6-unit apt, all vacant, cat-lady "tenant", distress Landlord

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6-unit apt, all vacant, cat-lady "tenant", distress Landlord

Jonathan Johnson
Rental Property Investor · Charleston, WV · Member since 2013 · 262 posts · 109 votes

Hello all,

Long time lurker, first time poster so be gentle.

I live in a small college town and I found a 6-unit apartment that I'm considering purchasing. I have a friend currently renting there ($600/mo) but he's moving out because the stink of a cat-lady who isn't paying rent. I assume the landlord doesn't know how to evict nice old ladies, this one even has a house that she could live in. I don't know.

My friend that's moving out, in his search for another apt said "It was priced ($600/mo) very fair. Most apts in the area that are not college focused went for the same price but much less room."

So this apt is just on the outskirts of college town so it wouldn't pull in the high rents of walk-to-campus, but close enough to still be rentable. I would rate the neighborhood around C+, as in low to middle income but still safe. It's a block away from a gas station, but tucked away on a quiet street.

Walking around the apt I didn't see any structural damage, but it's landscaping has been neglected. The inside is dated but has great dark woodwork and stain-glass windows on the central stairwell to the third floor. The appartments themselves are nice and big, 1-bd/1-ba, with big dining room and a sun-room.

The landlord is in his late 80's - 90's and is looking to get out of the business since he has some medical issues. I can tell he loves this apt because he's spent a lot of money on repairs and such. The roof leaked at one point and one of the rooms has water damage, but the roof was repaired with some sort of rubber stuff (I don't know).

I haven't walked through with him yet, but I wanted to ask you all

  1. What type of questions I should ask?
  2. How do I value this apartment?
    1. I don't know how to find GRM
    2. Not sure how to find similar rents in the area.
    3. NOI is about to be zero, since cat lady doesn't pay and my friend is moving out. Which could be a good bargaining tool.
  3. Is there a good way to get an estimate on the rehab? Like a sheet I could bring along?

I know some of these questions, probably all of them, are already answered somewhere on here, but I am overwhelmed with all the information. Please help!

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Joel OwensBusiness Member
Moderator
Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
10y

Sounds like the owner is tired. You would be the new energy coming in. Pay attention to what is around the property. If you make the 6 unit great but other buildings around it look dumpy you will usually not land the great tenants you are wanting.

If it's off market I wouldn't alert anyone that it might be for sale. The other landlords might have wanted to buy it for years. Once you get under contract you can check for due diligence and others might want to sell as well.

The owner if they have exhausted depreciation might want to owner finance to pay gains in small annual pieces. At their age they typically do not want to 1031 into something unless it is passive triple net or similar. 

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  • Zach Quick
    Investor · Bentonville, AR · Member since 2014 · 759 posts · 379 votes
    10y

    @Jonathan Johnson 

    1. Don't worry about finding GRM yet.

    2. Sounds like according to your friend $600 is within fair market rent.  Check on Craigslist for comps on rents or make some calls to some local property management companies and just ask for ballparks on what they think something like this would rent for.

    3. I agree it would be a good bargaining tool, but also figure out why they are all empty.  Is the location worse than you think it is? Is the maintenance really that bad?  Usually really hard to not have at least half of the units filled if the landlord is partly trying.

    3b. You could look up some rough estimates on this site, but if you are serious then call a contractor or two to walk with you.  They should be able to land within 10-20% of the final estimate on a brief walk.  That would also give you bargaining power if you tell them 'I just walked with a contractor and he quoted me at 'x' amount to fix it so I need to buy at this price'.  Have done that a few times and it helps push them to a lower price usually.

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  • Jonathan Johnson
    OP
    Rental Property Investor · Charleston, WV · Member since 2013 · 262 posts · 109 votes
    10y

    @Zach Quick I think the landlord just stopped trying. He's old and owns the property outright.

    If I ask other landlords, will I be at risk of losing the property to them?

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  • Zach Quick
    Investor · Bentonville, AR · Member since 2014 · 759 posts · 379 votes
    10y

    @Jonathan Johnson You don't have to tell them where it is or that it is for sale. Can just say you are helping a friend who owns it.

    0Reply
  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    10y

    Sounds like the owner is tired. You would be the new energy coming in. Pay attention to what is around the property. If you make the 6 unit great but other buildings around it look dumpy you will usually not land the great tenants you are wanting.

    If it's off market I wouldn't alert anyone that it might be for sale. The other landlords might have wanted to buy it for years. Once you get under contract you can check for due diligence and others might want to sell as well.

    The owner if they have exhausted depreciation might want to owner finance to pay gains in small annual pieces. At their age they typically do not want to 1031 into something unless it is passive triple net or similar. 

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  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    10y

    Based on how small it is this might be perfect for an owner finance situation. The property is at rock bottom so the seller really has almost nothing to lose as almost anything could be an improvement.

    If the property was cherry already and fully performing then owner finance could be more risky as the buyer could possibly run the asset down and have to hand it back to the seller worse then when they gave it to the buyer.  

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  • Ian Tudor
    Specialist · Charlotte, NC · Member since 2013 · 260 posts · 245 votes
    10y

    I invest in mobile home parks, so not sure this applies. But is there a possibility for the seller to carry back the paper? It could make the investment more attractive than going other financing routes. 

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  • Jonathan Johnson
    OP
    Rental Property Investor · Charleston, WV · Member since 2013 · 262 posts · 109 votes
    10y

    @Ian Tudor, @Joel Owens, @Zach Quick, Thanks for all your feedback.

    So I just got off an hour long conversation with the guy. He loves to talk. The situation is getting very interesting, I'm not sure if there's a deal in works or not, but I'm learning a lot as I go. I'll fill you all in and you can rail me with more questions to ask tomorrow when I go to the property to inspect some of the apts.

    What I learned, in as brief as I can:

    1. He's owned this property for 60 years, he's 85, and he thinks I may be too young to get into real estate at 30. 85 - 60 = ....
    2. He is super proud of his apt (not good for negotiations)
    3. He once had each apt be 3 small br / 1 ba and rented to college students at $400 a room.
    4. The history is mostly him not renting out the apartments because he didn't need to, and just rehabbing it himself. I guess he made enough money at his normal job to not need the apt to generate any income.
    5. All new electrical (3 yrs old) all new plumbing (5 yrs) and new roof (2 yrs). The roof is rubber and the contractors said one layer is standard and two layers is expensive and he had the two layers put down.
    6. Before the roof, there was water damage due to bad water management. One apt needs the wall scrapped (says he) and the one under needs the ceiling redone. He has all the materials for rehab in the apts but can't do the work anymore. My friend confirmed this. He also said he would give me a 4x discount off the price of what anyone else will pay to get this work done (big plus for me).
    7. Had the city redirect some sort of sewer line so that this apt will never back up. I didn't quite follow this part, but right outside there's now something that's really good as far as plumbing.
    8. Fire Marshalls were invited in to critique the apts 15-20 years ago. They told him it wouldn't be a good idea because they would critique it hard. They did. He fixed all errors. Invited them back, and the fire chief said it was like nothing he'd ever seen.
    9. Cat lady staying there hasn't paid rent in a long time, I have to double check how long because WV has a 10 year "squatters rights" thing (adverse dwelling or something?). This could be a problem when I give her the option to start a new lease and start paying or get evicted.
    10. He told me this cat lady is definitely crazy, drives buyers away, let cats get into one other apt, thinks she's the property manager, and will be showing me a scrap book he made of the apts tomorrow (oh boy) as well as apts 1-2 & 5-6. 3&4 he will show me himself because...
    11. apts 3 & 4 have parts of the ceiling and floor joists exposed as he was working on the plumbing. They just need to be covered back up since the work is done. My friend tells me that there are a ton of tools everywhere.
    12. The basement is half cement, half crawl space. He's done work down there but I couldn't understand what he was saying about it. I had the impression it was quality work. He seems to take huge pride in doing things right and having the best apts in the area that he doesn't care to rent... ? ...
    13. He didn't mention a price this phone call, but last time he mentioned 300k which I believe to be way too expensive. Other apts that are not needing rehab, but are also much less detailed and luxurious are going for 200 - 280k.
    14. He wants to buy a truck, a boat, and go traveling. So I don't think owner financing is the future.

    So tomorrow I go see cat lady. Not even sure if this can be a good deal, so I don't have financing yet which is a small concern. I'm in the process of learning how to estimate repairs. I'm kinda thinking it won't be a good deal, I just am learning a ton about how to analyze deals in multi-families and this is a unique situation. Any tips on any of those numbers, or questions to ask, or thoughts to think would be greatly appreciated.

    I'll try to post pics this weekend.

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  • Ray Slack
    Investor · White Haven PA · Member since 2014 · 363 posts · 221 votes
    10y

    IN a small town with this much sweat equity I would say that you should figure out what you could rent out the units for fixed up..  Say for the sake of arguement $750 each..    Annual Gross =$54,000 subtract out expenses such as taxes, water/sewer insurance, v&C of 5% for say expenses of $8000 ish to get a net amount of $46,000   I would say in a small town with this many vacants you should be getting around a 20% return.   so, based on those numbers purchase price in the $230k range.  Of course if the rent or expense numbers are not inline the purchase price will change.

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  • Ray Slack
    Investor · White Haven PA · Member since 2014 · 363 posts · 221 votes
    10y

    BTW that purchase price needs to be your "all In" price including renovations and closing costs.

    0Reply
  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    10y

    Yeah sounds like an old dreamer wanting someone to pay him a dream price for all of his years of turmoil and sweat equity.

    To take on problems you have to give a discount. They can't sell a problem property at a premium price unless there is an angle for big upside rehabbing the property or changing it's use etc.

    Just give him your price and terms. If he balks ask what would work for him? If he sticks on price you can hand him your card and say "I am not a buyer at that price but if your situation changes please be in touch".

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  • Jonathan Johnson
    OP
    Rental Property Investor · Charleston, WV · Member since 2013 · 262 posts · 109 votes
    10y

    @Ray Slack Thanks for those numbers, yeah I need some help with the financial numbers. What's V&C? Here's what I've figured:

    Income:           $50,400

    Taxes:              $2,315/yr (county website)
    Insurance:       $1,500/yr ($250 close estimate per unit)
    Utilities:           $1,235/mo  $14,832/yr (mostly paid by tenants after rehab, numbers from tenant)
    Landscaping:  $500/yr (hardly anything there)
    Maintenance:  $2,520/yr (@ 5%)
    Management: $4,032/yr (@8% I'll probably self manage, wasn't sure if I should include this)
    Marketing:      $500/yr 
    Vacancy:         $4,032 (@8%)

    Expenses:      $15,399 (no-utilities)

    NOI:                $35,001

    Now, I'm not sure what to do with that number. Ray were you talking about a 20% cap rate? How do I find out a good cap rate for the area? If I plug in a 10% CR, I get a purchase price of $350,010 which seems high? Of course that would be after repairs, which could get high.

    Tonight I get to see this apt, and the cat lady. I'm listening to "The Rehab Investors Bible" on Audible. I'm going to take a lot of pictures and try to figure out a scope of work and how much things will cost.

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  • Zach Quick
    Investor · Bentonville, AR · Member since 2014 · 759 posts · 379 votes
    10y

    @Jonathan Johnson Do you know any contractors you can take with you? Even if you pay them $50-$100 it would probably be worth it for your education.

    0Reply
  • Jonathan Johnson
    OP
    Rental Property Investor · Charleston, WV · Member since 2013 · 262 posts · 109 votes
    10y

    @Zach Quick I was thinking about that, what's weird is today I'm only being shown apts 1,2,4,&5 by cat lady and some time later the owner will show me apts 3 & 4 as there are more repairs in that one.

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  • Zach Quick
    Investor · Bentonville, AR · Member since 2014 · 759 posts · 379 votes
    10y

    @Jonathan Johnson That doesn't make any sense. At some point you will likely have to tell the owner what you will pay and he will take it or walk like Joel said above. He doesn't act ready to sell.

    0Reply
  • Brandon Battle
    Real Estate Agent · Buena Park, CA · Member since 2016 · 743 posts · 424 votes
    10y
    Jonathan Johnson , I think you could use some serious help from a more experienced investor who understands what to look for in a deal like this.You should consider finding a partner or selling this opportunity to them for a nice profit.There is no reason for you to see the apts unless you have a contractor with you who can show you all the numerous problems your inexperienced eyes may and probably are missing and exactly how much it will cost to repair the damage and decorate the property to modern standards.You are very lucky to have a potential seller with a fully paid off property because there is no bank loan to satisfy.You will be able to get a better price if they know they get to keep all the money and not pay off loans and real estate commissions. First things first,get a contractor to go with you and map out line by line everything that is wrong and the appropriate cost of repairs.Second,figure out the After Repair Value of the property by using local experienced real estate agents who sell these properties.Third is to take that information to whatever source of financing you are considering getting a loan from and showing them your discovery to get an idea of what they will give you for how much money upfront.Once you're satisfied you can still make a good cash flow after all is said and done and the apts are all rented out,make the offer to the seller showing him all the things you found wrong and need to do to get the place repaired and rented in the least amount of time.Again,I would seriously find a partner who can help you do all this because it will be overwhelming to an amateur who has never tried this before.Good luck to you.
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  • Brandon Battle
    Real Estate Agent · Buena Park, CA · Member since 2016 · 743 posts · 424 votes
    10y
    Also,tell the seller you want the property delivered vacant before you pay him a nickel.Cat lady being evicted is his problem,not yours.Find out what the West Virginia laws are and have him give her the 30 or 60 day notice to leave the state requires ASAP to prevent further delays.Remember,you must put "Seller must deliver property vacant at close of escrow" in the contract so you don't inherit his negligence of a freeloading tenant who's apt is probably a disaster area to be completely gutted.
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  • Jonathan Johnson
    OP
    Rental Property Investor · Charleston, WV · Member since 2013 · 262 posts · 109 votes
    10y
    Originally posted by @Brandon Battle:

    Also,tell the seller you want the property delivered vacant before you pay him a nickel.Cat lady being evicted is his problem,not yours.Find out what the West Virginia laws are and have him give her the 30 or 60 day notice to leave the state requires ASAP to prevent further delays.Remember,you must put "Seller must deliver property vacant at close of escrow" in the contract so you don't inherit his negligence of a freeloading tenant who's apt is probably a disaster area to be completely gutted.

     Great Idea. I might just use this exactly. 

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  • Jonathan Johnson
    OP
    Rental Property Investor · Charleston, WV · Member since 2013 · 262 posts · 109 votes
    10y

    Found a contractor to come with me, said he'd do it for free but I told him I'd give him $20 because the place stinks. I'm hoping the cat lady will show us all 6 apts. 

    I'm going to be bringing something to write down all the repairs needed and be taking pictures. 

    Just emailed two realtors for a list of recently sold mult-families.

    2Reply
  • Courtney Sorrell
    Rental Property Investor · Grand Rapids, MI · Member since 2015 · 55 posts · 8 votes
    10y

    This is a fascinating thread! Share your pictures and thoughts when you've walked through, please!

    1Reply
  • Jonathan Johnson
    OP
    Rental Property Investor · Charleston, WV · Member since 2013 · 262 posts · 109 votes
    10y

    Alrighty, got a lot of pictures, I'll just post about 25% of them.

    Basement: crammed full of junk, but my contractor said the foundation looks great and the joists and stuff are solid. New drain plumbing looks good and the electrical and gas are good too. Most of the water heaters need replaced though since there is rust at the bottom. One is new though.

    Then the interior stairwell seemed pretty good. There was a crack on the top floor above the stairwell. Also, there was some drywall outside the 3rd and 4th apts.

    More to come, I'll make a few posts...

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  • Jonathan Johnson
    OP
    Rental Property Investor · Charleston, WV · Member since 2013 · 262 posts · 109 votes
    10y

    Outside, sorry I didn't take a picture of the front. I was talking with the cat-lady a lot. These two are pictures of the back of the apartments. You can notice the railings are sketchy as all get out. Apparently some amateur "handy" men removed structural supports. This is a big safety hazard for sure.

    The second picture shows the ladder to the roof. It's bolted in and my contractor went on the roof. I was much too frightened to go, because... you know... death. He said there were a few holes from a tree branch falling on the roof but overall it looked really good. There are two layers of rubber on the flat parts, but the clay shingles are specialty made and we probably won't be able to replace those. They will have to be redone with regular shingles. I'll post pictures of the roof when my contractor sends them.

    Apartment # 6: Starting at the top and best and working toward the worst.

    The hardwood floors are amazing, couldn't find anything wrong with them.

    The bathroom was cramped and outdated. Needs remodeled and redone.

    Really cool mantles in the porch, all the apartments had these.

    The kitchen didn't look horrible. It was the best of the all the apartments.

    Except that the washer and dryer were in the kitchen...

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  • Jonathan Johnson
    OP
    Rental Property Investor · Charleston, WV · Member since 2013 · 262 posts · 109 votes
    10y

    Apt # 5

    This is the one with the crooked porch.

    The kitchen was super outdated and just needed gutted and remodeled.

    The hallway when you enter:

    A lot of the ceilings had these designs on them. Not sure what to think about them.

    Water damage.

    Bathroom looked bad.

    Porch. All the apts had these and they all looked about the same.

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  • Jonathan Johnson
    OP
    Rental Property Investor · Charleston, WV · Member since 2013 · 262 posts · 109 votes
    10y

    Apt #2

    Cat-ladies doll......

    Cool wall paintings.

    This apartment had the most water damage. I think it was because of poor water management (gutters and such). The owner and cat-lady said the water problem had been fixed, just not the walls redone.

    Awesome fireplace mantle.

    There was mold on one of the walls. I think it was from condensation from the walls being cold and the weather changes. 

    Apt # 1   The cat smell source. D: What's mostly in the bags? Probably trash. What I thought was in the bags: dead cats.

    This bathroom had water damage from the ceiling. It seemed that apts 5 and 1 had the water damage so I can assume apt 3 has it as well.

    Ok, so at this point the contractor and I had been walking around independantly since I was taking pictures of other rooms. He had peeked inside this room and started walking toward the door. I assumed he was on a time crunch and had his ideas of the apts. I was finishing up pictures on one room and the cat lady led me to the last room. She opened the door for me and I got hit by the stench like a paintcan to the face. I took this picture pretty much to be polite and not throw up on the lady. I'm pretty sure there is cat pee on the floor and vomit and poop and the cat that is/was doing it. I ran out of the apartment gagging to where the contractor was waiting, knowing what I had just seen.

    Lots of work to do and honesty probably not going to get these apartments. I want to still figure out the  scope of work with the contractor and make an offer to the seller. Problem is that the owner loves this apartment complex and probably underestimates what it needs to get tenants inside.

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  • Zach Quick
    Investor · Bentonville, AR · Member since 2014 · 759 posts · 379 votes
    10y

    @Jonathan Johnson what is the sq footage of that thing? It looks enormous for just six units. 

    I'm obviously not there but I can tell you right now I wouldn't offer over 100k for this thing just judging on the amount of work it needs. 

    What are you thinking about it now?

    1Reply
  • Jonathan Johnson
    OP
    Rental Property Investor · Charleston, WV · Member since 2013 · 262 posts · 109 votes
    10y

    @Zach Quick

    I forgot to measure! Doh! The apartments were very spacious. They were all one bedroom but had both a dining room and living room and a porch.

    My thoughts are that if it was fixed up and cat-smell free, it could easily go for 350k since similar sized apartments are going for 275-320k and this apartment has a lot of finer qualities underneith it all. As far as what I would pay for it, my original low-ball of 200k is looking pretty high. I'm honestly discouraged by the cat-smell alone and I have no experience with rehabbing so the water damage is completely mysterious as to what that needs and will cost.

    The remodeling and updating doesn't scare me but I'm thinking at least 10k per apartment. I just don't know how much updating is needed for a rental as opposed to a house to flip. I don't want to put in more than needed, but I want to definitely provide an attractive apartment.

    I'm really just waiting on my contractor to give me an idea of repairs, rehab, and costs. 

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