Purchasing a Three Family

16 Replies

Hello Everyone!

I need opinions.  This is my second purchase of real estate (not including my primary residence), and the first was several years ago and was a vacation rental property, which was sold after a couple of years.  So, this is my first big real estate investment purchase in quite awhile, and I am quite anxious.  Please let me know if you would move forward with this and why and why not.  I appreciate all opinions, so that I can move forward with confidence whether to purchase or not to purchase.

I made an offer on a three-family in North Attleboro, Massachusetts.  Decent market I am very comfortable with.  I live in a town close by, which is great.  There were several offers in on this property, and I offered a few thousand over the asking price of $379,000.  The listing price is a decent asking price for this area.  All units are occupied and have leases, so I am stuck with those leases until they expire.  One expires in February, another in April and the other in July of next year.  The rents being received minus all of the expenses cash flow around $600 per month.  My issues are these:

The current owner has no information about anything on the property including how old the roof is, how old the heating systems are, nothing.  Basically purchasing as is.  They want an inspection done within 10 days or no deal.  They also want me to forego my right to walk away unless the inspector finds more than $5000 worth of issues.  I realize that $5000 is not a lot for a three-family investment, but that coupled wtih no information whatsoever about the property's roof, systems, etc. makes me anxious.

My issues are:

I am taking on existing leases that I cannot change until they end.

I am taking on tenants that I know nothing about and did not screen.

I have no information about the condition of anything, except what I could see during the walk through, and they want to limit my walk-away amount during inspection to anything over $5,000.  Is this reasonable?  Am I being too picky?

The positives are that I like $600 in cash flow, which has been mostly impossible for me to find in Massachusetts for the months that I have been analyzing properties and will probably remain that way for at least the near future.  I like that I don't have to shop for tenants right away but with obvious concerns.  I want to be as smart as I can be, so that I don't destroy my chances of continuing a hopefully long real estate investing future, but also don't want to miss out on a good deal that I may not find again for quite some time.

The information and opinions I find on this site are invaluable to me, so my first instinct was to come on here and find out what you all think.

Would you move forward with the current owner's conditions on my offer, and with the cash flow amount, and with the fact that I am stuck with these tenants for at least a year for one of them?

Thoughts before I move forward?  I am a newbie and appreciate any words of caution to not move forward or encouragement to go for it.

Thank you all so much for being here for us new folks.  I know I will make mistakes, but I don't want to make a huge one as my first purchase.  

I personally wouldn't be as worried about the $5,000 or more contingency, as I would be about all of the unknowns especially the tenants! How much was your earnest money deposit?

Hello Tom.

Thank you so much for your response.  I agree with the tenants concern.  

I had to pay a deposit of $1,000 to submit the offer, and there is a $15,000 additional deposit to be paid upon signing the P&S. They want a P&S signed within 14 days. Inspection done within 10 days. So, I have paid $1,000 thus far for the offer.

The tenants have been in place for quite some time.  When they sent us the leases, there were a couple of letters included that showed the rental increases for these folks for at least the past year or two.  I am hopeful that they are not problematic, but how can I know?  The current owners aren't providing a lot of information.  I don't believe I have many rights when it comes to finding out much about the tenants.  The leases are pretty standard.  Nothing stood out as odd or concerning.  

Are there other things I could do to determine if the tenants are worth the risk?  I don't have a lot of time as the offer has been made.  They are just waiting for my response to their inspection stipulations.  I guess this comes down to whether I want to take the risk on how good these tenants in place are.  The good news is that if they break the lease at all, eviction can commence.  Of course, in Massachusetts, that could take awhile.  That is disconcerting, especially when just starting out.

Thanks again for your response.  - Liane

@Liane Cochrane The $5,000 limit on repairs isn't a big deal.  The tenants being long-term argues in their favor.

Do your home inspection and see what the inspector comes up with.

Triple-deckers in that area will most often be built in the late 1800s to early-mid 1900s.  Watch for knob & tube wiring (uninsurable), cedar post lally columns in the basement and slanted floors that result from the cedar posts shrinking over the decades.

If they have been replaced, remember that the adjustable (temporary) steel columns are not up to code.  The proper replacements are steel filled with cement.  Your inspector should guide you on this.

Bottom line: finish your homework and if the numbers work and the condition is satisfactory, jump on in!

Hi Charlie!

Thank you so much!  This information is awesome.  I will definitely have all of that checked out.  The current owners removed the $5000 inspection limit.   So, onto getting the inspection done.

Exciting and nerve wracking.  Thank you again for your very informative response.

- Liane

Hey @Liane Cochrane - It's definitely a good idea to get estoppel agreements from each of the tenants.  I passed on doing this with my first purchase, as the owner actually didn't want anyone interacting with the tenants.  The estoppel agreement states what is the tenant's property vs what is part of the house, among other important pieces of information, that should be reflected in the lease.  This sounds small, but I had tenants literally remove mini blinds, trying to say that they were there's.  We replaced them with much nicer stuff anyway, but with an estoppel agreement, we would have had an easier time dealing with the issue as it would have been a non-starter.  For a post on these, look here: https://www.biggerpockets.com/renewsblog/2013/06/1...

Hi Dan @Dan Smith .

Thank you so much for your response. I happened to be reformatting an estoppel agreement that I found on Bigger Pockets when I saw your post come in.  I had read about this about a month ago, and it is a great idea. I plan on using this, but I am a bit confused as to when and how to present it.  In the comments section of the blog, there were a couple of suggestions, such as having my real estate agent present it to have the tenants fill out.  Maybe she can give it to the owner's real estate agent to present to the tenants.  I don't want to cause any problems with trying to present them to the tenants in some other way.  

I am not sure that the current owner will allow me to converse with the current tenants (I am not sure why this would be a problem, but apparently it is for some).  The fact that we are required to keep the current tenants (they are part of the deal), because they have a lease, and that we did not have any input in the tenant screening, should afford us the ability to at least speak with them during the process. But, alas, if those are the rules, I will find a way to determine that the information given to me is correct.  Again, my only issue is figuring out the best way to present it to the tenants and get them back with confidence that the tenants actually completed them.

We will see how it goes.  I just scheduled an inspection for Wednesday, so I am getting excited/nervous, and it is starting to feel like this is really happening!  LOL

If anyone has another approach that would be better than my asking my agent to present the estoppel agreement, please let me know.

Thanks so much as always for your help! - Liane

@Dan Smith is right on about the estoppel agreements! 

Also you have the right to inspect the rent rolls and be assurred that the tenants have been paying on time. Also you want to know if there are any security deposits and/or ;last months rents that need to be transferred to you as you can bet that if the tenant leaves they will claim they gave the previous landlord both of these items! (It should also bementioned in the lease if there are any deposits) If the lease says no and you get the estoppel agreements that confimr it you should be all set. You also wnat to get something in writing from the seller confirming that there are or are not any deposits and that he will be liable after the sale if the tenat proves otherwise. The seller should be working with you to get the estoppel agreements.

You can add these things as an addendum to the P & S (the requirement that the seller provide the estoppel agreements)

Not for nothing but your agent should be assisting you with this

Put your numbers up for us to see and review, that'll be helpful for you. 

Also, is $600 worth it on a $380,000 house? That's not a lot of leeway if the loan is a little higher interest than you thought. Then if the tax and insurance goes up a little you are down to scraps. 

Can you raise rents at all? 

It's a seller's market, so be careful. Idk what's common in your area, is a 3 plex is hard to sell?

@Liane Cochrane - For getting the estoppel's filled out, I would present the form to the seller and ask them to please get those filled out.  They should be signed by both the seller and the tenant of each unit.  You want as much detail in there, specifically about what the tenant own's, and what is officially part of the property (appliances, window coverings, etc).  Let the current owner deal with getting that from the tenants, as they should be signing it as well.

When we bought, the owner said that they didn't want us calling or emailing the tenants, so we just showed up one early evening with cookies to talk to them and introduce ourselves, (that just happened to be how we could get around what they were saying).

On the matter of security deposits - The recommendation I got from my lawyer was to have the owner pay out the current interest back to the tenant.  The only amount that you want to take from the owner is the actual security deposit, you'll want that written somewhere and signed by the owner that they have settled with the tenant on interest.  Lots of landlord's don't actually handle interest correctly and that could technically come back to bite you even if it's not your fault.  This is especially important in MA, where our security deposit laws are so strict.  Make sure you understand all the rules about security deposits too (like paying interest every 12 months, and keeping them in separate interest bearing accounts).  For that, we actually use Santander bank, which has a landlord specific escrow account for security deposits that I would urge you to seek out, whether at that bank or your own.

Hi Everyone. 

Thank you all so very much for our responses.  They are all invaluably helpful.  I am sorry that this is such a long response, but I wanted to address each of you.  I read through all of the Massachusetts Landlord Tenant laws and after being a bit dismayed at some of them, I made sure that I understand what needs to be done, especially with the security deposits.  

@Douglas Snook .  Once I saw these responses, I contacted my agent and told her that I need to present the estoppel agreements for completion by the tenants.  I will also let her know that the tenants as well as the current landlord need to sign and confirm the information contained in each.  

I will also go through the leases and letters again for information about the security deposit and last month's rent. It looks like the current owners charged a cleaning fee as opposed to a security deposit, but I will confirm this. If just a cleaning fee, I will need to find out how that is handled with regard to the security deposit law. They may have done this to avoid the security deposit law altogether. I also did not see anything in the lease regarding a last month rent collected either. I will be sure to check on and confirm this information ASAP. I will include the requirement of the completion and receipt of the estoppel agreements in the P&S as well as confirmation of the existence of or the lack of security deposits/last month rents. I agree about my real estate agent. I do not believe that she is as experienced with investors as she had claimed (my fault for not checking further with references from her), but thankfully I have all of you, and this will end up being her first and only transaction done with me in the future. She has been helpful and kind, but definitely does not have the "investor" type information that I need.

@Clint E.   I truly wish that my cash flow could be higher, but as I stated in an earlier post, there truly has not been one property in our area that even cash flows at all.  Those very few that do cash flow at all are always way less than $100 per door.  This was the best I found thus far.  My area is highly priced, and this was a good price for what I am getting and where.  Not a "deal", but the best I could find (condition, location, price) after months of looking and analyzing as well as the fact that I am not a cash buyer.  

The numbers.  

The tenants have separate utilities (meters, heating units) and pay for the heat and electric to their units.

The price is $382,000

Expenses:

Insurance:  $1,000

Water/sewer:  $1275

Electric:  $658

Trash removal:  $900

Landscaping/snow removal:  $1450 (My husband and son-in-law are landscapers/plowers (and very talented general handymen), so this amount will not be close to this)

Real estate taxes:  $3847

Vacancy rate:  8.3%

Maintenance and repairs:  $1200 

Advertising:  $150

Administrative:  $150

20% down payment:  $76,400 with 5% interest rate - $305, 400 mortgage amount - mortgage payment $1641

Rents are:  3BR - $1325; 2BR - $1050 and 1BR - $975.  All tenants have been there for at least two years (haven't been given any further information).  In this area, once the leases end, the market rent is approx. $1650; 1400 and 1050. 

With regard to raising the rents, I will not be able to do anything with these tenants or their rent amounts until the end of their current leases in Feb 2019, April 2019 and July 2019.  Just have to wait for the leases to end (probably raise in manageable increments if the tenants are worth keeping).  These units are all in good, clean, rentable condition (from what I saw during the walk-through)

I would love to find something with better cash flow, but I don't see that happening in our area unless it is something that will need a lot of work.  I don't think I am ready for (if ever the renovation route). 

Our area is selling very quickly.  Multis are flying off the shelves, and this one had multiple offers on it a few hours after it was shown to us.  I don't see an issue with my having to resell if the need arose.

If the inspector finds anything major, we will need to renegotiate or I will walk away.  You are right, it is a tight cash flow if something major comes up.  Although, I know and am prepared for the fact that anything can happen any time - inspection or not.  I am hopeful that the inspector will do a good job and warn me of anything big or small coming soon or in need of immediate attention.  I also have some cash reserve saved.  

@Dan Smith   Thank you for another helpful, great response.  I told my real estate agent that I need to see the rent rolls.  See above comment for the security deposit information.   However, I will also be sure to get in writing from the seller the status of any security deposits (if any) and if there was a last month rent collected from any of the tenants.  And, if so, I will also ask them to pay any interest due to the tenants per Massachusetts law, so that I am only collecting from the landlord the security deposit itself.  However, as I wrote above, I saw in the letters that the landlord included with the leases that they collected a $300 cleaning fee and no mention of a security deposit.  I will check on the laws regarding that fee to determine how that is legally treated, if at all.

Thank you all so much.  If I missed anything in my responses to your awesome responses, forgive me.  I didn't want to wait any long to respond to you, and it is quite late at night after a long day.   I will be going over all of the information I have received from the current owner with a fine toothed comb again along with all of your information, so that I can list out everything I need to do in my next steps.

I could not do this without you all!  I am deeply grateful for the caring and content included in these responses.  I am not going to move forward with this if anything major comes up with the inspection that the owner will not renegotiate.  I am not afraid to walk away.  There are always others out there, but it may be a long time where I find cash flow like this in this area, unless I wait until some sort of down-turn in the future.  Once these current leases end, I can raise the rents a bit. The market can definitely bare an increase on at least two of them.  The cash flow will be better starting with the first lease's end in February and the next in April.

You are all wonderful. Thank you! - Liane :-)

The $300 "cleaning fee" is troubling. You can collect only 4 things at the start of the tenancy - $25 for a lock/key change; first months rent, last months rent and security deposit.

Is the current landlord holding that cleaning fee in a separate interest bearing account like a security deposit? Is this cleaning fee mentioned in the leases? If the current lanlord has not treated the cleaning fee like a security deposit you may have to take the money and set it up as one your self or return it to the tenants and get it in writing it has been returned. 

How long has the current owner owned the property? Doesn't sound like they know what they are really doing

Echoing what @Douglas Snook is saying, don't take that "cleaning fee" from the current owner, that was an illegal fee to charge on the front end of a tenancy.  That being said, it's likely not your problem if you don't assume it in the sale and the owner gives it back to the tenants.  As for getting a security deposit, you would likely have to wait until the lease is due for re-signing again, and in your new (likely improved) lease you would require the additional security deposit.  

To what you said about being a little overwhelmed by MA security deposit laws: It's honestly not as bad as it sounds, but it's in your best interest to let a bank like I mentioned above take care of it so that you don't find yourself in a pickle!  I'm glad that you're getting the help you're looking for in this forum!!

Hello.

Thank you so much for the reminder of the Massachusetts fee allowances.  The leases I received clearly state that the landlord was in of $295 for cleaning fee.  I am not sure if this is legal either.  I am going to have an attorney look everything over and discuss all options, including walking away if I feel it is the best thing to do.  I am not comfortable with not only inheriting tenants that have pretty long leases that I am stuck with, but I will also have no security deposits from any of them should there be any damage or lease-breaking by any of the existing tenants. 

Couple that with the fact that North Attleboro just passed an override of their 2.5% property tax hikes, so a tax hike is coming.  Now I can see why they want to sell two properties in North Attleboro so badly.  I realize that most towns are going through similar things, and the town I live in has property taxes higher than this; however, the hike will cut more into my cash flow than the amount being paid right now.  However, when the hikes take effect, my ability to raise the rents will be closer at hand corresponding with the end of these current leases.

I am going to have an attorney discuss with me my options for dealing with the cleaning fee issue with the current owner and determine if there is something we can work out to make both parties happy with continuing with this deal.  Because I am so new, I am not sure of all of the things I can negotiate at this point.  I do know that a lease can be changed only if the current owner and tenants agree.  

Also, does anyone have a recommendation for a real estate attorney in Massachusetts (preferably South of Boston area)?  I have someone I know, but I am not sure they can deal with this particular issue within the tight time-frame that the current owners have us running around in nor if they would be great for the investor's perspective.  I also would prefer to have someone come highly recommended from here than my only knowledge being that I know someone is a real estate attorney.

Thanks so much for all of your responses, and any other information/warnings/negotiations, etc. anyone would like to include would be welcome.  I still have time to walk away from this one, but I only want to if most (including an attorney, inspector, etc.) believe that I should.  As I said in earlier posts, cash flow like this (although not great) doesn't come around often in our area, but if I should wait, I should wait.  I am still on the fence and will take all opinions, including that of an attorney to make the final decision.

- Liane

I am not a professional at all. Just bought my second investment property but i would be alittle cautious, no imformation of any kind of anything and also 5k or more in issues for you to be able to walk away seems alittle weird they would mention that. 

Does anything in the basement have dates written on them. Also i would not move forward. 

If he wants that clause in i would think its because he knows something is wrong. 

Ask for proof of rents. Why is he asking for everything so quickly done? I usally have inspection within a week closing within a month. Never had that 5k contigency and after inspection i would ask for a few things if its a no its a no. 

@Liane Cochrane

I highly recommend you go on masscourts.org and search the all of the tenant's names for non-payment issues.

I eliminated several deadbeat applicants for my properties using this site.

If there is non payment history, either ask to receive the property vacant or run for the hills..

Try running your numbers again. They do not seem to add up. At 305k 5% is approx a mortgage of $16xx not including taxes and insurance Water/sewer seems a bit low for a 3family household