How to value multiple rental properties w no written lease

2 Replies

A man in my hometown passed away and had rental property that he owned outright. Some of them are now owned solely by the widow, and some are owned jointly by the widow and 2 of her adult children.  This would be my first investment property purchase, but after I made my desire known to purchase them once she was ready, she has come to me first.

The widow wrote down what each of them pays each month, so that’s all I have to go on to try to value them and come up with an offer price.  

Supposedly the tenants pay on time, but there are no written lease w any of them (and never have been!).  They are also paying significantly under market rents, since the husband never raised any of their rents for decades.

She's not yet told me what she thinks they are worth, but I will ask that question in our next conversation.   I know I will also need to talk to the tenants to see if they are actually paying these amounts, plus do a lot of other due diligence too.

I believe this could be a good opportunity to buy them when they are not anywhere near market rent, and also not fully-rented out (3 vacancies out of 15 units), and then get them rented out and also move gradually to market rent.   The husband also had grass mowing included in their rent, plus had the 3 duplexes and 1 triplex all on one meter per building, so I'm looking into getting them submetered to be able to bill that back for what each unit actually uses.

But I’m having a hard time figuring out a “rule of thumb” on what the value is today based on the current income, to try to give her an offer, plus try to get a loan on them.

If anyone has any tips or feedback on how to do begin to value these properties, I would so appreciate hearing from you. I can give more details also, if this is not enough.  Thank you!

I've had lots of sellers like this say they want the tax assessment. Be prepared to deal with that, most likely by showing them what it's going to cost to fix the places up.

Smaller properties like single families through quads are going to be valued based on comps and current condition. If they're larger and in commercial territory, then income becomes more relevant.

The rents haven't been raised in years, and I would be willing to bet that many major Cap Ex items haven't been taken care of.

Since you can't definitively determine what they're bringing in now, work the other way around. What do you think you can bring in once they're all fixed up? What's it going to cost to fix them up? Look at how you'll operate the properties and what your Maximum Allowable Offer is.

Thanks very much, @Taylor L.   It's really hard to find comps for these since it's not a hot real estate market in general.  

And you're totally right on sellers wanting the tax assessment amount!  Since it's not a hot market, they really don't have anything more to go on, so they think tax assessment is market value in this area!  I will work on educating her that tax assessment doesn't take into account the condition, the town wants to get as much tax money as it can, so just because a place needs a new roof, that doesn't mean they're going to lower the tax assessment to account for that.  

She did mention on our first meeting that she didn't think she was doing a good job managing them because she just had to spend $7k on 2 HVAC units that died, soon after her husband passed away.  She doesn't understand the upkeep part and her husband just let things go as long as he could.

So I'm going to do as you suggest:  go at it from what these properties will bring in when more stabilized in rent and condition, and also request to have a good inspection done to figure out what needs repairing.  I might even offer to pay for the inspections myself as a show of good faith, as long as she will get them scheduled.

It's not going to be easy for this seller to coordinate with all the tenants, but she will just have to do it, whether it's me who buys them, or someone else.  I can't imagine that any other potential buyer wouldn't do the same thing, since this husband was known as somewhat of a "slumlord".    I am certain it's as you say, the husband just did his own repair work, cutting corners, probably not doing the upkeep right at all, just whatever he could get away with.

Thanks again Taylor.  Really appreciate your quick reply.