Too good to be true?

Question

Hello, I am in the education phase of real estate investing and keeping an eye on Zillow in the process. I noticed this came up and I am curious why a fully occupied apartment would go up for sale. Why wouldn't someone want to hold this and keep making money? Would you jump on this or are you as skeptical as I am? I don't have a ton of money saved up so that is why I'm not jumping on buying my first rental property.

https://www.zillow.com/homes/for_sale/condo,apartm...

Jim K. · Answer

@Melissa Camden

There are all kinds of reasons people sell investment properties with tenants in place. Sometimes, it's a fantastic deal. Sometimes it isn't. The "units are occupied, please do not disturb tenants" is a curious sort of way to put things, it's true, but hey, it could mean nothing.

You will need to investigate, and of course, part of that investigation will be to get into each of the apartments and look everywhere. Another part will be researching the owners and their financial situation. You could start by calling Ms. Ann Milton there, the listing agent on Zillow, and asking a few questions.

Joe Villeneuve · Answer

Either a deal is good, or it's not...It isn't too good to be true.  Using that phrase means, in your mind, you are already anticipating a deal as being, on the surface, basically a lie.  You've already made up your mind...you just haven't proven your predetermined conclusion yet.  If you are already, in your mind, assuming a problem...you'll find the problem...and not the solution.

I'm not saying the REI looking at this deal should automatically assume it's a great deal.  In either case, good or bad (a lie), the research and analysis must be done...so don't walk into that analysis with a skeptical frame of mind.  Walk in uncommitted...and yes, if you utter those lazy words, you have in your mind, already committed to the "lie"...and it is lazy.

Your mind has already assumed the property is "guilty"...until proven innocent.  There's a reason why the court system filters out (tries to) any potential jurors that might already be favoring one side or the other...even though they might say they're not.  The defense would not want a juror to be skeptical of an alibi or the prosecutor would not want a juror to be skeptical of the police officer...and in either case, start out assuming the "alibi" or the police officer's "assessment", as being "too good to be true".

Joe Villeneuve · Answer

First, the sooner you stop using the phrase "...sounds too good to be true...", the better.  It is the phrase of lazy.  The fact that you are attempting to find out why this property is being offered as a great deal, means you are in fact not lazy...so stop using that phrase.

Second, there are many reasons why a property is a deal.  One of the most common reasons for this is if a rental property has just gone through some type of major rehab...out of pocket.  This means the REI is now, and will be far into the future, in the negative...cash wise.  However, that rehab did increase the value of the property far over that which was paid in rehab costs.  In other words, this cash flow property was no longer cash flowing positive...but had a lot of new equity.

So, the REI sells the property with NO vacancies, to eliminate the negative cash flow...and recover the cash put in (rehab cost) AND the additional profit (new equity).  Then, the REI buys another CF property (positive) that's better than the first one.