Backed out of first multifamily deal in Indy

[Michael Magbalon]

Hi fellow investors I am a level headed investor who has recently rediscovered real estate as I have had mixed luck and success in world of investment real estate. I wanted to seek the opinions of those more seasoned and more intelligent in this area than myself. Maybe I wanted to just see if I was too cautious in evaluating this deal I saw a quad come up on MLS in Indy the other night and it stated that all units were rented each about 1800 sq feet with 3 beds 1 and 1/2 baths in B area of Indy. Without knowing anything about leases other than listing stated they were all fully rented with hardly any vacancies ever.. So I felt market may be fairly hot and so I made offer that early AM after I got listing sheet that rents were averaging about 1200 unit. I would later find out that owner charged tenants around 180-250 dollars/mo for utility cost since old building and he paid for gas, water , electricity and he didnt reveal that he was really charging tenants 995mo rent and had separate utility charge that made it look like the tenant was paying all 1200/ mo in rent I Had no idea regarding his true expenses and cap rates but realized that cap rate was about 5.5% Also found out that there was a small studio in basement that could easily rent for about 550/mo and he did that to some degree in past two years Anyway once I made offer without all the numbers I came to find out there were multiple offers already made. I figured I would offer first then get all info later. DUMB So after figuring out 25% down with 30 yr am at 5.25 percent ... I would make maybe a 1000 dollars a year with property manager at 8perrcent unless I brought rents to market which would have been truly 1200 month best case scenario per multiple property managers. In that case I would have cash flow of about 10000 yr and there cap rate would move from 5.5 to about 7%. If I rented studio for another 6000 plus a year then cap goes to 8.4% Seemed like a lot of ifs in there...sorry for long winded post. 1st time I have ever made offer on quad, got into bidding war and ended up contracting above asking price (424k asking went to 441k with my best offer) This is my first post ever here and I wanted to share perhaps my naïveté and /or prudence or lack thereof in this fiasco Thanks for any and all comments

[Scott Choppin]

Making an offer as you did is not an issue, this is why we have due diligence periods. In this case, given competition, you were warranted to make a quick offer, evidenced by multiple offer situation. Once you get it into contract, THEN you dig deep and hard. Obviously, no buyer can truly know the property until they get trailing 12 with leases, make sure to review the leases for hidden deducts, rent concessions, etc.

You did good here generally, once you made an offer, even before going into escrow, you found out all these fun things the owner was doing. You can bet that there's more than what you found out initially. Time to walk away. When you buy from a professional owner with a property manager, you'll know it, clean books and records, good systems, etc. You'll recognize it.

Make sure to go see any out-of-market property, so many times people don't visit out of market properties, which to me is a mistake. So worth the price of a plane ticket and hotel night. Have the broker pick you up at the airport(!).

Once you make multiple offers in your target market, and go through one or more due diligence efforts, you will learn the market fast. 

~ Scott