How do I handle this (my first) FSBO cash deal? 80k/12% Cap Rate

Question

I’m interested in a multi family that’s FSBO. This would just be my second property and this seems daunting. It’s a cash only purchase of ~$80k that on paper would be a 12% Cap if their numbers are accurate/truthful.What questions can and should I ask them?I want to ask them why they’re selling if the money is so good. Is this wrong, too personal?Also, how do I even go about doing this? It’s out of state already and I’m not sure if I should have a buyer’s agent.Should I make an offer with contingencies included in the offer? For example proof of rental income, inspection, appraisal. If its cash only should I even have it appraised if the numbers are great and the price looks fair?The seller’s response to my initial email:"Currently we have apts rented for $600, $600 and $900 a month with utilities included. The $900 unit is actually the larger 2nd floor apt that we connected to one of the vacant efficiency apts through an adjoining door. One of the $600 units has a history of renting for $800 but needs flooring and paint. I moved a tenant in  at $600 in the current condition on a month to month basis. He would like to stay and is willing to increase to $800 when updated. There is another small functioning apt that we currently allow a handyman to live in rent free. It would rent for $400. The total utilities avg $500-$600/month for gas, water and electric. Property tax is $2400 annually. I don't have square footage info"

I initially posted this in  the in the Real Estate Rookie Facebook group, but realizing it's probably not the best place.

Jaron Walling · Answer

@Matt Charette For a second investment I see many challenges and a few red flags. Without touring the units and looking at the structure (probably why there selling) I'd pass on it. Idk your experience level for REI, but seeing the property in person changes everything. Some of the numbers they provided feel kind of vague, or inaccurate.

I would be asking for everything including rent role, utility bills, proof of maintenance and repairs, etc. Verify that property tax as well.

Asking good hard questions politely is the name of the game! Don't be offended to ask anything. That's how you discover the problems and motivation to sell. Maybe a few of the tenants don't pay on time. Maybe the roof is shot and needs replaced. Sometimes people don't want the headaches that young investors are ready for.

Canesha Edwards · Answer

@Matt Charette

I would definitely find an agent or contractor to tour the property and take pictures.  You don’t have to sign a buyer’s agent agreement if you don’t want to. I would offer to pay a small fee and leave it at that. But you definitely want to have some idea of what the property looks like and what work needs to be done.

Always confirm the rent. I would ask for bank statements to verify that what rent amount is being paid and if it’s been paid consistently.

Also, a 12% Cap is pretty high which means there’s risk involved. I’d definitely ask why they are selling.

Never buy sight unseen. It’s a recipe for disaster.

My 2 cents.

Best,

Canesha

Matt Charette · Answer

@Jen Arizmendi Thanks. I have reached out for more details and proof of rents and utilities, but I haven't heard back yet where initially  he was very responsive. It's either very telling or he may be working with someone else now.

Paul Moore · Answer

Hi @Matt Charette.  I recommend that you get this under contract with several contingencies that give you an easy-out. (Even if you don't close, you'll learn a lot!) Then I would hire a coach/mentor to help guide you through this. Maybe you could find one in the South Bend area on BP.  Then I would go there and inspect every corner of every unit yourself, with your mentor, and a property inspector. And I would look at his books and reconcile them to his bank account and what he's told you. And more. Leave no stone unturned, and if you have a bad feeling in your gut, though the numbers may work, walk, no run away.  Good luck!

Jonathan Greene · Answer

CAP rate does not apply to four units and under so the calculation is irrelevant, especially if you are looking to BRRRR. The true valuation of 4 units and under is by comps and that is how it gets appraised. CAP rate is for commercial (5 units and up) and the appraisal for those factors the rent rolls in making the rate more relevant. You can use it as a calculation for small multis, but comps are what drives your future refi.

It sounds like a Frankenstein to me, not good. This - "that we connected to one of the vacant efficiency apts through an adjoining door." - is piecing parts together and the handyman thing sounds bad also.

Matt Charette · Answer

@Jaron Walling totally agree. I’d have my local property manager walk it on video to get a better understanding. The current photos look 60% updated, but it’s not showing all of the units. I’m sure they are hiding some blemishes.

I’ll have to push back for firm answer and documentation. That’s the only way this can work.

It’s in the South Bend area, so it’s not super low priced property, but I’m confident a he’s fluffing the rents. I was able to find some listing history for rents there and they’re looking like $50-100 lower to his claims. Even with that in account the numbers still work. Just have to keep digging and see if I need to walk away.

Jen Arizmendi · Answer

@Matt Charette

I’m an investment broker in a South Bend. $800

For a one bedroom sounds pretty steep to me. However, it depends on the area. I’m happy to help if you have more questions.

Matt Charette · Answer

@Paul Moore thanks for the feedback! I had the same mindset of at least get it under contract, get my foot in the door on the deal. At the very least, you're right, it's a learning experience.

Matt Charette · Answer

@Jonathan Greene technically this is a 5-unit. It has the two efficiency apartments, a studio, a 1bd, and a 2bd. I don’t intend to BRRRR, that’s not my approach. Strictly buy and hold maintaining equity in the home.

I don’t see how cap rate doesn’t apply to every property, it’s a metric. I used it as a way to filter and find my deal (Also never been to it in person). Maybe it’s just your philosophical method as it sounds like  BRRRRs are your approach when speaking of future refis. Maybe you can explain why you wouldn’t use it for me to better understand your stance.

It’s certainly a Frankenstein! Up front I am short on pictures of the full place to piece it together. However I could get it under contract and have my property manager check it out on a live call. Physically being there doesn’t concern me, as long as I can get the video or walk it virtually I’m covered.

The handyman piece is also concerning, I doubt the owner has anything legally written up. But, his lack of structure and mismanagement can make this a great opportunity. I have to look at the positives.

How do I handle this (my first) FSBO cash deal? 80k/12% Cap Rate

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