Is this going to be a problem investment?

[Pradeep Ranganathan]

This is our initial foray into multifamily investing. We are currently under contract for a 12-unit multifamily residential building in the greater Detroit area. Our initial visual inspection of the common areas suggested the building was in good condition, prompting us to move forward with the contract.

The contract included both a document contingency and an inspection contingency. We specifically requested comprehensive documentation, including current lease terms, rent payment history, tenant background, income and credit verification, and information on recent building maintenance. The document contingency stipulated that the seller provides this information within the first three days of the contract, allowing us seven days for review.

Upon receiving the documents, we found that the seller had only provided poorly scanned, one-page lease documents missing signatures and subsequent pages. All were one-month leases with the same start and end dates. We later learned that in Michigan, leases automatically transition into month-to-month agreements if not explicitly terminated, which seemed acceptable, though it was odd that all leases were for the same period. Seller later provided physical copies of these signed one-month leases after we escalated this concern though the document deadline had passed.

The seller has not provided any other documentation, such as move-in checklists, information about appliances provided or replaced, maintenance requests or repairs, or rental payment history. The only documents provided were a rental certificate valid for another year and a heating system inspection certificate also valid for another year. It appears the seller performed all repairs himself and does not maintain records of repair requests or completions. We have also not received any utility bills to support his estimates of operating expenses.

Meanwhile, we also scheduled a commercial inspector to inspect the property, and two alarming issues arose:

1. Roof Condition: The roof was in poor condition and required immediate replacement. It had rained the morning of our inspection, and there was significant water pooling on the roof. The inspector also found spongy areas with cracks that seemed to squirt water when stepped on. The seller initially claimed there were no leaks. However, the ceilings of multiple units started leaking on the day of the inspection. The seller attempted to blame the leak on the inspector walking on the roof. The inspector's thermal camera revealed more leaks, both small and large, in the ceilings of multiple apartments with visual evidence of past ceiling patches and repairs. There was also water leaking through window seals and some window corners. One of the apartments had extensive visible mold, and the tenant mentioned to the inspector that he had been complaining to the seller about leaks from his ceiling. Overall, most tenants seemed to have the attitude that "the rents are quite a bit below market rate, so let us put up with these minor inconveniences like leaks and mold."
2. Drainage Problem: The building has a drainage problem due to poor grading, causing water to seep into the basement. There are some step and minor horizontal cracks in the foundation, but nothing that appears to be of immediate concern. However, the inspector recommends fixing the grading to prevent the cracks from worsening.

We are curious if this situation, where a seller does not keep detailed records, is common. Or is it possible the seller is trying to provide only the absolutely required information to hide known problems? A building with active leaks would typically not pass city inspection, yet this building has active leaks, a rental certificate, and is currently for sale. We are trying to understand how this is possible. Should we be wary of the seller?

[Ned Carey]

@Pradeep Ranganathan small landlords often keep lousy records. 

You should be wary of every seller and wary of every deal. Someone sending only the first page of a lease is a bonehead, possibly just lazy. The reason doesn't matter what matters is what is in the lease. 

If you can't get proper due diligence done in time, you have two choices.

1) Cancel the deal. This doesn't mean you can't continue negotiations and make a new offer but it tells the seller you will not accept his or her games. 

2) If the price is so good that the deal has great reward for the potential risk, move forward. My guess is this is not the case. A landlord that has unrealistic expectations on what to provide a buyer is also going to be unrealistic as to price.  Since this is your first deal. I recommend against this option.