Please Help: First Small apartment deal

11 Replies

Hi everyone. i am a buy and hold investor who has up until now paid all cash on deals. after lots of BP reading i was inspired to purchase a small apartment building. My husband and i both have full time jobs and we are looking at this for income after retirement. my criteria was fairly new with some cash flow after expenses. Can someone tell me the best way to negotiate reductions or credits after an inspection on a property. For example, I am under contract on a 6 plex and I just found out that there is lots of minor damage in 4 of the units and they are not all rented. I have a formal inspection scheduled which will cost 1500 dollars. Should I try to see if he is open to the price reduction before I pay for the inspection? 

Building information 

C location 

Built in 2010

600/ month tenant pays all utilities (4 currently rented)

Purchase price 290000

Taxes 3332

Trash 172

Damage (water damage from top unit to bottom unit, wood floors need to be replaced as a result, 1 unit has lots of cigarette burns on some surfaces, etc) nothing major but definitely not what was seen in the unit that was shown before we were under contract.

How do I proceed

I would negotiate with the inspector. Most of them that I dealt with will come down. I found out it's worth your time to shop around when in comes to inspectors. I found ranges from $475-$1200 for my 4 plex. Give it a try.

You're going to want the inspection, if you're already aware of damage there may be other items that you can't see and you don't want to find that out after you buy.  The inspection report is a helpful negotiating tool.  I would figure out what work needs to be done, put together estimates for the cost, run your numbers again and decide what the purchase price (or seller concessions) need to be for the deal to work for you.  The best negotiating tool in these scenarios is the willingness to walk away if the seller can't give you what you need.  What you don't want to do is let him "take care" of the repairs.

If he wants to sell and you're being reasonable he should listen to you. If he's an unrealistic seller he may not budge, but he should be able to see that any smart buyer in the future is going to come at him with the same issues.

My concern would be, if they tried to keep you from seeing that stuff, what else are they hiding? If the amount of damage is already borderline for you I think an inspection will probably just tip the scales and is probably a waste. But if, while unhappy, nothing you've found is a deal breaker i would go ahead with an inspection. Just my two cents. Good luck!

Of course you need the inspection first.  You will need to have all the data before you try to negotiate.

As a seller, I try to set all the expectations up front.  I am not selling a perfect property so don't expect it.  I will also talk about the main issues so that everyone knows what is going on before an offer is made.

If discoveries are made after that, I may or may not negotiate a price reduction depending on the strength of the argument and the strength of the market.

If a buyer seems like a pain in the ***, I will just stand my ground until they go away. 

In a seller's market, I don't want to work with difficult buyers.

Be careful how you set the tone.  There is never a perfect property.

thanks everyone...I hadn't thought about trying to negotiate the cost of the inspection. I definitely agree that my position would be helped by that report.  

I don't know if this is commonplace in your area but you can ask for the rental history report for the building as well. This can act as another negotiating tool to give you information about how long these units have been empty.

If you are simply trying to prevent the situation of wasting $1500 on an inspection because you are concerned about the seller not correcting items, go back to the seller with an addendum now that states the max dollar amount that will be paid for repairs by the seller. Get it in the form that makes the deal work best for you. It's better to confront the issue in advance than spend the money and hope the seller will either A-adjust the price B- provide a repair credit or C-fix the items prior to close. Peace

Tiger, is the addendum addressing max repair costs that you're suggesting to be used primarily as a litmus test to see if the seller is willing to play ball if there are reasonable repairs to be made?

    I'd be just as concerned with the fact that 2 units aren't rented (and it seems you thought they were) as I would about the damage.  The numbers don't seem awesome for a C location, how confident are you that the $600 per month rate is low enough to keep high occupancy?  Also do you feel the seller deceived you at all regarding the occupancy?

How well do you calculate this property cash-flowing? The rent is only 0.8% by my calculation.

update: the deal fell through during the inspection period. There was foundation issues as well as other deferred maintenance. I asked for a credit at the closing and a price reduction based on the vacancies that were discovered during the inspection period. The seller was offended which made me laugh. The other thing that complicated the deal was the sellers lack of understanding about how this property is valued. This was a fairly new property and the seller was given an appraisal when he purchased the property. After a closer examination the appraisal was done after the property was built when the loan closed and was based on 100% occupancy. Oh well...I moved on to 2 duplexes and a SFH. I must admit I was excited at the thought of having a small apartment. But the numbers are most important.

Create Lasting Wealth Through Real Estate

Join the millions of people achieving financial freedom through the power of real estate investing

Start here