What to ask the seller BEFORE the offer on a Multifamily?

Question

Wondering what the appropriate questions are to ask before making an offer on a Multifamily? I assume you'd obviously want the gross scheduled income, vacancy, gross operating income, total expenses and NOI but beyond that what should be asked before the offer and what should be saved for the due diligence phase?

Rent rolls? Building Tax return? Independent Appraisal? etc...

Rent rolls? Building Tax return? Independent Appraisal? etc...

William Hochstedler · Answer

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.

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.

Stone Teran · Answer

Yup, I've seen enough fantasy P&L's from sellers to know that I need to calculate my own numbers.

Sarnen Steinbarth · Answer

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)

Joel Owens · Answer

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.

Sarnen Steinbarth · Answer

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.

Account Closed · Answer

"Fantasy P&L's"... too funny... too true.

Raul Pelcastre · Answer

@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

Troy Sheets · Answer

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.

Mark Creason · Answer

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

Joel Owens · Answer

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.

What to ask the seller BEFORE the offer on a Multifamily?

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