Too good to be true?

8 Replies

I have the opportunity to buy a property. I would appreciate all feedback. Here are the details: 10,000 Sq ft  13 rooms rented $500-750. Per room, depends on size 2 Huge living room areas 5 bathrooms,  1 full and 4 half 2 full size eat in kitchens  1/3 acre mostly fenced Basketball sized,  concrete back yard 3 storage sheds Swamp coolers, 2  1 new boiler, 1 refurbished Heat system  Fresh paint inside and most rooms newer carpets  This property is currently a boarding home for elderly or disabled people on fixed incomes. Current realtor appraisal of $480- $500,000. Asking $365,000. They are on a deadline to avoid foreclosure. My question to them is why they can't afford to pay the mortgage if they are truly getting at least $500+ a month from 13 people/rooms. The numbers seem to work.

@Kendra Levy

I would not go by the realtor's appraisal, I would get my own.  I don't know how well you know the realtor, but I have seen many appraisals inflated to make a sale.  It may be appraised on the building itself, but the type of business it currently has is what would concern me more.

Have you looked into if there are any state requirements or state inspections, stuff like that?  This seems like there would have to be some kind of management on board that would be medical/care focused since there are elderly/disabled people there.   It doesn't seem like your typical multifamily situation, so maybe that's where the numbers game comes in?  Is this assisted living?  If so, you have to have staff to take care of the people, and that could add a big overhead.

I don't know anything about a boarding home for elderly folks, but I would think there would have to be some mandatory regulations you would have to meet; the building might not be up to the regulations.  I can't imagine 1 full bathroom for 13 residences as being enough.   I would speak to someone who really knows this niche and dig into the requirements, if you haven't already.  I think this goes a lot further than just the numbers if you plan on keeping it the same thing it is now.  

I could be way off, just my two cents based on what you have above; good luck!

@Kendra Levy your instincts are right on, there is a story of why they are losing it to foreclosure. Either understand the reason completely and why you could fix it or stay far away.

Don't trust an appraisal that isn't yours, odds are good they're trying to tempt you with stories of "built-in equity." Also, how is rent being paid? By the actual tenants, or by government voucher? Do you have a plan if the tenants die or the city runs out of money to pay?

Something else to consider, depending on your local zoning: the building may be *required* to be a boarding home. For example, last time I looked into it here in Chicago, SROs (single-room occupancy, aka half-way home or boarding home) had to stay that way, unless the owner was able to vacate the building entirely and rezone, which of course required the city's permission.

You are not buying an investment but a JOB. These types of assets are very intensive time wise and emotionally. I had a few clients look at larger ones many years ago for millions and millions of dollars. Some investors live on site and then they have to watch people pass away after getting used to seeing them around. When people are very old then people constantly pass away.

The funding could be tied to the state or federal level where many heavy requirements are placed upon the business for care.

I am not well versed at all on these but I know enough from talking with others I have zero interest in the space. I like properties that are more passive with easier returns and less lawsuit risk for the potential income generated.

Though it may not have to be licensed by the State, it will have to meet zoning codes, health and safety, etc. so you'd want to check on all of that, as well as business licenses, insurance, etc. However; if they're going into foreclosure the question would be why?  I'd also go and try to talk to some of the residents as part of any deal to find out their thoughts on the place. 

Income can only be verified through tax return transcripts or bank statements. Seems like there's more to this story. In any case, businesses like this are extremely difficult to run successfully. They are highly regulated, income streams can be unreliable and clients sometimes difficult. I'd give this one a wide berth.