How much should I change my accepted offer for recently unoccupied units?

Question

Hi,

I have had my first offer accepted on a 6 unit (2 tax parcel) "fully leased" property. After my original offer was accepted, the seller informed me that two tenants are moving out in 4 weeks. I wasn't able to get the lease agreements before an offer was accepted...

My question is: How much should I change my offer with this new information and also how do I calculate it for the future?

The area has a good occupancy level and the units shouldn't be too hard to fill...

Roy N. · Answer

@Taylor Green

Similar to @Adam Johnson 's recommendations, when we are purchasing a "full" building {around here sellers like to use that to market} we have clauses/conditions in our purchase offer that, if any unit represented to us as being full becomes vacant prior to close:

a) the Vender will make material efforts to advertise, show, accept applications, and fill the unit prior to close;

b) all applicants will screened using our application process;

c) Any successful applicant will sign a copy of the "standard lease" with our appendices if their tenancy starts within a month of Close.  If the lease starts earlier, they will sign a copy of the "standard lease" with our appendices attached, but with the Vendor listed as current owner and us listed as the agent for the owner.

d) the equivalent of two months rent will be deducted from the purchase price for any unit represented to us as "full" which turns out to be empty at Close.

Thus far this has worked for us.

Taylor Green · Answer

Thanks for the input Adam, you made some really good points...

I really like your idea of pre-renting the units before closing, of course using the proper leasing agreements...

@Adam Johnson undefined

Adam Johnson · Answer

In line with the other advice, I would take it a step further.  I would write in the counter offer that you will ONLY accept the units vacant!  Trying to overcome your reluctance to fill vacancies by forcing a lower price on the seller will backfire, if you even get it accepted at all.  If you force them to place tenants, you will have a problem, guaranteed.  The current landlord also has no incentive to carefully select tenants because a bad choice will soon be your problem, not theirs.

You MIGHT want to write in the units are in ready to rent condition at closing.  You might also want to write in that you have access prior to closing to "pre-rent" the units, but don't sign leases that start prior to closing and include a "subject to closing" clause in your lease in the event that the deal doesn't close so you are liable for damages with the tenant.

Yes, this does change the dynamics of the deal slightly, but it doesn't ruin it, in my opinion.  Look at it this way, you will have selected 1/3 of your tenants in this property.  I don't have a lot of experience in SFH rentals, but I would think that MFH tends to have a higher turnover than singles.  I operate all multi-units and use a 10% factor for vacancy when number crunching.  You may find that you have a unit occupied for 2 years or more, but you may also find that by the time you get it ready to rent and find a suitable tenant, it is several months, so that number seems to fit.  This will also help pick up your bad rents that never get collected.

Welcome to real estate.  Nothing ever goes quite the way you planned it. (At least it hasn't for me yet!)  All you can do is make the best of the situation and keep moving forward.

Jon Holdman · Answer

The trouble with looking at the sellers books is two fold.  For one, things just get left out.  Someone pays a contractor $200 in cash and it never makes in on the books.  Or they pay something out of a personal account.  More toublesome is that sellers will sometimes hold back on expenses trying to improve their APOD (annual property operating data) in preparation for a sale.  So, if things like maintenance are neglected to improve the NOI, you may have above average expenses at first to make up for this neglect.  Look at the seller's numbers, but look at them critically.

Taylor Green · Answer

Thanks again Jon, I am new to this! I only own a couple of single-family homes and I bought every one off investors with a long-term tenant in place.

This is hopefully my first multi-family deal, and I've been using the 55% rule for block construction buildings and 60% for older non-block buildings to make my initial analysis because the owner pays water/sewer.

I have had my agent run the rental comps, as well the purchase price per unit in the area , and the comps seem to be right in line with what it is being rented for, as well as driving around the area and calling every for rent sign I saw to confirm the prices.

After getting quotes for insurance, property management, taxes, as well as leaving 10% for maintenance, 12.5% for vacancies/credit loss the only thing I can't confirm is the cost of utility usage yet. The MLS told me what it cost him for the last year, but I will confirm that during the due diligence period...

I have never thought that the seller would scam me like that, but I will check it out to make sure!

@Jon Holdman undefined

Jon Holdman · Answer

Filling vacancies is just part of this business.  You're signing up for doing that when you become a landlord.  That vacancy is all a part of the "50% rule".  You must be pretty new to this if you're not yet had to deal with any vacancies.

Honestly I'm leery of "fully leased" buildings.  With six units, sure.  With 50, no way.  The only way you're going to be full is if the rents are too low.  Unless you're lucky enough to be in a very high demand area.

Sellers can also pack a building with crummy tenants to make it more attractive to someone like you who doesn't want to fill vacancies.  But that doesn't make them good tenants nor will they stick around forever.  In some cases they can be flat out scams where the seller put a horrible tenant in place, cuts a side deal with the tenant and tells the buyer something completely different about the situation.

Taylor Green · Answer

Thanks Wayne, I've just never got a place without having tenants in place already. I know I have to get comfortable with the idea of filing vacancies. Thank again.

Wayne Brooks · Answer

Oh okay, you Don't have an accepted offer (contract).  You'll probably end up closer to Jon's suggestion.  Two months rent and get ready costs seems excessive.

Taylor Green · Answer

Thanks for the response Wayne and Jon, I wasn't quite sure how I should approach it. I was thinking I might counter back with an offer of 2-3 months of vacancy costs for each property as well as the costs to make the units ready?

Wayne, I just had my offer price accepted and they countered back with a couple of requests, as well as the information that 2 tenants will be moving out. So I believe I can counteroffer their counteroffer? Thanks!

@Jon Holdman undefined

Wayne Brooks · Answer

Are you still in your due diligence period?  Why do you think you can change your "accepted offer" anyway?