So, Im thinking about buying a 10 Unit Apartment Building

[Thomas Blaine]

So I’ve been looking at a lot of apartment buildings for sale lately. What I’ve noticed is that owners, each and every time are asking way too much for their properties. Without fail they are skimping on expenses, or not even reporting the true cost of repairs, maintenance and capital improvements in their proforma. Obviously this is very frustrating.

Here is an example

This is what an owner sent me earlier this week. I was a bit surprised to say the least. This guy states he has owned the property for 14 years and this is the quality of his report. Few issues I see right off the bat, there is not one line for repairs & Maintenance. Nothing for capital repairs, even though he states that he recently replaced the siding on the building.

It also appears that they were able to collect every single month of rent from each of the 10 units last year.  Doubt It!

Couple other things that stick out to me as I research this deal is the following. City records show that the owner bought this building 11 years ago, not 14. He seems completely unwilling to provide a copy of his Schedule E and does not have a report for the first 3 quarters of 2015.

I will make an offer next week at the right price and Ill take Brandon's advice & include a letter of intent / Resume.  

[Michael Gansberg]

Thomas,

I sympathize with your plight. As a veteran buyer in the eight to twelve unit space(I'm in fact obsessed with that property size- it's generally too large for the mom and pop buyers, and always too small for institutional money, so the cap rates tend to be rather sweet,) I've experienced what you're dealing with several times, and I wrote something in my recent book on this point. 

Sellers are incentivized to inflate numbers to you for the best selling price, but it's your job to be a savvy buyer.  A seller will not tell you about any substantive defects related to the property, and it's your job to find them- bring your property manager along for the building inspection. Ignore the pro forma, it's meaningless. Base part of your analysis on the leases(I'm assuming those have been provided to you,) verify that the leases are essentially market rent- if they are under, you're actually in luck as you'll have future upside, and you can factor the below market rent into your purchase offer- and if they're over, that may signal that some desperate tenants signed leases that they'll break at the first opportunity. I'd rather be in the former situation than in the latter. The rest of your analysis should focus on the usual issues- local occupancy rates, mechanicals, utility expenses, taxes, building condition, etc.(remember- what you spend on the building may be very different than what the last guy spent. Maybe the roof has neared the end of its useful life at the time of your purchase? What if he replaced everything 10 years ago- his capex could be very low, but the building may need a big refresh upon its sale. Don't count on the seller to do your figuring, that'll make you very poor, very quickly.)

The suggestions to insist upon the schedule E or the tax returns are interesting- most investors can figure out what a building needs(in terms of capex and operating expenses) and what the rents and vacancy rate should be(as those are functions of area, the economy, curb appeal, management skill, and so on,) so if I were selling a 10 unit and a buyer insisted upon my seeing any part of my tax return, I'd consider that buyer to be an irritant and I'd find one who was capable of doing their own proper due diligence. Further, if someone buying a 10 unit can't figure out what a building needs, they have no business buying a 10 unit. 

Good luck with it!

Michael