Does this sounds sketchy to you?

Multi-Family and Apartment Investing
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Does this sounds sketchy to you?

Terry Dunlap
Rental Property Investor · Olney, MD · Member since 2019 · 32 posts · 10 votes

I recently bought a SFR from this company that also is managing the property for me. They know I'm an out-of-state investor. However, I grew up in the area and we know many of the same people.

I asked for his help in looking into some SFR on my radar. A text over the weekend said he's working on a 6-unit deal "exclusively" for me. He would contact me with details. Here are those details from his email

---
Terry,

This is the one I was talking about that has been all redone. Just a money maker

 415 Huron Avenue #1 Rent $525 monthly Security deposit $525; unoccupied

415 Huron Avenue #2 Rent $450 monthly Security deposit $450; occupied

415 Huron Avenue #3 Rent $400 monthly Security deposit $400; occupied

415 Huron Avenue #4 Rent $500 monthly Security deposit $500; occupied

417 Huron Avenue #5 Rent $595 monthly Security deposit $595; occupied

417 Huron Avenue #6 Rent $500 monthly Security deposit $500; occupied

Unit #5 completely redone on the inside, units 4& 6 completely torn off and redone inside and out, new roof, new walls, new floors new cabinets. New and updated furnace and water heater. New roof entire building. New water line to the building. New gas line and meter to the building. New driveway next to building. Storage shed. Tenant in unit #3 cuts grass in summer, shovels snow in winter and rakes leaves in the fall. Also puts the trash to the curb every week and back after trash is picked up. For a reduced rent of $50. Potential income of $2970 per month less expenses. I am working on getting you the expense report. This is to good to pass by for only $149,900.00 with annual income over $35,000 it pays for itself in less than 5 years. This is the one!

Scott

Full disclosure: My Dad owns it. I told him sell it and pay off his house so Mom does not have to move if something happens to him. He agreed. It is not listed.

---

A few things I need to mention:

  • I can only find one of the properties on the county website (I asked about this... awaiting reply)
  • The one I could find was bought by him and his brothers at a Sheriff's Sale then a quitclaim deed to his dad
  • I have no pictures other than Google Maps
  • I have no financials... yet so I cannot use the tools here to analyze this investment

I may need to find another local realtor to help me run comps as I wouldn't fully trust anything he sends me since he's so deeply intwined.

Am I being paranoid?

Thanks,
Terry

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Account Closed
Financial Advisor · CA · Member since 2012 · 128 posts · 76 votes
7y

This one needs a plane flight out there.

He sounds believable, but a simple round trip

might end up saving you a ton of heartache. 

8Reply
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  • Bryan S.
    Rental Property Investor · CA · Member since 2018 · 225 posts · 180 votes
    7y

    @Terry Dunlap I would ask for loads of pictures, videos etc.

    0Reply
  • Alexander FelicePro Member
    Guy with Great Hair · Austin, TX · Member since 2013 · 2k+ posts · 4k+ votes
    7y

    a little paranoia is good when dealing with brokers. 

    I don't know the area so I don't know if it's a good deal, my advice is to listen to nothing this guy says and analyze the deal on your terms. Do extensive due diligence like you would with any other deal.

    Brokers have a asymmetric gain when selling you a property, they make money no matter what and take on none of the risk. The guy might be doing right by you 100% and on the up and up, but he certainly does stand to gain a lot even if he sells you a lousy deal.  It's important to be vigilant is all. 

    You need a LOT more information. I would contact some property managers and ask how it would be to manage this property, what the neighborhood is like, and what quality of tenant you will get at $400 a month (by far my biggest concern with this property) being an OOS investor is much harder when you have a realtor you are unsure of so I would try and work on this deficiency. Also start some conversations with other local investors to that area so you can run this potential deal by them. You need a fairly large coalition of people to make sound decisions long distance, imo.

    and remember, don't fall in love, there is always another deal. 

    [email protected]Podcast Guest on Show #301
    7Reply
  • Aaron Stuiber
    Real Estate Consultant · Milwaukee - WI · Member since 2018 · 142 posts · 73 votes
    7y

    @Alexander Felice I'm %100 about this quote : "Don't fall in love, there is always another deal."

    Find a core of realtors, PM's and a rock star lender that you can trust by vetting them through as many outlets as possible. I would highly suggest meeting in person to gauge their personality and doing as much background research as possible if you're weary. 

    Wait for the FULL financials and from there, like others have said do your own independent research and make sure you can verify everything before moving forward. 

    0Reply
  • Bjorn AhlbladPro Member
    Investor · Shelton, WA · Member since 2017 · 6k+ posts · 6k+ votes
    7y

    @Terry Dunlap IMO you are not being overly paranoid at all. I share your paranoia. 

    There are numerous significant red flags here; Financials, title, rent roll etc. I would not chase this deal, look for others instead and see what 'Scott' comes up with if anything. If you do end up pursuing this further definitely use an experienced buyers agent or REI lawyer and be very careful with 'Scott'.

    Just because it is 'not' listed does not mean it has not 'been' listed. You can check that out by entering the address into a browser and see what comes up. I have found police reports among other things. 

    I know nothing of the area; but wherever it is those rents suggest it may be a difficult class of tenant. PM or not it can smack you in the face real hard-that may even be the least of your problems with regard to this property. ;<)

    All the best!

    1Reply
  • Lynnette E.
    Rental Property Investor · TN · Member since 2018 · 2k+ posts · 2k+ votes
    7y

    Is it possibly a large house with rooms rented out?

    0Reply
  • Terry Dunlap
    OP
    Rental Property Investor · Olney, MD · Member since 2019 · 32 posts · 10 votes
    7y
    Originally posted by @Bryan S.:

    @Terry Dunlap I would ask for loads of pictures, videos etc.

     I asked for pics and vids! We'll see if he produces.

    0Reply
  • Terry Dunlap
    OP
    Rental Property Investor · Olney, MD · Member since 2019 · 32 posts · 10 votes
    7y

    @Alexander Felice, I have submitted offers on other properties. So I am not wedded to this one! ;-)

    0Reply
  • Terry Dunlap
    OP
    Rental Property Investor · Olney, MD · Member since 2019 · 32 posts · 10 votes
    7y

    @Aaron Stuiber There is no WAY I would even consider this property without FULL financials. And he knows that! :-)

    1Reply
  • Terry Dunlap
    OP
    Rental Property Investor · Olney, MD · Member since 2019 · 32 posts · 10 votes
    7y

    Thanks @Bjorn Ahlblad! Definitely don't need a smack in the face being an OOS investor!

    0Reply
  • Terry Dunlap
    OP
    Rental Property Investor · Olney, MD · Member since 2019 · 32 posts · 10 votes
    7y

    @Lynnette E. No. They're definitely multi-family properties. Well... at least one is. I can see that one on Google Maps and Street View! :-)

    0Reply
  • Caleb Heimsoth
    Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes
    7y

    @Terry Dunlap I think it’s worth exploring but make sure you get accurate comps because I am guessing something like that is going to be hard to value

    0Reply
  • Ben Zimmerman
    Rental Property Investor · Raleigh, NC · Member since 2016 · 393 posts · 995 votes
    7y

    I'd be cautious about the low rent that each unit is paying if you plan on having a property manger take care of this for you.  I'm not sure what your management team costs, from what I've seen most low rent places take a flat rate instead of a percentage.  So if you get charged a hypothetical $79 a month per unit, that is almost $500 a month which drastically alters your cashflow numbers.  Places with a lower rent rate get eaten alive by property management costs.

    1Reply
  • Terry Dunlap
    OP
    Rental Property Investor · Olney, MD · Member since 2019 · 32 posts · 10 votes
    7y

    @Ben Zimmerman It's a flat 10% of monthly rent from these guys.

    0Reply
  • Terry Dunlap
    OP
    Rental Property Investor · Olney, MD · Member since 2019 · 32 posts · 10 votes
    7y

    @Caleb Heimsoth I agree. I'm actually chatting with another realtor at this moment about this exact issue!

    1Reply
  • Encarnacion Gutierrez
    Pasadena, CA · Member since 2016 · 39 posts · 9 votes
    7y

    @Terry Dunlap

    You should analyze the desk the same way you would any deal and go through all the same motions. Inspections, escrow, visit the property, look at comparables. Don’t be paranoid, just analyze the deal.

    0Reply
  • Terry Dunlap
    OP
    Rental Property Investor · Olney, MD · Member since 2019 · 32 posts · 10 votes
    7y

    @Encarnacion Gutierrez If I receive the full financials and the numbers make sense, those will be my next steps.

    0Reply
  • Doug Elkerman
    Member since 2019 · 21 posts · 5 votes
    7y

    Agree with the sentiment of caution here, lots of due diligence will deliver you the right decision. You can't eliminate 100% risk but you can get as close as possible, meaning if it all goes belly up you can't blame yourself as it would have happened to anyone. No risk no reward. But also remember buyer beware! 

    0Reply
  • Account Closed
    Financial Advisor · CA · Member since 2012 · 128 posts · 76 votes
    7y

    This one needs a plane flight out there.

    He sounds believable, but a simple round trip

    might end up saving you a ton of heartache. 

    8Reply
  • Damaso Bautista
    Rental Property Investor · Hawthorne, CA · Member since 2018 · 655 posts · 900 votes
    7y

    @Karen Lee

    I agree with Karen on this one. If this is a good deal I think it would be worth it to spend $350 on a round trip ticket to go look see and feel it in person for yourself. That is what I would do.

    3Reply
  • Oleksandr IvanovskiyPro Member
    Rental Property Investor · Member since 2019 · 124 posts · 38 votes
    7y

    @Terry Dunlap I would have a third party to take a look at it. Also run your numbers!!!

    0Reply
  • Natalie Schanne
    Real Estate Agent · Princeton, NJ · Member since 2016 · 1k+ posts · 1k+ votes
    7y

    @Terry Dunlap - the motivation part sounds fishy. Why would dad want to sell and pay off his personal house when “obviously” the positive cash flow would pay mom’s mortgage and some living expenses into perpetuity while being managed by a PM? Why wouldn’t the son want to buy or hold it if it’s so rocking? I think they’re taking you for a sucker and/or have problems with some of the current tenants. What did they buy it for? Are they flipping it on you? Is the cash flow worth it to you? What’s your imputed cap rate? How much capital expense will you have? Death by a thousand cuts? New appliances, hwh, etc with so many units? Can you hire we go look or pay an appraiser or real estate agent to do an analysis for you for a couple hundred bucks? Have them check for deferred capex like an older roof. I’m looking at buying a 2 unit 3000sf property in Trenton NJ that rents for 1500/1000 with a super strong tenant pool. 30,000/yr rent for ~$100,000. Would you rather have 5 $500 units or 2 $1000+ units (2500 rent) for the same cash outlay? When I sell a rehab house, I sell it because after I’ve fixed it up, It usually has a market rent rate < 1% compared to its market value. Ex. Rents for $1500, sells for $180k.

    3Reply
  • John Corey
    London · Member since 2019 · 722 posts · 386 votes
    7y

    Terry, if you grew up in the area and know many people there, you can send folks around to take a look. Someone who is not tied to the 'agent'. Let them run a live broadcast with you so you can see what they are seeing in real time.

    2Reply
  • Randy E.
    Rental Property Investor · Durham, NC · Member since 2014 · 1k+ posts · 1k+ votes
    7y
    Originally posted by @Terry Dunlap:

    IA few things I need to mention:

    • I can only find one of the properties on the county website (I asked about this... awaiting reply)
    • The one I could find was bought by him and his brothers at a Sheriff's Sale then a quitclaim deed to his dad
    • I have no pictures other than Google Maps
    • I have no financials... yet so I cannot use the tools here to analyze this investment

     Too many red flags for me to get too happy about this right now. 

    1- He and his brother bought it, rehabbed it, quit claimed to father, and now want to sell. Why?  His stated reason makes no sense.  Especially because the only real concern if his father passed would be that his mother was not able to manage the rentals.  However, with at least one son living nearby and in the RE business, he could easily manage it for his mother.  That stated reason rings false.

    2- He is experienced in the RE business, yet he wants to give up a $35K/yr money maker?  

    3- Tenant in unit#3 handles a lot of extra tasks for only $50/month.  Assume that tenant moves out the month after you buy the property.  What will it cost for you to pay someone to do all the yard work, shovel snow, and ensure the trash cans are moved back and forth?  Also, if this property is in a city like Cleveland which fines landlords obscene amounts for trash cans being left curbside more than a day, you could be looking at additional costs.  Ignoring the possible fines, you might be looking at a change from $50/month to $150-$200/month.

    4- "exclusively" ... "This is the one!" ... " -- the general phrasing of the message is too much of a hard sell to me.  

    5- Definitely find out when his family acquired it.  Also, find out exactly when it was transferred to his father's name.  If this was held for many years, it lessens somewhat my concern raised in point 1.  If, this was acquired, lipsticked, and offered "exclusively" to you in less than a 2-year period, that screams "BE CAREFUL!".  If it was held for years in the sons' names, and only recently transferred to the father, you have to wonder why.  I would.

    6- "I am working on getting you the expense report" -- Working on it?  This is a property bought by him and owned by his father.  What is there to work on?  He should have had the expense report on hand when he sent you the offer.

    7- A lot of rehab is listed.  You definitely need eyes on this to verify the work is quality work.  Something doesn't quite add up. 

    Maybe I'm cynical, but this smells fishy to me.  It might be a good buy at the right price, but I have a feeling the right price is at least 1/3 lower than the asking price.

    3Reply
  • Curt Smith
    Rental Property Investor · Clarkston, GA · Member since 2012 · 2k+ posts · 1k+ votes
    7y

    @Terry Dunlap commercial , MF, turn key are easy to ball park value.

    $total annual rent x 0.5 (50% expense ratio is reality especially with management ) = noi

    $value = $noi / cap rate as a fraction. Start with 10 cap or 0.1. The rougher the property, IE lower rents like these higher capacity rate like 12% or 0.12.

    IE a 6 door actual rents, excluding vacant Doors, 550/mo, 6 doors, value is.

    550 x 6 x 12 x 0.5 = 19800

    At 10 cap value is 198k

    Less differed maintenance less negative factors...

    The challenge in underwriting commercial is determining actual expenses when the owner has poor books o.

    1Reply
  • Todd Dexheimer
    Rental Property Investor · St. Paul, MN · Member since 2016 · 3k+ posts · 3k+ votes
    7y

    Be cautious on every deal, especially when it's too good to pass up. Every deal that I put under contract, I am nervous about. I always question why I got the deal and work diligently at digging in to be sure no skeletons appear. 

    3Reply
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