What is reasonable Deferred Maintenance?

19 Replies

Hey BP fam, 

So I'm in contract to close on a 7-unit bldg by the end of the first month..first deal, hopefully.  

Had the inspection done and there is clearly work that needs to be done in the $5-$10K range, incl some work around rotten wood, leaky pipes/faucets, holes in doors/walls, small amt of mold in bathroom, sump pump drain issues, bathroom fans routing into attic causing moisture issues...etc.  Many other small/trivial repairs.

For a $250K purchase price on a 7-unit in a B- class neighborhood, what is considered a reasonable deferred maintenance that I am expected to assume vs. the Seller to fix or credit?  Of course, Seller being incredibly hard and insisting that for an 'as-is' deal its no repairs at all.  I'm considering ending the deal on this matter but don't want my pride getting in the way of closing a good deal.

thoughts?

@Masroor Ahmed Way too general of a question. Make a list of repairs and what they cost. Use that information with the proforma you made and make a decision. Some of the best deals are from stubborn old farts you think they are winning by sticking to their guns. You aren't paid on being right, not caving, or winning. You're paid in dollars.

I always get a very hard nosed detailed inspection done.The guy I use I trust explicitly & get a very detailed (sometimes 40 page) assessment of the property structure & its ancillary mechanicals.

I have used that to 'disclose' deficiencies of the property structure etc , to the seller & have used same to secure a significant reduction in price. Some times it works or we walk away.

That same report details the work required or anticipated, which is effectively the 'deferred maintenance' you make reference to. In fact a property we bought several years ago systematically failed in two well documented deficiencies, the roof & heating systems on both buildings. But given a grace period of 6 years of income & the significant reduction in sale price, we were more than prepared for the expense.

be tough, be very tough on the buy

P.S. If that inspection report you received on the 7 unit is not 'intensive' (the 40 pager I referenced above was on a two unit) I would definitely look for another well qualified inspector. Our guy also does our commercial properties so it's more than worth the extra $$$ & Castro Cigars.

One time we had an inspection done and it took 6 hours, and it was very specific and a tough inspection for the seller, but we were on the buying side.

@Josh C.  thanks.  I've tried to remain fact-based on my request of concessions based on the report.  Not trying to nickle and dime the seller at the last minute.  Either want them to fix material deficiencies or get a credit for when I will have to fix within 6-12 months.

I have always compared buying investment property to that of buying into a Divorce....

You are literally financially committing to ongoing maintenance, complete with inflated estrogen clauses, alimony with COLA, child support (if there are ancillary buildings) & a lot of baggage. So you would be well advised to take the best of precautions :)

good luck

@Pat L.  ha! It was quite extensive.  Very detailed w/ pics.  Team of 3 spent a few hours out there.  Somewhere around 60-70 pgs. I feel pretty confident nothing major was missed.

I would not worry about giving the seller his way or not. Determine the cost of repairs, factor those in, and decide if the deal is right! If it is a good deal, close. If not, walk away. The only thing that matters in the end is whether you can make the right amount of profit with terms that fit your criteria. 

No company avatar mediumJohn Thedford, John Thedford | 239‑200‑5600 | http://www.capehomebuyers.com

Originally posted by @Masroor Ahmed :

@Pat L. ha! It was quite extensive.  Very detailed w/ pics.  Team of 3 spent a few hours out there.  Somewhere around 60-70 pgs. I feel pretty confident nothing major was missed.

Then you are very well informed .. trust their candid review & assess the cost of potential repairs as you make an 'adjusted' offer. Then if the margin is not there walk away. 

Masroor,

On a somewhat related note- What did the inspection cost? I realize they vary greatly by market, but I'm looking for a ballpark range. Trying to move from single family homes to small multi-family, 6-12 units. 

Thanks!

@John Thedford  is exactly correct. 

This week I walked away from a deal.  Numbers were great.  But, 20yrs of deferred maintenance made it not so great anymore. 

@Alex Fortsch  - I paid $1250 for the 7 unit inspection. I got quotes by hour or around $200/unit.  All estimates were $1200-1500. This guy was highly recommended. 

Deferred maintenance as well as who pays utilities are other things not considered in the 2% rules, just ask @Ben Leybovich  

 @David Krulac  

2% rule applies to ARV/total investment, it does account for maintenance. example, 70k property plus 30k maintenance = 100k, 2% of 100k. never 2% of purchase price.

same as 50% rule, its always total investment, as in once the property is made "turn key". Otherwise no matter what the rule or guide may be it would be impossible to use.

Both rules assume landlord doesnt pay utilities. or HOA's or mobile home park fees, etc.

Ben comes up with odd or extreme examples that where it doesnt work to try and disprove it. remember its a guide to start with as we all already know, anyone can come up with examples to disprove the 2% or the 50%, they are not meant for these extremes. I find that both rules can be used as a good pass or fail to allow me to not waste a bunch of time. Your "typical" rental investment which is what most of us are here dealing with.

@Isaac Essex  

You may be confusing flipping versus buy and hold.

The idea of the 2% rule is that the monthly rent is 2% of the value, so a $100,000 property should have a $2,000 per month gross rent.  When you are looking at the listing or the advertisement for a potential buy and hold and the rent pro forma, you usually don't have sight of deferred maintenance.  You can't tell the last time it was painted, had new floor coverings, rotted porch floors, etc.  The defense of the 2% rule is that it is a rule of thumb which allows you to reject a property that doesn't measure up based on the numbers.

When you're looking at a fix and flip, the rent is not a prime consideration, many times the property is vacant and often uninhabitable.  If you are rehabbing the property to resell, or wholesaling the property to a rehabber to flip, the rent is not your strongest interest or selling point.

And as well the 50% rule has to do with the expense costs versus the income generated, again not a prime concern if you are never going to rent because you are flipping or rehabbing to resell.  again this measure is at the initial stage of evaluating the listing or advertising of the property as a potential purchase.  The age of the carpeting, and deferred maintenance is not visible at this stage.

Once you see the property and inspect yourself or have a professional inspection, they you would know the deferred maintenance as well as upgrades and improvements needs at the property.

@Masroor Ahmed  

On a 250k 7 unit B- multi deal 5-10k in deferred maintenance shouldn't kill your deal.  

Don't forget your reputation is on the line to close.  That doesn't mean you shouldn't back out of a deal within your inspection time frame if unforeseen issues come up.  But that does mean being a sophisticated investor & doing everything you can prior to offer acceptance to ensure you close the deal.  

Real estate is a small circle, especially as you get into larger deals.  Backing out of a deal might mean not getting the next one.  I'm not trying to be negative but I am trying to show the opposite side of the investors that think walking away on a regular basis is acceptable.  It's not, & it will show the investment community that you are not a closer, especially over time.  

that's great advice @Chris Winterhalter , especially if REI is a long term plan and not a one off transaction.

I have a lot to learn about negotiations. I've priced this so that $5k in repair costs doesn't materially change my IRR, but two things at play 1) my desire to build in as much cushion as possible for my deal #1 because I'm nervous (side note I even negotiated my mortgage rate down 10 bps last week) and 2) I think certain aspects were misrepresented during the showings so I want seller to make whole, on principle.

In this case though, I shouldn't let this get in the way of a great deal. 

@Chris Winterhalter is exactly right. It's about reputation and you want to be known as someone who is easy to do business with and gets deals closed.

Granted, if you find large, unexpected items during your diligence that you could not have reasonably known about you might consider taking it up with the seller, but most of the things you listed are minor.

I work in acquisitions for a private investment firm that owns over 9,000 units and has purchased 3,000 in the past two years. Please trust me when I say reputation is important. We get deals even when there's many bids because we are known to close quickly, with no hassles. IMO if the $5-10k doesn't hurt your returns too much I'd say eat the cost.

Hi @Masroor Ahmed 

I happened to be trolling the bp threads I was curious if you moved forward on this deal or no? What was the outcome if you don't mind sharing?

619‑289‑9401

Hi @Masroor Ahmed 

I happened to be trolling the bp threads I was curious if you moved forward on this deal or no? What was the outcome if you don't mind sharing?

619‑289‑9401