Seller can't produce repair invoices on 30+ complex, worrisome?

[Ben Holloway]

Hi all,

Quick question for the folks on the multi-family BP forum here. I'm a relatively new real estate investor with a few single families and a few smaller multis (sub 4 units). I have aspirations to move into larger properties and found a 40+ unit multi-family that I'm considering putting an offer in on with a few partners.

The numbers all work out, the neighborhood is what we expect, I have walked the property and it's in pretty good shape, but the once concern I have is, the seller is unable to produce any of the repair invoices for work they've done over the past 5 years of ownership. The complex was originally a heavy value add project and it seems like they've done a lot of work on it (and it's evident), but it strikes me as strange that they wouldn't be documenting the work for an eventual sale. The seller is also supposedly an experienced real estate developer, which is even stranger. They claim that they focus on the development of the building, not the management and that's why they aren't organized on receipts, better financial reporting, etc.

Am I just being paranoid here? If the inspection comes back with no issues is this worth considering? Or is this lack of info worth being concerned about.

[Erik W.]

I agree with the others that it is the end result (i.e. does it look right and function properly) that matters most, not so much a piece of paper.  I can write up an invoice right now that says "$3000 - replaced natural gas furnace", but until you fire up the furnace and test the performance and put eyes on the unit to verify it is new, who knows the quality of the work?

That said, it's weird from a tax perspective.  If/when they get audited, they will have to produce invoices or receipts.  What's their plan for that?  You might casually ask it in a round-a-bout way like so.... "No receipts?  Huh, interesting.  You know I got audited last year and the IRS said they wanted to see everything....took me a week to get it all together but I found them all and it was a good thing I did!  I sure hope they don't come knocking on your door."

See what they say.  If they shrug it off...oh well.  But they might say something that gives you a better clue as to whether or not they are telling the truth.  I don't like getting into deals with people who don't tell the truth.  It often ends up being a waste of time.  Had a 20 unit I was looking at recently.  We talked to the PM and Realtor.  At first meeting, they said 17 units had been recently rehabbed.  The second time, it was "the majority" had been rehabbed.  The third time, "at least 10".

What?!?!  How do you go from 17 out of 20 to "majority" (which is 11 or more), to "at least 10?"

Because they were liars.

Anyway, the Seller was a bit of a screwball himself, so we never could get him to put a counter offer on paper and now we're looking elsewhere.  It would take the better part of 2 days to get inside every unit to inspect, plus go over the financial with a fine tooth comb, verify utilities, and check with the city on any outstanding code issues....why would I burn up two days of my time only to uncover countless other lies when the Seller wouldn't even respond on paper?  Can you imagine trying to negotiate any changes as we uncovered more problems?

Anyway, that's my 2 cents.  Professional inspection of a 40 unit would likely cost a significant chunk of change.  I would prefer not to spend that money until I am reasonably sure the Seller is being truthful.  How you determine that is up to you.