Good evening all,
After months of searching, I found a 24 unit complex that I really liked and all the numbers worked for me. It was off market, so I've been dealing directly with the seller and worked out some creative financing to help get me in the door without 25% down. Once I received the documents from him I found a hiccup, all of his tax returns and bank statements included 4 other doors, 2 single families and 1 duplex. When I originally got the documents to begin with I did not get the pages I found this on but the yearly income made it appear as though the 24 unit has been nearly fully occupied for the last 3 years but now I find out 4 other doors were also included in those figures. Has anyone run into a situation like this? He tells me he's never broken the income/expenses per individual property which will never allow me to know the true income or vacancies from previous years. Deal breaker when no way to verify income?
I wont put too much attention on tax returns. Sometimes people represent income expenses in return that arent 100% representation of the business.
I would assume you have fair knowledge of the area. With that try to judge how much rent you could get from the building minus expenses; then see if this makes business sense.
Otherwise you can try to renegotiate the deal to make it work for you.
Its advisable always being on safe side.
Ask for estoppel letters from each tenant; rents, lease dates, security deposits etc... this will give you a good idea of what’s going on with what he already gave you and those documents
Does his rent roll show 24 full units? Also, although you don't want to be hemorrhaging money from the beginning so you want it to have decent occupancy, how you plan to manage it is more important than however he's currently running. Do you think you can get it stabilized? What is the occupancy in that sub-market and what does your market survey say about the other comp properties?
@Michael Le Currently the rent roll and leases I received show one vacant unit. It is a stabilized property, I had planned on using the current management company already in place. I have met with him a couple times and have been impressed with how he handles the tenants(during the walk through) and is local. My concern that maybe its not as stabilized as I had thought is that 6 of the units are currently being occupied on short term leases to a construction contractor in the area that has rented them out for his workers to stay in. The information I've found shows the town rentals at mid 90's occupancy. Rent is about 50 dollars higher than a close comp but these units come with washers, dryers, and garage where the other one does not.
@Kim Meredith Hampton Thank you for the suggestion. I'll see if that gets me somewhere
@Manik Zaman I am probably more conservative than I should be but that's who I am. I was hoping between the bank statements and tax returns I would have a clear picture of what was brought in for income but with 5 properties on the one statement its hard to figure it out. I just find it hard to understand why he wouldn't at least do books on each property individually for when he sells them. I cant be the only one that wants to know this stuff. If I can indeed keep occupancy around 95% with current rents and my expenses figured I should have no problem making It work. Thanks
Is he seller financing you?
If you can't verify something have him give you a reserve credit at closing you can draw from.
Generally it will have a timeline to hold the money say 3 months or 6 months and what is not legitimately used goes back to the seller after that time.
If everything is as he says then he should not have an issue. If he balks then maybe he is hiding something. If this is owner finance have some outs where you are not personally on the hook and can just quit claim back to him if you find out you were sold a dog. At that point you gain experience and just lose a little time and money instead of big money and time.
Estoppels are important. Since he appears (from what you have said) to keeps multiple account properties co-mingled with ledgers it will be hard to verify everything.
Whether the property is full or not you need to underwrite to conservative standards. Do not think because you are putting less down or getting owner finance that under any terms you have a deal. The owners sometimes do this because they want to (dump a problem) they no longer want to manage onto somebody else.
Some sellers will not want to give a reserve amount they get partial back and instead will just want to give an amount and be done with it. Pay attention to post closing warranties given in the purchase and sale agreement.
No legal advice given.
@Ryan Oelmann How about leases? He must have leases for the units. You can check the paper trail on those to figure out occupancy rate. Also, you said you were planning on keeping the same property management company in place? They should have records on rent roll and vacancy as well. Vacancies are due to 1) poor management 2) rent price 3) condition of property 4) condition of unit 5) location. Location is the only thing you don’t have control over so as long as you know it’s a good rental area, just make sure you’re taking the other 4 factors into consideration. If you’re keeping the same property management in place then there are only 3 factors remaining. If you’re keeping the same rents or raising them then you better make sure you budget for rehabbing the building and the individual units as those are the only 2 factors left on the list that can turn the investment around.
@Ryan Oelmann you have access to his PROPERTY MANAGEMENT COMPANY! Just ask them. They will tell you how much rent is actually collected from this unit, as they have to report it to whoever does his taxes. They can tell you exactly how much each unit is renting for, and which ones are vacant. Good luck, I hope it turns into a great find.
Get copies of all leases for 24 unit building for the last three years. That will give you the rents, and a reasonably accurate number for vacancy.
@Salvatore Lentini Thank you, Yes I have all the current leases. The property management is a local real estate agent and not a large company. From what I have gathered he collects rents(with checks made to owner) and deals with the calls and finding tenants. He does not do any of the financial stuff so he has no papers to go along with this property other than his contract to do the management. I have asked for the last few years of leases as mentioned above and he said he would try to find what he had. Units are in tremendous shape, this is, for the area an A class building in my opinion. Very little repairs need to be made with apartments that I would personally live in without second guessing it. I'm hoping that he was just slow on raising rental rates but I have no way to prove that until I get the existing leases from years past. Thank you for your insight.
@Robert Herrera I have tried this route. Explained above. I'll keep on him and see if he can dig something up
@Ryan D. I have asked, I'm hoping they can come up with at least some so I can see that A: the rents were significantly lower then or B: It has more vacancies that I was expecting for the area
@Joel Owens He is seller financing a part of the down payment, the rest of the down payment is from me and financed with a local lender. I used conservative numbers for income and expenses when running my underwriting numbers so I was hoping to verify the income and it's vacancy history to be sure my numbers were in fact conservative enough.
I like your idea of a reserve credit, had not considered that and you're right, if he believes in the building he should have no problem giving a little reserve to prove it.
I agree that this is sometimes why owners are wanting to get out quick, its the skeptic in me that makes me want to see true numbers/leases from years past to verify the claims. Thanks a bunch.
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