Investor · Los Angeles, CA · Member since 2011 · 242 posts · 61 votes
Hello BP,
Yesterday 1/12/12, I got a 6plex under contract in southern California. Four 2bd+1 and Two 1+1. Owner is financing with me putting 30% down. Building is currently fully occupied. What documentation should I ask from the seller. I will be buying and holding the property.
My current list is:
1. Rent roll for 2009, 2010, and 2011.
2. Who is paying utilities? If owner then I need copies of the 3 past bills.
3. Copy of leases. Is everyone current?
4. Copies of bank statements showing regular rent deposits.
5. Who is managing the company currently?
What am I missing? This will be my largest building and I could really use any input not just on paperwork, but what are some deal killers/red flags for you.
Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
14y
When you take over, be sure to have efficient bulbs installed in those common areas (either compact fluorescent or LED). Cost of operation will be lower on the electricity bill, and they have longer life (replacement less frequently = less work to do).
Real Estate Consultant · Lansing, MI · Member since 2011 · 356 posts · 306 votes
14y
Have you already had an inspection to make sure the building/mechanicals check out? Make sure you also get all the tax information and consider getting title insurance as well.
Investor · Los Angeles, CA · Member since 2011 · 242 posts · 61 votes
14y
Patrick thanks for your reply:
I will be getting a professional inspection, already looked into taxes and it is current, and I am getting title insurance without a doubt.
Commercial Loan Officer · Southern Maine, ME · Member since 2009 · 782 posts · 415 votes
14y
I would ask for copies of receipts for any work done to the property and operating statements (YTD and for the past couple years). If the current owner has kept a detailed profit and loss record it will help you to gauge trends in expenses.
Commercial Loan Officer · Southern Maine, ME · Member since 2009 · 782 posts · 415 votes
14y
I would ask for copies of receipts for any work done to the property and operating statements (YTD and for the past couple years). If the current owner has kept a detailed profit and loss record it will help you to gauge trends in expenses.
Real Estate Broker · Beloit, WI · Member since 2012 · 1 post · 0 votes
14y
I always do an inspection for visible issues and document them, have the owner sign. One this is required in some states, two - it protects you from some liability. Check with your state for requirments.
Investor · Buffalo, NY · Member since 2011 · 100 posts · 86 votes
14y
Schedule E tax form from the last 3 years. As long as he does not lie to the IRS it should tell you most of the story as far as income/expense history.
Investor · Los Angeles, CA · Member since 2011 · 242 posts · 61 votes
14y
Hello Gary, thanks for replying to my post. Can you explain a little more about what you mean by having the owner sign during inspection. I personally never heard of this. How could it help me reduce liability?
Investor · Los Angeles, CA · Member since 2011 · 242 posts · 61 votes
14y
Estoppel is a form filled out by the current tenant verifying that the lease provided is correct and that there are no verbal agreements with the owner.
Investor · Los Angeles, CA · Member since 2011 · 242 posts · 61 votes
14y
Just an update I received the rent roll for the 6plex and lookes like they have been only able to collect 75% of the rent over the last two years. Also the complex is professionally managed and operating at a 55% expense ratio over the past two years. I am thinking I will have to lower my original offer. Based on the rent roll provided my current excepted offer is at a 9 cap, but I wanted to buy at a 10 cap or better because it is a D area. The rents are already at market price. There is also one eviction in process. Any experience dealing with this stage of the deal would be appreciated. We are planning to close by February 1st.
Multi-family Investor · Member since 2011 · 7 posts · 0 votes
14y
-Get tax info (schedule E, C etc) for past several years;
-copies of leases AND rental applications (leases generally do not have dob or social security info you may need later to evict)
-profit and loss statement - you can usually verify a lot from the local county/state tax assessment website (i.e. water bill, property taxes); contact gas & electric for accurate 1-year monthly average
-get permits/licenses: make sure the property is compliant before-hand with lead permits and any state/city lead or multi-unit licenses and inspections
-of course the inspection will tell you what kind of deferred maintenance there may be and what you can be looking at laying out the next few years
-if you are buying the company (such as an LLC which in turn owns the company) then have an experienced title attorney who handles these also run lien search on both company and property, and update all appropriate filings. In fact, make sure the company (if it is held by one) has current active status with the state. For example, I ran across a good prospect multi-unit lately but the seller (LLC) has been forfeited by the state (for non-payment of personal property taxes by the LLC each year) and now would need to clean that up and reinstate prior to any sale.
-also you can check the background easily on your state's judiciary case search and/or sex offender registry. Don't want to inherit any issues such as that.
Good luck!
Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
14y
When you take over, be sure to have efficient bulbs installed in those common areas (either compact fluorescent or LED). Cost of operation will be lower on the electricity bill, and they have longer life (replacement less frequently = less work to do).
Investor · Los Angeles, CA · Member since 2011 · 242 posts · 61 votes
14y
Great tip Steve. I am definitely trying to reduce all expenses. Especially since I am close to running a negative cash flow because the seller financed loan we agreed on is amortized over only 10 years.
Lender · Los Angeles, CA · Member since 2009 · 1k+ posts · 2k+ votes
14y
With vacancies dropping in Los Angeles Andrew, the professional management running this building doesn't appear terribly competent if the effective rent has been 75%. Expenses are probably at 55% because the rent is low in relation to the fixed expenses. With "close to running a negative cash flow," I would absolutely suggest you reconsider your offer and not get hung up on the CAP rate. In a D class area, it's the cash flow you're buying and negative cash flow on a high CAP rate won't do you any good.
You’re getting some good advice here regarding due diligence on the property. You noted the seller has a knowledgeable agent. Who is representing you? In particular, with owner financing, who is advising you on the note? As with any deal, there’s price and there are terms. You’re understandably focusing on the former.
Knowledgable real estate agents are not necessarily skilled at negotiating buyer or seller friendly notes. This can work in your interest. Favorable terms are yet another way you can make money on a property and I’d encourage you to spend as much time as possible on this document as well.
Investor · Los Angeles, CA · Member since 2011 · 242 posts · 61 votes
14y
Just an update. I inspected the property today. I had a professional inspector and a termite report done. Seems the roof and fawning need to be replaced which I will be requiring the seller to fix before I take title. Also I will need to replace all the carpet. So I will be looking into what type of flooring to install. I saw a great thread recently on this subject which I will read over. I wish I could put in painted and sealed cement.
Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
14y
If you are financing the property you should ask the seller for a deferred maintenance credit for these items to reduce your cash at closing. This will allow you to make the repairs after you close out of funds that would have been stuffed into the loan.
Investor · Los Angeles, CA · Member since 2011 · 242 posts · 61 votes
14y
Hey Bryan thanks for the replies. My deal with seller so far is that I will present him several things that need to be fixed along with quotes from contractors I know will get the job done right and he will use them to get the repairs done and pay them. Is that what you meant?