of the place is dated...roof probably is too.

Other points to consider-- electric and plumbing...and windows.

Is there anyone there that can help you with visually assessing this project?

Keep at it!

JJ

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@Jean Jost ; it’s basically just me and my wife. I did what you said and straight up asked on the roof. Seems the roof was replaced at some point in the 90s and not touched since.

His boiler looks old but maintained, the manifold that splits the heat to each unit has a squirrels nest of wiring that looks like he’s done some work.

The way I see it, he has a mountain of deferred CAPEX he’s trying to avoid. Roof is going to be 12-15k (includes the garage). Updating the commercial gas water heater (100 gallon), I’m sure that’s 3-4K (also older unit), and the boiler/auxiliaries will probably be needed in 5 or less years.

@Lee Fahy So I think my thoughts would be...

1.) If you can't get into the units you'll rarely be happy when you do get in there with what you find.  That said, no owner wants to spooke their tenants so you'll probably have to wait to review leases, look at units, etc. until you have it under contract.  At some point you'll want a home inspection so you can accompany that inspector into each unit.  By then the "for sale" cat is out of the back but at least the current owner knows you're pre-qualified for the loan and not just a tire-kicker.

2.) I, personally, always think it's a dangerous assumption to assume "bad management" or that the owner is selling because "they want out".  Sure, it could be bad management or it could be that the tenants that want to live in that particular building, in that area, just aren't great quality tenants.  Odds are it's a mix of both but I think too many people think they can wave a magic wand an increase tenant quality.  How much you want to "bet" on you being able to do that is up to you.

What I would do in your shoes is look at the current (open) unit and ask yourself what it might cost to "spruce up" something with that layout, square feet, etc.  Odds are things like the toilets, showers, appliances, cabinets, etc. are all of a similar "vintage".  Is it $1K to spruce it up or $5K?  You can start to model out a likely vs. bad scenario and adjust your initial offer accordingly.  If the current owner hates the offer you can explain that you have to mitigate the risk of not seeing the other units and if they would like a better offer then they have to work out a way to get you in there.

@Andrew Johnson ; thank you for the input. Really solid advice, especially on #2. I think it’s given my pause to consider how much more I can actually get out of the fourplex.

Update: I ran my numbers and sent it to the owner showing how they don’t work unless the price is at or below $180,000. I don’t think they were well received because I haven’t heard back yet. (Asking is 225)

@Lee Fahy I don't know how much sending the owners numbers would help.  I've seen plenty of small-scale multiunits be listed and then pulled off of the market where I invest.  Anecdotally, it seems to be more common in the past 12 months than in the past.  If I was randomly guessing, it would be listings from owners that don't to sell.  Juxtaposing "cash-flow ___ per month" vs. "sell for a profit of ___" is just plain different that someone wanting to sell a home.  If I were you I'd look up the tax records to see when it was bought and for how much.  I don't know if it's easy to access where you invest but it is for me.  Then you'd at least know if you're offering $180K for something he paid $100K for 15 years ago or something he paid $190K for in 2006.  Not that it should make a difference in your offer price but you'd at least know how much effort to put into the deal.