What to ask the seller BEFORE the offer on a Multifamily?
Investor · San Francisco, CA · Member since 2015 · 302 posts · 206 votes
What to ask the seller BEFORE the offer on a Multifamily?
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Broker · Logan, UT · Member since 2013 · 1k+ posts · 1k+ votes
10yI agree with @Sarnen Steinbarth. Most of the details will be part of the due diligence. We rarely see good documentation from sellers even then. When we make offers we use our own numbers. If you don't have a good sense of your market, take a property manager through the property to get market rents.
The only question we ask prior to an offer is, "Why are you selling?" This--more than any numbers the seller could give us--influences our offering price.
15 Replies
- Commercial Real Estate Broker · Fort Collins, CO · Member since 2015 · 308 posts · 151 votes10y
These are all great things - and yes you will want to review them all of course.
Typically I have seen these presented after an offer is accepted, not necessarily before the offer.
Most typically I see just a basic rent roll and expenses (utilities, property taxes, etc.) prior to an offer. Then afterwards you will of course want to confirm the accuracy of what was represented to you (that you based your offer on) and get leases, tenant estopple certificates, etc.
The seller would typically have X number of days to get you the required docs (after the date of an accepted offer), then you have X no of days to review and respond to any concerns.
Appraisal almost always comes after an accepted offer.
Prior to offer you might get:
- rent roll
- insurance / taxes
- Utilities (and who pays what)
- Broker · Logan, UT · Member since 2013 · 1k+ posts · 1k+ votes10y
I agree with @Sarnen Steinbarth. Most of the details will be part of the due diligence. We rarely see good documentation from sellers even then. When we make offers we use our own numbers. If you don't have a good sense of your market, take a property manager through the property to get market rents.
The only question we ask prior to an offer is, "Why are you selling?" This--more than any numbers the seller could give us--influences our offering price.
- Commercial Real Estate Broker · Fort Collins, CO · Member since 2015 · 308 posts · 151 votes10y
Originally posted by @William Hochstedler:
I agree with @Sarnen Steinbarth. Most of the details will be part of the due diligence. We rarely see good documentation from sellers even then. When we make offers we use our own numbers. If you don't have a good sense of your market, take a property manager through the property to get market rents.
The only question we ask prior to an offer is, "Why are you selling?" This--more than any numbers the seller could give us--influences our offering price.
Yes, totally agree and should have thrown it in the original post.
I too love the "why are you selling?" question prior to offer. Some seller agents are reluctant (and almost to a point offended) by this question. But I think knowing this can be great for all parties.
If they are selling because of a crisis in their life and need some cash ASAP, then an offer with a quick close date is likely in the best interest of both parties (buyer could get a better price in return for a quick close, seller can achieve their goals as well).
There are a hundred different reasons why someone is selling and knowing why (and hoe that relates to an offer) is very valuable information.
- Investor · Cincinnati, OH · Member since 2015 · 374 posts · 120 votes10y
Originally posted by @William Hochstedler:
I agree with @Sarnen Steinbarth. Most of the details will be part of the due diligence. We rarely see good documentation from sellers even then. When we make offers we use our own numbers.
Yup, I've seen enough fantasy P&L's from sellers to know that I need to calculate my own numbers.
- Frederick, MD · Member since 2015 · 654 posts · 256 votes10y
Originally posted by @Stone Teran:
Originally posted by @William Hochstedler:
I agree with @Sarnen Steinbarth. Most of the details will be part of the due diligence. We rarely see good documentation from sellers even then. When we make offers we use our own numbers.
Yup, I've seen enough fantasy P&L's from sellers to know that I need to calculate my own numbers.
"Fantasy P&L's"... too funny... too true.
- Rental Property Investor · Toronto, Ontario · Member since 2012 · 538 posts · 298 votes10y
Bit of a tangent to the OP's question but what I 'love' are pro-forma statements that have no basis in reality.
Most of the big numbers are easy to check; property taxes, utilities, insurance, payroll, service contracts. The smaller numbers will not have much of an impact (e.g. on a 500K purchase, 1K or 1.2K for office expenses is meaningless). Still need to be checked as it does add up but that is not where the focus needs to be. The one it seems to boil down to is maintenance. Is it 'low' due to recent capital investment (e.g. New Low Flow Toilets across all units) or are they letting things deteriorate and you will have to invest to bring it back.
The other one that seems to crop up regularly is vacancy rates. Just looked at a property that put in a 'standard' 8% vacancy even though they were currently at less then 5%. Examining the rent roll, showed that there had been a nearly 30% turnover in the past 2 years. That in itself raises questions regarding tenant verification, criteria, etc.
Yes, 'fantasy' is the more polite word to use.
The thing that bugs me is the agents. Assuming they have in the business for more then a few months, they KNOW that it is BS and just publish what ever the owner provides. I understand as they want to retain control of the listing but on the other hand, they are wasting their own time in fielding the calls and questions that would naturally be asked.
Back to the OP's question; from my experience the information provided varies greatly. I have reviewed properties where actual P&L's going back 3 or 4 years have been provided just for the asking along with full response to any questions to others properties that basically tell you an NOI and keep everything else confidential until they accept an offer.
- Real Estate Lender and Broker · Dallas, TX · Member since 2013 · 966 posts · 500 votes10y
I want to see 3 years operating statements, a T12, 3 years of rent rolls when financing. On apartment deals, you routinely see fantasy numbers.
Mark
- Buy & Hold Owner · Redlands, CA · Member since 2015 · 5k+ posts · 2k+ votes10y
btw: An appraisal for MFUs is expensive and part of the buyer's loan process, therefore their expense.
As a Seller, I would demand a Pe-Approvial letter as well as a Verification of Funds for the down payment before I would accept any offer - - otherwise Joey Buyer is just another lookie-lue. Why enter escrow when the buyer can't possible close?
So even if the buyer requests the appraisal going in, the two letters noted will force a level playing field.
- Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes10y
On multifamily it depends on if you are talking about a 10 unit property or a 100.
A 100 unit will usually have a full time bookkeeper, tax accountant, and PM company with professional computer generated reports.
A 10 unit many times has an owner that self manages, keeps only basic records to keep a property going, doesn't have reports in the right format, etc.
This is why I stopped brokering small deals years ago. The larger properties it is easier to perform due diligence and read the reports. The smaller properties are a mess and hard to get financing on.
I try to look at most of the numbers while under LOI. I am looking for what I call "deal killers" that likely cannot be overcome. It's better to find out now then later while under purchase and sale as it wastes everyone's time.
Many sellers try to get you into purchase and sale before looking at anything with a short due diligence. They try to string you along hoping that at the last second they say they don't have a document and hoping you will proceed anyways and close the deal as due diligence is ending and you have money in with reports etc.
Insert a clause where due diligence does not start until ALL items have been received. The seller can't play games then. Also with estoppels have it where the condition is not waived UNTIL all the estoppels have been received, fully signed and executed, and approved in a format by the purchaser along with their lender.
- Frederick, MD · Member since 2015 · 654 posts · 256 votes10y
Originally posted by @Joel Owens:
Insert a clause where due diligence does not start until ALL items have been received. The seller can't play games then. Also with estoppels have it where the condition is not waived UNTIL all the estoppels have been received, fully signed and executed, and approved in a format by the purchaser along with their lender.
" ... have it where the condition is not waived... "
Is the "condition" referred to in this statement, the start of the DD phase or something else? Also, as estoppels are new to me, are there some common certificates available for completion, or does the lender provide the format? And should they be notarized?
Thanks!
- Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes10y
You can have a list of DD items that must all come in before the clock starts. What happens is the sellers play dirty sometimes and say they will be getting the rest of the items to you soon. Then as the DD date approaches for the contingency to be waived they make up excuses or give incomplete forms hoping you will still close on the property.
The estoppel you want your lender to approve the language of the agreement as well as your attorney. The lender will also want an SNDA component. Notary is important as the authorizing officer as the tenant could claim they never signed it, seller falsified it, etc.
SNDA - An SNDA is an agreement among a commercial mortgage lender, its borrower (in its capacity as landlord), and the borrower's tenant, establishing the parties' legal rights should the landlord (borrower) default on the loan and the lender forecloses and becomes landlord to the tenant. Subordination.
- Real Estate Lender and Broker · Dallas, TX · Member since 2013 · 966 posts · 500 votes10y
I am working on a loan right now where the listing agent doesn't understand what a trailing 12 is. Listing agents always like to present the best possible picture when selling their listing, but get irate when they get re-traded when their misrepresentations come out.
Mark
- Developer · Philadelphia, PA · Member since 2013 · 1k+ posts · 902 votes10y
Originally posted by @Sarnen Steinbarth:
Originally posted by @William Hochstedler:
I agree with @Sarnen Steinbarth. Most of the details will be part of the due diligence. We rarely see good documentation from sellers even then. When we make offers we use our own numbers. If you don't have a good sense of your market, take a property manager through the property to get market rents.
The only question we ask prior to an offer is, "Why are you selling?" This--more than any numbers the seller could give us--influences our offering price.
Yes, totally agree and should have thrown it in the original post.
I too love the "why are you selling?" question prior to offer. Some seller agents are reluctant (and almost to a point offended) by this question. But I think knowing this can be great for all parties.
If they are selling because of a crisis in their life and need some cash ASAP, then an offer with a quick close date is likely in the best interest of both parties (buyer could get a better price in return for a quick close, seller can achieve their goals as well).
There are a hundred different reasons why someone is selling and knowing why (and hoe that relates to an offer) is very valuable information.
These gents nailed it. The only thing I'd add that I do is, when you're walking through each unit, ask the tenant (if they're there, obviously) what repairs are needed, how their utilities are, any other problems with the building/neighborhood/landlord, if they plan on staying and if not, why not.
You'd be amazed at what you can learn. Many times it's just general complaints but occasionally you get a gem that will help your decision, influence purchase price, etc. Last one I recall like this, tenants paid for heat, which is a good thing. Come to find out there were air handlers and duct work in each unit and A/C too, the kicker is, the heating portion was electric elements, not gas. The tenant I talked to, for her small 2br unit, was paying over $700/month in electric in the dead of winter. She was leaving as soon as her lease was up in a few month due to that. If I hadn't asked I probably wouldn't have noticed that the heat was electric and the turnover was likely higher than average. All I saw on paper was tenants paid for heat and when I looked in the heater closet I saw a nice newer air handler with A/C. Never would have looked for or guessed it was electric. Electric heat isn't necessarily a deal breaker but it's certainly not a plus, at least in tenants minds.
- Real Estate Broker · Fresno, CA · Member since 2015 · 17 posts · 5 votes10y
@Nicholas Lohr there is a lot of questions you can ask prior to send an offer but most sellers or seller's agents won't talk to you until they have accepted your offer.
- First secured the property with an accepted offer
- The due diligence will create more questions than before the offer
https://www.youtube.com/user/rpelcastre
- Real Estate Consultant · Camarillo, CA · Member since 2010 · 2k+ posts · 1k+ votes10y
@Joel Owens@Sarnen Steinbarth mentioned some of the main ones, but I also like to know about some of the big ticket items.
When were the roofs last replaced
what is the condition of the parking lot
when was the last interior upgrades and what was done?
How old is the HVAC units?
What type of roofs (pitched/flat)
How old are the boilers. ( we were looking at a 100 unit that had two boiler that were at year 40 of a 35 year life span. Replacement costs 35k each)
The more you know before the DD inspection the lower the chance of you spending a bundle of money just to have to retrade or walk away. Of course all the information you get from the broker or seller needs to be confirmed during DD.
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