Why are a lot of MFH being sold with rents under market

[Robert Quiroz]

I've underwritten around 30 deals so far, mostly in the Ohio market. I'd say that 85% of them have rents that are 10-15% under market. If the way to increase the selling value of a MFH is to increase NOI by increasing income or decreasing expenses; why are the majority of sellers putting their properties on the market with under market rent?

Let's assume that the neighborhood is a C class and the median income of the city is greater than 3X of the market rent.

Here are some of the considerations I've come up with so far:

- Units are in need of renovation and capex is too high or not available

- Unit quality is not the same as market 

- Seller is worried about losing tenants due to increase

- Vacancy rates are high or filling units have been difficult

- Rent increase would take multiple increases over multiple lease periods to get to market rate if seller is trying to retain the same tenant

- Seller inherited property and just want to liquidate

- Seller needs to liquidate quickly (financial burden, sickness, quick exit from land-lording)

It seems like I might be missing a warning sign about a deal if they are selling with current rents that are under market; but again, this seems to be most of the properties I've underwritten.

And in the same vein, what should I be worried about when purchasing a deal with under market rent with the intention of raising them after purchase.  I imagine a lot of the reasons will overlap with the previous topic.