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No. of Recommendations: 1
The inspection went great. We found a few problems with the units, but they were obvious things that the handyman was supposedly aware of and working on. The appraisal came in about 15-20 % above the purchase price, and the guy said he could have gone higher if need be. So far, so good.

I forgot to mention that the seller only had the apartments for a few months. His job transferred him away from this part of town (he said), so he was ready to sell.

For some reason, it took me about 40 days to close the loan, and by that time things were taking a turn for the worse. Two of the tenants had left. Hardly any of the repairs had been made. Those that were complete were not very professional, to say the least. After I closed, I found out that he had filed an eviction notice on a third tenant and failed to mention this to me. At closing, I was expecting to get deposits and prorated rents from 4 rented units. My check was much smaller then expected.

It was obvious, in retrospect, that the seller did whatever it took to fill the units. I figured that, with better screening, I could keep them filled.

To make a long story short, I have had to make more then a few repairs to the property. Excluding a new central heating system, nothing has been major. Just a lot of little things. On top of that, I have had the same trouble keeping them filled. Summer arrived and the units lack air conditioning. Getting good tenants was very difficult. I lowered my standards and demanded a larger deposit. I could rent them, but couldn't keep them filled.

I have since turned to Section 8 (government subsidized) housing. This program pays $620 a month ($70 above fair market) and the government guarantees the money. The check arrives every month. So far, I have gotten better Section 8 candidates then I had been getting before. They require the apartment to be inspected, but the repairs I've had to make have been very reasonable.

It's too early to tell, but I have been happy with the program so far. Anything to stop the bleeding.

The good news is that the area is still improving. I get 2-4 cold calls a month from investors wanting to buy them. Once I get them all rented with Section 8 tenants, I might consider selling. With $2480 gross rents each month, I should come out OK if I sell.

If I can keep them filled, I will probably hold for now. I should be able to refinance in a year and get back all the cash I've put in and then some. Depending on the interest rate situation, my payments might not go up too much. Even if they do, if the turnover rate improves, I wouldn't mind the risk.
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No. of Recommendations: 5
b06mjb:

"After I closed, I found out that he (the Seller of the Investment Property purchased by b06mjb) had filed an eviction notice on a third tenant and failed to mention this to me.....Two of the other tenants had left.......And at closing, I was expecting to get deposits and prorated rents from 4 rented units. My check was much smaller than expected. "

First of all, hey, great idea to start a Real Estate Investing board here in Fool Land!! I hope to contribute as time allows from time to time. As my name makes clear, I am a licensed real estate broker. In fact, I own my own independent brokerage firm (purposely not affiliated with any of the national franchises).

I've had the good fortune of meeting and getting directly involved with a major real estate investor over the past 2 years. Acting as a Buyer's Agent for my investor client, we have consummated over $10 million in real estate purchases since 1998. We've learned a great deal from each other and have since created a partnership arrangement.

Enough about my background..........Now, in response to your situation outlined above............

First of all, it seems that the mistakes you made in the above referenced transaction weren't serious enough to put you into a financial bind. However, it's fair to say that you walked away from the closing table with less money than you have originally planned on---and in fact probably deserved! It's been my experience that any Seller, sophisticated or not, is only concerned with their own financial well being. Though the Seller will in the beginning attempt to "win your trust" to move the process forward, in the end they're not going to see that you get any more than what's fair (to them).

What can you do, as a purchaser of an income producing real estate property, to prevent future re-occurences of similar problems you were so brave to outline for the rest of us?? Start with Estoppel Certificates!

For those not familiar with what an Estoppel Certificate is, please allow me to digress. In simple terms, the "income producers" of the property (generally known as tenants) sign individual "form letters" stating specifics such as monthly rental amounts and current paid through date status, security deposits paid, current maintenance problems (if any) and other similar facts. Typically the Seller will be the pointman of getting these Estoppel Certificates from the tenants. Thus I'd highly suggest making sure each certificate is also notarized to prevent any "funny business"................

Your purchase contract should stipulate having these Estoppel Certificates completed and notarized and into your hands well before closing in order to give you the opportunity to review and confirm that the information provided to you by the Seller prior to negotiating the contract is in fact true and accurate.

Now, as far as prorated rents go, unless you and the Seller specifically negotiated how this was to be handled at closing, you'll likely see $zippo, nado at closing. Hope you didn't close on the 5th (for instance) allowing the Seller to walk away with this month's rent income! Ouch, what a terrible way to start out----in the red! And I wonder how many "promises of repairs" really were made by the Seller, or if the tenant(s) are just trying to get you to commit to paying for something that may not really be necessary when you become the new Owner (hey, Landlord, I was promised new carpet, etc.---I ain't paying you a penny until you deliver!)

I'm certainly not trying to insinuate that any of the above actually occurred in your situation, just what some (of many) of the problems could be and what could possibly arise by not properly negotiating favorable terms and by being taken in by a more sophisticated adversary! To many, most experience and knowledge is first learned the hard way.........through prior mistakes and missteps! By bravely sharing your experience with this board, you'll hopefully prevent the next Fool from making similar mistakes! Kudos!

It does appear that you purchased the property right assuming the appraisal you spoke of was accurate. Please don't tell us that you used an appraiser that the Seller recommended, or that you relied on an appraisal that the Seller had paid for sometime in the recent past! Otherwise, that 15-20% you spoke of may be simply "smoke and mirrors"!

Best wishes to your future real estate endeavors, as well as to those of other avid readers of this most foolish board!

Regards,

Rick Rogers, CRS, GRI, CBR
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