Rental Property Investor · Myrtle Beach, SC · Member since 2013 · 208 posts · 61 votes
Hello BP. I am looking to purchase my first piece of property, a small multifamily in Philadelphia. I spoke to a real estate agent today who informed me that there is no due diligence period in Philadelphia. Maybe we were using different terminology and confused each other. She says that most due diligence takes place before the offer. Once an offer is accepted there are usually several contingencies such as an inspection and mortgage contingency but it is very difficult to back out of the deal unless the property seriously fails inspection. Is this true? Properties in Philly usually don't stay on the market for more than a few days. I was under the impression that you should first do a quick check to see if the property is good and run some basic numbers to see if it cash flows and then make an offer. Once the offer is accepted you tie the property up by going into contract. During this period you do your due diligence and if you find something as small as the tenant leases are ending before you thought they were or as big as serious foundation problems then you can back out of the deal. Can anyone from the Philly area explain how the process works because now I'm really confused. Thanks in advance.
Real Estate Consultant · Camarillo, CA · Member since 2010 · 2k+ posts · 1k+ votes
13y
I am not from the Philly area, but your inspection contingency period is your due diligence period. You should be able to back out if don't like the color of the grass, no questions asked. If this is not the case then I would think twice about buying in Philly or find another agent.
Real Estate Consultant · Camarillo, CA · Member since 2010 · 2k+ posts · 1k+ votes
13y
I am not from the Philly area, but your inspection contingency period is your due diligence period. You should be able to back out if don't like the color of the grass, no questions asked. If this is not the case then I would think twice about buying in Philly or find another agent.
Developer · Philadelphia, PA · Member since 2013 · 1k+ posts · 902 votes
13y
I agree with @Jeff Greenberg , once you get the property under contract, your inspection period is the time to find anything wrong with the house and negotiate repairs or back out if need be. I wouldn't make a habit of bailing on deals for minute issues like the color of the grass ;), I can't imagine any realtor would put up with that too many times!
It sounds like you've got it right @Chris Rosenberg and maybe it was a miscommunication?
Rental Property Investor · Myrtle Beach, SC · Member since 2013 · 208 posts · 61 votes
13y
Troy, do you have a contractor walk through the property before you make an offer? Do you just run some basic numbers and then make an offer? Once the property is under contract do you then verify the NOI and leases, rental apps, seller's tax returns, and everything else or do you do all of this before you make an offer?
I have to call your realtor this week. And you've been a big help so far.
Developer · Philadelphia, PA · Member since 2013 · 1k+ posts · 902 votes
13y
@Chris Rosenberg I'm lucky enough that I have a background in construction and facilities management as well as (in the past) owning a few duplexes and have flipped a couple properties so I've got a pretty good idea what I'm looking at. I will use a home inspector (or contractor) if there's an issue I'm concerned about and I know I need to negotiate it with the seller, once something goes on a home inspection and the seller is made aware, even if we can't come to terms on it they'll have to disclose it to the next buyer, which means it's in their best interest to repair or sell to me as-is (at a discount for the repair) since the issue (should) be disclosed to all buyers going forward if I don't buy the property. This is for MLS listed properties.
Something like a plumbing leak or loose handrail is easy to spot and pretty cut and dry, I wouldn't bother bringing in an inspector or contractor for it, just specify the repair be made before closing, you get a price reduction, ignore it and repair after closing or get a credit at closing for the repair. The last house I had under contract, the brick facade was bowing out in the middle (3-story house, bricks were bowed out several inches at the 3rd floor line) and the listing agent said they had a contractor look at it and it's fine. I knew better so I had a reputable home inspector look at it and he flagged it for replacement at a cost of $18k-$20k. Great negotiation point and now it's not my word against some made up contractor, it's documented by an "expert". In this case they wouldn't replace or discount, they wanted to do a half-*** fix (they showed me the estimate for $3200) that would have looked terrible. This was going to be my home for 2 years to then sell at a profit (hopefully) so I didn't want a stop-gap measure that would detract from the sales price in 2 years so I passed.
If I were looking at a house that needed major work (flip) I can guesstimate repair costs pretty well so I'd come up with my offer price taking into account my guesstimate for repairs and get it under contract. Once under contract I'd take contractors through and get firm bids during my inspection/due diligence period. If the bids come in under, more money in my pocket. If they come in at what I estimated, still good. If something turns up that was more money than I was expecting or a new expense/problem is found during this time, I'd renegotiate with the seller or walk.
Basically, I run numbers before I ever look at the property whether it's buy/hold or a flip. If it's a buy/hold I ask my agent to get me all expenses if I'm interested. Next, I'll ride by, walk the neighborhood and try and talk to any neighbors I see out and about. Sometimes I'll ask my agent about the property and she knows the dirt on it and why it is/isn't a deal and often will ride by it before I get a chance and check it out for me. She has a good idea what I'm looking for and can report back, possibly saving me the trouble of driving by or encouraging me to get my *** moving because it looks great. If the neighborhood is good and I don't see anything too scary from the street (house isn't leaning, neighbors aren't running a dog fighting ring or meth lab) I'll schedule a walkthrough with my realtor. After the walkthrough, if I'm still interested, I'll come up with my max number and make an offer. If it's accepted, that's when I'll go back through with an inspector and/or contractors to make sure I'm not too far off with any costs or didn't miss anything.
I'm not saying this is the best or only way, just what I do. I'd love to hear what others have to say!
Rental Property Investor · Myrtle Beach, SC · Member since 2013 · 208 posts · 61 votes
13y
Thanks Troy for that in depth explanation. I actually printed your response out and highlighted a few things. Just one more question if it's not too much to ask. When you get the list of expenses from the agent before you make an offer is it pro forma numbers or all verified income and expenses from things like bank statements, tax returns, utility bills, maintenance records, vendor agreements and stuff like that?
Developer · Philadelphia, PA · Member since 2013 · 1k+ posts · 902 votes
13y
Generally pro forma. If something seemed too good to be true, however, I would verify through some other means. Let's say an owner of a triplex states yearly insurance at $600 when you know most others you've looked at are paying $2k a year, red flag on not only that number but all the others as well provided by that particular owner. As you start looking at properties, take notes of what expenses look like even if you're not interested in that particular property. You'll start recognizing ranges for the expenses and once you see something out of the range you're accustomed to seeing it'll jump out at you.
Another thing to ask about is property taxes in 2014, Philadelphia is in the middle of a tax hike and what you're seeing for 2013 may be quite different in 2014. I'm closing on a quad next month and the taxes are going up $700 for the year in 2014. Luckily it's not make or break for this property, but if you were looking at a marginal deal, this could put it nearly under water.
Again, just how I look at properties, not saying you can't ask for and get all of those things you mentioned, it's just a bit harder on the residential side as compared to commercial. I'm not sure if the owners or the listing agents are lazy or what the deal is but it's like pulling teeth getting expenses in my experience.
Rental Property Investor · Myrtle Beach, SC · Member since 2013 · 208 posts · 61 votes
13y
Ok great. Thanks Troy. One tool I found useful for finding out what the 2014 property taxes are going to be on a particular property is the AVI calculator. http://avicalculator.phila.gov/
Investor · Philadelphia, PA · Member since 2013 · 43 posts · 5 votes
13y
@Troy Sheets this is great info thanks for sharing. You're starting to look like one of the leading investors in the philly market on BP. Thanks again.