It seems like small bulk deals are becoming more popular these days (bulk meaning somewhere between 10-50 properties). With the market on its way up, there are a number of investors out there who see this as an opportunity to unload a lot of properties at one time and turn a quick buck. I think there were a handful of investors who had the foresight to accumulate properties when the market was at its lowest knowing they’d be able to sell as a package of properties at a higher price point at some time in the future. (Granted, I’m not sure anybody realized how quick the demand for property would ramp up)
Regardless of how these packages were put together, there definitely does seem to be a good number of these deals floating around right now. That said, out of all of the bulk deals I’ve looked at over the last year or so, I’ve only seen one that I had any interest in purchasing. Why? Because almost every bulk deal is either priced too high or sprinkled with too many junk houses to make for a good investment.
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5 Potential Pitfalls
Here are a five common pitfalls I’ve found with these small bulk packages and why it’s very important to analyze a deal closely before committing to something:
1. Properties Priced Too High – This is probably the most common problem with deals I’ve seen lately. Perhaps the assumption is that because this is an efficient way for a large buyer to acquire a lot of properties at one time, there can be a premium charged for this. Whatever the reason, most bulk deals I see get deleted fairly quickly at an initial glance of the pricing.
2. ROI isn’t calculated correctly – Many bulk deals show CAP rates or ROI’s that don’t take into account all of the numbers. Some of the most common omissions include vacancy factors, maintenance factors or even property management. It’s critical that any investor use their own proforma when conducting due diligence on a package of homes.
3. Properties advertised as turn-key but in need of repair – Anybody can say that a property is turn-key, but what does that really mean? If it simply means the property was rehabbed just enough to get a tenant into the property, it may not be as turn-key as you think. Some sellers think that a fresh coat of paint constitutes a rehabbed property, but most investors know better. If you’re considering a package of properties, it’s important to also factor in immediate repairs as well as deferred maintenance that will be required.
4. Junk Properties Included – Because I know my market very well, I can usually glance at a package and tell you whether or not there are bad properties sprinkled into the package based on zip code. Other times, you’ll find that there are properties that didn’t stand alone very well and were tucked inside a bulk deal as a means to unload them. Whatever the case, it’s important to vet each individual property to make sure the “bad ones” you inherit don’t sink the package as a whole.
5. Properties advertised as rented – If I’m an investor whose endgame is to get my package of properties rented and sold as quickly as possible, what are the chances the tenants are screened satisfactorily? Maybe they are, maybe they aren’t … but it’s important to get as much information as to the current status of the rents. Also, I’m looking at a package right now that is advertised as fully rented, but come to find out, some of the tenants have just moved out. Bottom line is it’s important to know the true rental status of each property before calculating your numbers.
Just as you would do your due diligence on a single property, the same kind of care and consideration needs to be taken when vetting a package of homes. Don’t let an artificially high CAP rate or “turn-key” package of homes entice you into something that doesn’t make sense … always do your due diligence first!