Seller kept horrible records

6 Replies

Found an off market multi family that a women wants to sell (she is elder and husband recently passed) The duplex has two tenants but she noted they have been on month to month for years. Told me what they pay but had no lease. Also she has no financial records as she gave discounts for paying cash etc. Is there any other way to analyze the deal ? Based on current market rates in the area it would cash flow $200/door after putting in 10% capex/PM/repairs (10% each) Should I be suspicious and is there a way to protect myself. I don't have accepted offer etc. Any advise appreciated Thanks

@Chris Seveney , I wouldn't say you should be suspicious, but you should definitely perform your due diligence.  

I know some landlords with one or two properties who don't use leases and don't keep records.  In your example, the woman apparently inherited landlord duties when her husband died.  If she'd never been responsible for those duties before he died, it's not surprising she doesn't have the sort of records/documents you want.

Figure out what you would charge for rent and what you think is an acceptable price for the property.  Investigate what you would have to do to evict the current tenants (if it came to that -- for now you're just investigating for the sake of knowing) and how long the process might take.  Make sure you have enough money to pay the mortgage for a few months with no tenants in place.  You don't have to keep those tenants in for the long haul if you want to fix up the place a little and raise the rent and they don't want to pay more.

If you two agree on a price you like, strike the deal.

Great questions! Sounds like theres great potential there but obviously run through your WHOLE due diligence list. Obviously, you can take control being that its an off market listing. Make sure you have your own contract and get any clauses and verbiage in there that will protect you.

Does she have anything from her taxes? She should be able to give you something form her reporting. Unless she was just collecting straight cash all along and everything is under the radar and she is reporting it vacant as a loss...These are all things I would find out but get clauses in the contract for whatever it is that you want to check out and make the offer contingent on the satisfaction of any and all clauses.

Good luck!

Old real estate saying: "All sellers are liars and all buyers are theives"

All this means, of course, is that we act in our own best interests. 

The seller's poor record keeping are your opportunity to turn lemons into lemonade. 

Here's what I do: figure out what market rents are. That becomes what the investment vehicle supports (or justifies) as the maximum. 

From this number subtract taxes, insurance, some regular maintenance and of course a small margin for you (because you need to make something). That's what's available for your monthly payment to seller. 

My quick estimate is 50% of FMV rent. If they're still talking to you, you'll probably be able to negotiate a deal.

Thank you all for the information. Very helpful

Very common that sellers of duplexes keep little to no records.

I would not focus my attention on how the property performed in the past. I would focus my attention on how you believe it will perform in the future. With an investment that small how this lady operated it in the past is irrelevant. What matters are the comps and the rental price points you know you will be able to receive.

Most of my tenants have been living in their units for 4+ years. I always start with a lease and usually renew it formally once, sometimes twice, but after that I just continue on a month to month basis. All of the long term tenants are paying more than is stated in their last lease. Schedule E of my tax returns document the rent and expenses. I would show that to a prospective buyer who presented an acceptable offer and documented that they had the funds to close. 

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