Difficult seller in St. Louis Multi family deal

22 Replies

I’m looking at a 16 unit deal in the Bridgeton MO, area. The numbers are good, the seller will finance with agreeable terms, and I walked each unit and entire property with my property manager and contractor. Everything seems to be in working order, but I would like to get an inspection on the plumbing and mechanicals of the property. The seller refuses to allow an inspection because he insists it’s a waste of time and money and the home inspector is not qualified to determine the serviceability or life of the mechanicals. Furthermore, he refuses to to do business with me if I use my property manager. The properties are in good condition, aside from cosmetic work and cleaning in the units. He rents under market rent and provides low quality housing to cash paying tenants. There is plenty of forced appreciation and cash flow here, but he wants to me to continue to run his “business model,” which I refuse to do. I provide clean, quality units updated to the market standard, and I claim income and expenses on my taxes. Any recommendation on how I can make this deal work with a difficult seller?

Based on what you posted, I'm wondering if the owner is going to want the loan payments in cash.  Are the seller finance terms so good that you haven't looked into bank financing?  The contractor should be able to give you a sense of the condition/remaining service life of the plumbing and mechanicals.  I guestimate 15 years for builder grade split DX equipment.  Water heaters can go longer if they are flushed and the water supply is not either corrosive or has a high mineral content.  If the owner pays utilities, you may think about upgrading to more efficient equipment.

@Andrew Pappas If you are to use his PM company, can you make sure you have an out clause within 3-6 months, if they are not meeting your expectations? You could use them, then fire them shortly thereafter, if you have enough reasons to do so.

As far as the other issues ... how much trust to you put in the owner's words? Sometimes, you just have to go by guts. If you really want the property, then you might just go by gut. Personally, I hate surprises and would always prefer to have actual factual data for my decisions. 

What would be the worst case scenario, if plumbing and mechanicals needed to be fully upgraded? See if you can factor those into the price for negotiation. 

Good Luck !!! 

He wants to be the manager, As he manages it now. Honestly he is a slum lord and the units are not well maintained. They are messy and some have cockroaches. He takes cash from tenants and has no one on a lease.  If they don’t pay he just kicks them out.  He’s not running a legit company.  As far as the inspections, everything seems to be working fine.  I know some of the mechanics are old and will need to be replaced soon, I’m just concerned about a city inspector coming in and making me do costly updates right off the bat, which would cost over $50k easy. The owner claims everything is up to code, but he has no paperwork to show electrical, plumbing, and HVAC is inspected by the city,  or a certificate of occupancy. It just seems suspicious that he won’t allow inspections since he says everything meets code and works. 

The potential here is great and her seller financed terms are exceptional, but he seems to want to maintain control and continue to collect cash rents for me.  Completely unacceptable for me. 

So, he will do seller financing and he wants to remain involved managing the place ... 

One of the reasons I buy real estate is for control.  If the seller refuses to give me control, then that's not a good deal. I would like him to be as passive as possible, while I control the whole asset. 

Could there be a monetary value to him giving aways his "control"? Offer him money to give you full control. How much ... depends on what you think would make sense to you financially. 

Unless he's a RE Broker he can't PM for you after he sells, in Missouri you need your Broker license to PM a property that you don't own, unless you're an employee of the owner. So you can tell him that, because if he does have Broker's license, I would report his slum lordness to the MO RE board. Also St. Louis County is pretty strict with code enforcement, you could always call in to them and see what they could do to help you out. If you have it under contract already, can you try to do bank financing so you don't need to worry about this seller after closing? 

As for keeping to his "business model" you could always agree in theory, and then once it closes kick him out and do your model. Unless you've written a contract to continue to use him, which I wouldn't do in your position. Good luck. 

My guess is you are only seeing the tip of this iceberg. His 'business model', his property manager, his financing and no inspection allowed. Time to walk away.

@Andrew Pappas Donald S. has a good point on the needs to be a broker to PM.  

Setting quality standards to key to avoiding conflict.  If this PM cant operate to your standards, then it will be a constant source of conflict.  I would say unless you can use your preferred PM, I would walk away.

As a side note, maybe you can scrap the deal for now and touch base with the owner every so often and see if they have changed their mind on their terms.

Hi @Andrew Pappas ,

I would recommend securing the property using other financial means, removing him entirely. Even if you agree and then decide later to use a different PM, he is going to be showing up causing all sorts of trouble with your tenants. Either get in bed with him his way or go alone, don't half-step.

Good Luck!

Thanks to everyone-excellent advice and I’m glad my intuition is in line with what you all recommend.  At this point I am concerned he would continue to get involved with the tenants and operation of the property after the sale of the property, and bank financing is the only way to cut ties with him. 

Yeah when the lawsuit comes because he showed up and did a sidewalk eviction on one of the tenants, he will expect it comes out of your end not his.

There are enough red flags on this one for me to walk away and find the next great deal. 

Watch out there are some red flags there all over the show with unreasonable seller.

@Andrew Pappas   i don't know how good is the deal for you to take the risk of not having the inspections done BUT for me - it borderline walking away from a nutter!.

Seller financing with a guy like this could be a headache he is clearly not reasonable. 

My motto and one of the investing principle is " Never Ever Be A Motivated Buyers" 

Don't be desperate to get in to a deal, this could cost you dearly. 

Do you have to do seller financing? for how long?

Do you have the right to inspect in a written contract or what?

Originally posted by @Hadar Orkibi :

Watch out there are some red flags there all over the show with unreasonable seller.

@Andrew Pappas  i don't know how good is the deal for you to take the risk of not having the inspections done BUT for me - it borderline walking away from a nutter!.

Seller financing with a guy like this could be a headache he is clearly not reasonable. 

My motto and one of the investing principle is " Never Ever Be A Motivated Buyers" 

Don't be desperate to get in to a deal, this could cost you dearly. 

Do you have to do seller financing? for how long?

Do you have the right to inspect in a written contract or what?

 He wants to seller finance With no payoff before 7.5 years and a balloon at 15, amortized over 30 years at 5% fixed.  I don’t have a right to inspect, I’m not under contract, and I likely won’t go under contract at this point.  Best case scenario is we part on cordial terms and I reach back out every few months. He’s not motivated now but he may be in a year when he plans to move.  

16 units has to be 200k+ in total at min.

I would see if you could get a HML for this (rehab to pass underwriting) and then refinance?

If he's a true slum-lord... I'd mail each unit and inform them of their rights take pics and let code enforcement know as well as your local housing authority (he'll be forced to bring it up to code or face violations which would later turn into a lien on his complex).

He wants full control for the benefit of him financing the property.  Owner finance is great but not if you lose full control and if you use his model there could be legal ramifications as well.  I would find another way to finance it and remove him from the equation.  

Try to look at it from his perspective.  He probably has no idea he's a slum lord and thinks he's the best manager alive.  Because he's financing the property, he wants to make sure it's maintained up to his "standards" in case he needs to take the property back.  Also, inspectors are hired to find problems and condition can be subjective.  I've had experience with inspectors who don't know what they're talking about and they can't see through walls anyway.  I would want to send a camera through the sewer lines to make sure they're okay and that's about it.

On the other hand he might be planning to put the cash rent in his own pocket, be hiding known expensive defects, hiding financial problems that the bank would find, there could be title issues. etc.

I love this game!

What does he say is his reason for selling? It's just seems odd that he would want to sell but maintain control. Does he own the property outright with no loans? Are you making a down payment?

Originally posted by @Andrew Pappas :
Originally posted by @Hadar Orkibi:

Watch out there are some red flags there all over the show with unreasonable seller.

@Andrew Pappas  i don't know how good is the deal for you to take the risk of not having the inspections done BUT for me - it borderline walking away from a nutter!.

Seller financing with a guy like this could be a headache he is clearly not reasonable. 

My motto and one of the investing principle is " Never Ever Be A Motivated Buyers" 

Don't be desperate to get in to a deal, this could cost you dearly. 

Do you have to do seller financing? for how long?

Do you have the right to inspect in a written contract or what?

 He wants to seller finance With no payoff before 7.5 years and a balloon at 15, amortized over 30 years at 5% fixed.  I don’t have a right to inspect, I’m not under contract, and I likely won’t go under contract at this point.  Best case scenario is we part on cordial terms and I reach back out every few months. He’s not motivated now but he may be in a year when he plans to move.  

My suggestion was about to be that you have the seller finance it, then kick him off as property manager, get the building performing, and refinance to kick out his financing control. You could still do that if you can convince him to loose that no-payoff term - maybe offer him a high interest rate, but you can payoff after 1 year. Sell it to him that refinancing isn't your plan immediately, and break out how much interest he'll make in 7.5 years at that higher offered rate (even though you know you'll never pay that) for the little bit of risk that you'll actually refinance before then (wink, wink). Just be sure you are in a position where you are building in at least 25% equity and can actually refinance it.

I would look at the bigger picture and decide whether you want to get in bed with this guy at all. If he refuses to sell without being allowed to stay on as manager, then it seems like a non-starter. Even if you wrote up a PM contract with a 3-month out clause and then fired him for whatever cause, it sounds like this guy isn't going to go away. Plus, you'll have to delay your forced appreciation efforts while you surgically remove this guy. Then, even if you managed to do that and he still held the note he could make your life difficult until you refi him out. I would only do this deal if the guy is cut loose at closing and then if he kept sniffing around for whatever reason you'd have every right to remove him from the property.

As far as an inspection goes, that's up to you on your comfort level. The average inspector probably won't point out much that your contractor or PM wouldn't have caught on your walk through, but it also doesn't cost that much and if they snaked the sewer or pointed out one defect you missed, the cost would pay for itself. What I would definitely not do is call the city/county on this guy being a slumlord. If he puts two-and-two together that it was you then you're going to be out anyways and even if it helps put pressure on him to get out of the property, then they're going to be up your butt about everything that's wrong. Stay off the government radar as long as you can. They're just there to extort money from you, not help.

He likely is very involved with the tenants (drugs, sex, and $). Like it was said before, only buy if he will be completely removed from the situation. And then you will have the tenants to deal with. 

As most everyone else had said, walk away. Quickly. 

Regardless of the value, or lack of, from am inspector, the owner's refusal of one should be a huge red flag. 

Then because I have trust issues, I would not be surprised if he's not collecting more for rent than he's indicated. 

Again, walk. 

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