Advice on a Sticking Point On A Deal

6 Replies

Looking at a mutlifamily with over 20 units.   Last roofed and sided in 1996.

Owner asking for a certain price but I found out the roof will probably last another 5 years at best.

Class C property would generate $50K year NO.

Would be taking a non recourse 5 or 6 year interest only mortgage loan on property.

If owner does not provide concession looks to me like I would have to walk on the deal ?

@Bruce Harding

It is all about the math Bruce. Run the numbers and make sure it will meet your goals with the roof replacement costs. Remember you can likely finance the roof purchase if needed at a low rate at a local vendor. Also, remember that the replacement roof has some tax advantages to the owners as well.

With that said, get estimates and professional proof (from a contractor) that the roof will need the repairs and present them to the seller with the fact that you want to move forward, but you need a discount for the roof. Anything over the cost of the capital to pay for the new roof is likely to work if the deal works now due to the tax advantages. 

Good Luck!

I agree with Joe. Regardless of the hangup, it still comes down to the numbers. Get the roof inspected and get a quote. I don't know where the property is located, but here in North Texas, 5-years is a long time for a roof, because a single hail event can wipe that roof out every year, and then it becomes the insurance company's issue. But, you should be accounting for CapEx repairs in your cash flow model. And, as a CapEx expense the roof would give you depreciation benefits on your taxes. See if you can get additional concessions from the sell, once you have an inspection report. But, don't walk away just because you can't. Run the numbers and let the numbers guide you.

A roof is a roof and every building will need one sooner or later. This is a big step-20+ units. Frankly I’d be more concerned about the rest of the numbers and the total picture. So what if you spend 30K on a new roof you simply budget for it. Alternatively the roof may be the tip of the iceberg-maybe the whole place is a nightmare? You need to look at the bigger picture here and see the whole investment. Run the numbers and if the numbers work, really work with all expenses figured, make an offer subject to inspection.

All the best!

There are many avenues to get a new roof. Whether it be financing or with an insurance claim. I am in the roofing business and I am surprised more buyers don’t request new roofs more often. The only thing you are out is a deductible and that is usually small a price to pay when you are looking at increasing the value of the property...

Hey Bruce, 

One way to add this into your valuation would be to take a reasonable quote and include it as a capEx expenditure at year 4 or 5 in the cycle. Make sure you bump it a bit for inflation in the calculation. 

In general, over the cycle of the investment the roof will likely have to be replaced on most MF properties. When you walk down the property, I would make note of all capEx expenditures that are likely to occur and bake them into the analysis. 

Let us know how it goes.

- JA