First property. Pls help me avoid costly mistakes before closing.

5 Replies

Dear BiggerPockets members, I've signed a contract for my very first investment property. After reading countless books, articles, forum posts and just about everything else, it's time. The numbers add up, however, I would appreciate your tips on things I should look into during my due diligence period. Most of the books talk about finding the right investment. I think I have, now I'm looking for hands-on tips that should tell me whether to go though with the closing or walk away. I'm obviously doing an inspection, but looking for tips on things you wouldn't think about your first time around. 

A little bit about the house:

1. It's a single family converted into two units. 1st unit is on top floor, 3 bedrooms. The 2nd unit is ground floor and basement. 3 bedrooms also. 

2. I've inherited two leases, but they don't start until September (the house is empty now). There are 3 people on each contract (one for each unit). So six people in total will be living in the house. This is good and bad. The good thing is that I know it will be leased, starting September, the bad thing is that I cant influence the rent. The house is run down and I could get more rent by fixing it up. Is there anyway I can negotiate the contracts already in place?

3. The tenants are students as this is close to a major university. They might want to move in sooner. Either way I will have to find tenants before September. Maybe Airbnb.

4. There is a city ordinance limiting unrelated occupants to 3 per unit. I'm looking into this to make sure the house can occupy six people. 

5. It smells of gas in one in the kitchens. I'll have to look into this. 

6. At some point I'd like to convert the basement into its separate unit and a another bedroom to the first floor. 

Thanks for your help. No tip or suggestion is too small. As the saying goes, you don't know what you don't know. 

Brgds

Tor

@Tor Lemhag

Everything looks good so far except for the gas smell in the kitchen. Try to get that investigated as soon as possible. The last thing you want is your tenants dying from CO poisoning.

When it comes to the city ordinance, you are in the clear. Remember what it states: "limiting unrelated occupants to 3 per UNIT". Your property is a 2 unit house. So for each UNIT, 3 unrelated people can live there w/o violating any laws.

Since the property was previously a single family that was converted to a 2 unit. Please make sure it was done legitimately where the town or city recognize the property as an actual 2 unit. Living in NYC, I have found some houses converted to multi-units but was never legitimately done through the proper channels and the landlords were fined hefty fees.

Don't get discouraged though. These are very minor bumps.

Why would the Seller sign leases for September when it's only February? I understand it's a college situation but what tenant or landlord signs a lease 5-6 months early, particularly when the property is up for sale? I think it smells fishy and I would work hard to force the current Landlord to cancel those leases before closing so you can buy the property and have complete control over it.

If you can't terminate the leases, I would ask to review the applications and find out how they were screened, if at all. My major concern is the tenants were all accepted just to fill the house and make it look more attractive to a buyer. If the contracts are already signed, you're stuck. But at least you can know what you are getting into.

As @Brian Adzadi pointed out, you want to make sure it is up to code, any renovations were properly permitted and professionally done, and that there are no violations that can surprise you down the road.

Thank you for your help.

@Brian Adzadi @Nathan G.

Thank you for your help. 

In your opinion, what documents should I ask for? I've already asked for:

Rent roll.

P&L statement for 2016, 2017 and YTD 2018 .

Copies of the leases.

Capex expenses for past 3 years.

Property tax and insurance expenses for last 2 years.

Utility bills for last 18 months.

Environmental reports.

3 years of tax returns

But I got only got a very short answer and no actual documents. 

What is customary to actually get on paper for a property like this?

Thanks

     1 & 4. It's a single family converted into two units. 1st unit is on top floor, 3 bedrooms. The 2nd unit is ground floor and basement. 3 bedrooms also.

A: Contact the city and MAKE SURE that it's a true double. Otherwise you're going to have issues down the road. 

     2 & 3. I've inherited two leases...

A: It's not uncommon to inherit leases with a unit. What is uncommon though is those leases starting 6 months down the road. If I were in this position I'm not sure I would complete the deal honestly. Unless those kids are paying a giant amount each month in rent to make up for the 6 month loss you're going to take leading up to it. When I evaluate properties, if they're not actively rented, I tend to not even consider them. I know that's going to come off as silly to some but actively rented means that the units are good enough for someone to live there and also that there's a benchmark for the rent you can expect. Cash flow upon closing is key. 

     5. It smells of gas in one in the kitchens. I'll have to look into this.

A: Does your city have a point of sale? If so, make sure to make the agreement contingent on the POS. Anything that comes back in this POS can be negotiated on. One of my buildings had $4,000 in repairs before I bought it and I told the seller that they needed to handle it (fully expecting them to only do half and leave half for me). They fixed it all before closing.  If there isn't a POS then make it contingent on your own home inspection.

     6. At some point I'd like to convert the basement into its separate unit and a another bedroom to the first floor.

A: Make sure to follow the regulations when doing this conversion. Some day you're going to want to sell the building and some buy is going to check to see if it's a true three family :-) 

Good luck with your purchase! 

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