Why do sellers sell good rental properties?

36 Replies

I'm looking at a multi family unit which would be a turnkey rental opportunity for me.  I'm a total newbie so I've run the numbers two dozen times with conservative assumptions on everything (high vacancy, high repair costs, etc.) 

All three units are occupied; two through spring and the other is month to month. The building is well maintained with lots of updates and is in a good location.

The numbers look pretty good which makes me if I've missed something important.  As a new investor I'm not confident in myself yet and I wonder if I'm missing something that should concern me.

The seller told my realtor that he's selling because he wants to concentrate more on vacation property around a nearby lake, so maybe he needs the equity from this property to expand his more profitable vacation property?  Is that believable?

Newbie is nervous :)

Story could be true.

You might want to see how long the owner has owned the apartments.  If its only a few years, you may be getting a 'flip'.  

See if it was bought much lower and priced higher than normal appreciation would give.  

The owner may have cooked the books to show less than normal expenses and thus showing extra high profit.  Or maybe they showed extra high income with the same results, showing extra high profit.  Or maybe they put lipstick on a pig and you have serious hidden problems.

He is probably going to make more money in his other endevour. What does your RE agent say about the pro forma?  Do you knowyour local cap rates and if so how does this compare? 

@Anita Parsa Sellers sell for all kinds of reasons, sometimes they're absolutely unbelievable but still true. Vacation rentals can be much more profitable than regular rentals so it's not hard to believe this seller wants to move equity in that direction.

That said. Don't believe anything a seller or their agent tells you. Do your own due diligence until you're confident you have a deal you're happy with. Also just in case you're worried about 'missing out', don't be. There are 10 million more deals to be had, take your time and if you get this one great, if not that's OK too.

@Anita Parsa There is a such thing as not being ready to buy a good deal. I know this sounds strange, but it sounds like in order to be confident enough to land a deal like this you need to learn the business a little more. All of your research should lead to the point where when a deal that checks the boxes for you comes across your desk you trust your research and knowledge base enough to pounce on said deal. 

People sell properties for all different reasons and if the property is what you are looking for which you mentioned it is, I never understood why the sellers motivation factors into a buyers decision making process. You are going to presumably have an inspection so if there is anything you are missing property condition wise it will be uncovered then. Pull the trigger!

Every investor has different goals and approaches. The deal may not have been a long time hold. They may have purchased distressed and repositioned for a profit. If that specific investor is making more money on his vacation rentals then he absolutely may be trying to go all in on that. In my experience I try not to overthink why they are selling. 

Originally posted by @Mary Mitchell :

He is probably going to make more money in his other endevour. What does your RE agent say about the pro forma?  Do you knowyour local cap rates and if so how does this compare? 

I feel silly to admit that not only do I not know average cap rates for multi family homes in this area, I don't know how to find them.  Off to research.  Thanks.  This kind of thing is exactly why I posted. I've got a lot to learn :)

Originally posted by @Frank Procopio :

 In my experience I try not to overthink why they are selling. 



This is good to know.  As a newbie I wasn't sure how much to factor that in.  What I have realized during my few months of research is that certain good deals don't fit with my own goals, so it makes sense that this good deal may no longer fit with his.   

Originally posted by @Michael Noto :

@Anita Parsa There is a such thing as not being ready to buy a good deal. I know this sounds strange, but it sounds like in order to be confident enough to land a deal like this you need to learn the business a little more. All of your research should lead to the point where when a deal that checks the boxes for you comes across your desk you trust your research and knowledge base enough to pounce on said deal. 

People sell properties for all different reasons and if the property is what you are looking for which you mentioned it is, I never understood why the sellers motivation factors into a buyers decision making process. You are going to presumably have an inspection so if there is anything you are missing property condition wise it will be uncovered then. Pull the trigger!



You have confused me a bit.  The first paragraph seems to be saying "you'll know when you're ready" and the second one is saying "go for it".  LOL

Also, I wasn't sure if the seller's motivation should factor in at all.  It is helpful to get feedback suggesting that I don't need to worry about it too much.  

Originally posted by @Anita Parsa :

I'm looking at a multi family unit which would be a turnkey rental opportunity for me.  I'm a total newbie so I've run the numbers two dozen times with conservative assumptions on everything (high vacancy, high repair costs, etc.) 

All three units are occupied; two through spring and the other is month to month. The building is well maintained with lots of updates and is in a good location.

The numbers look pretty good which makes me if I've missed something important.  As a new investor I'm not confident in myself yet and I wonder if I'm missing something that should concern me.

The seller told my realtor that he's selling because he wants to concentrate more on vacation property around a nearby lake, so maybe he needs the equity from this property to expand his more profitable vacation property?  Is that believable?

Newbie is nervous :)

Focus on the property and what it can do for you as opposed to what the seller's deal is. There are an unlimited amount of reasons that someone would need to sell. Could need money, could be getting divorced, could hate being a landlord, could have inherited the house, could be moving etc...None of that really matters. It's either a good deal or it isn't. Focus on that.

 

@Anita Parsa Every investor has a different risk threshhold. As a beginner, yours may be lower than someone with more experience. Some investors will accept a property based on future appreciation and cash flow "potential" where others will only buy if a proeprty cash flow right now. The sellers expenses will be different from yours once you take possession, ie: property taxes will go up, etc. Run your own numbers on your expenses and satisfy yourself. Take the following into consideratoin: vacancy rates, management costs, property taxes, insurance, repairs, maintenance, owner paid utilities during vacancies and any common areas and of course your bottom line cash flow that you feel is reasonable for you to take each month. Subtract those items from the rents you know you can collect on it now before any inprovements. Whatever is left is yout NOI that will be available for you to pay a mortgage payment, principal and interest. With all of that calculated in, you don't really even need to know the cap rate.

@Anita Parsa I’ve only been able to confirm the reason the seller was selling a few times, and usually after the sale. It’s not something I think about too much unless it’s obvious somebody is unloading a turd. Shoot, even then if the price is right I’ll polish that turd right up good as new, sometimes those are the best deals. If you look into the ethics rules agents are supposed to follow “Why are they selling?” isn’t even a question the selling agent is supposed to answer. What are they going to say, “This property is a real money pit and the tenants are insane”. Probably not, it will be more along the lines of “the owner is looking to liquidate some capital to invest in a larger building” so shifting funds to vacation rentals checks out. As others have said focus on the property and how it fits your investment goals. Run your own numbers and verify them with inspections and 3rd party professional opinions. Buyers are liars and sellers are worse! Run your numbers as well as you can, do as much due diligence as you can, and buy based on that.

In the end, people sell for all kinds of reasons. It doesn't matter why. They are just done with it. The property is available for you now. If it is profitable go for it. Run the numbers in worst-case scenarios for that margin. NOI, Cash on Cash, Net, Cap Rates. Set your minimums and then you'll know.

Sometimes if its too good to be true it is not. You need to verify and be even more cautious when conducting due diligence. Some cases it is a good deal from a seller who wants to do a 1031 exchange or even needs cash quick for an emergency. 

@Anita Parsa I bought two small multifamily because investor was diversifying into his new business venture and needed cash to fund that deal. If the number work for you then you should buy it. Given that all other conditions met about property inspection.

Originally posted by @Steve K. :

@Anita Parsa I’ve only been able to confirm the reason the seller was selling a few times, and usually after the sale. It’s not something I think about too much unless it’s obvious somebody is unloading a turd. Shoot, even then if the price is right I’ll polish that turd right up good as new, sometimes those are the best deals. If you look into the ethics rules agents are supposed to follow “Why are they selling?” isn’t even a question the selling agent is supposed to answer. What are they going to say, “This property is a real money pit and the tenants are insane”. Probably not, it will be more along the lines of “the owner is looking to liquidate some capital to invest in a larger building” so shifting funds to vacation rentals checks out. As others have said focus on the property and how it fits your investment goals. Run your own numbers and verify them with inspections and 3rd party professional opinions. Buyers are liars and sellers are worse! Run your numbers as well as you can, do as much due diligence as you can, and buy based on that.

LOL.  Excellent point! 

Originally posted by @Hai Loc :

Sometimes if its too good to be true it is not. You need to verify and be even more cautious when conducting due diligence. Some cases it is a good deal from a seller who wants to do a 1031 exchange or even needs cash quick for an emergency. 

 I wouldn't stay it is too good to be true; the numbers are all within normal parameters.  I think it is just an insecurity thing on my part, like the old line of not wanting to be a member of any club that would have me as a member, lol.  

Originally posted by @James Wise :
Originally posted by @Anita Parsa:

I'm looking at a multi family unit which would be a turnkey rental opportunity for me.  I'm a total newbie so I've run the numbers two dozen times with conservative assumptions on everything (high vacancy, high repair costs, etc.) 

All three units are occupied; two through spring and the other is month to month. The building is well maintained with lots of updates and is in a good location.

The numbers look pretty good which makes me if I've missed something important.  As a new investor I'm not confident in myself yet and I wonder if I'm missing something that should concern me.

The seller told my realtor that he's selling because he wants to concentrate more on vacation property around a nearby lake, so maybe he needs the equity from this property to expand his more profitable vacation property?  Is that believable?

Newbie is nervous :)

Focus on the property and what it can do for you as opposed to what the seller's deal is. There are an unlimited amount of reasons that someone would need to sell. Could need money, could be getting divorced, could hate being a landlord, could have inherited the house, could be moving etc...None of that really matters. It's either a good deal or it isn't. Focus on that.

 

Thank you, this is exactly what I needed to hear.  

 

Hello , I read all the comments about why some people sell, as I can give you my prospective. I have good rentals that I am selling because I am retiring, not because my rentals are not cash flowing or any other reason . I have remodeled them and are easy care rentals . I am selling on the side of strength and not weakness. I can take you to each and every unit and tell you how much I recieve per month and you can speak to the tenant , then you can decide if you want it or not . I agree to trust but verify , but when you see it with your eyes and talk to the tenant and the real estate attorney agrees that the property is clear then you good . It took many years to get there , but remember there are still good and honest people in this world. I choose to believe that everyone is good until proven wrong. Thanks

I agree with others that the seller's motivation doesn't matter a bit. For the primary reason that you likely won't have any idea why they're selling it and even if you do, that may or may not be true. Just work your numbers and make sure you know the condition of the property. I don't even ask why someone is selling something. 

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