what we learned from second multifamily purchase

[Daniel Vella]

This post is a year late, but my wife and I learned a few things on the purchase of our second 4-unit (what we learned from our first one here). 

1. Appraisals: what attracted us to the property was that it was down the street from our first multifam, but also because we believed it to be overpriced based on the comp approach when compared to the first property. Both properties consist of two side-by-side duplexes, and the first one was newer. It appraised for about 100k less than the asking price of the new one a year before, so we figured making our offer contingent on appraisal was money in the bank after due diligence. We were wrong because of the income approach. The property did appraise, and it was because all 4 units had leases at the time of the appraisal, and they were all leased for higher amounts than the first property was. The first property had one vacant unit which was trashed, and the three rented units were rented for $50-100 less than the new property's units. The appraiser used the income approach rather than the comp approach, so the property was more valuable. We learned to consider the income approach when analyzing deals, and, of course to always include the appraisal contingency (which we do already), unless necessary not to. We also learned that when selling a property, having all units rented at maxed out leases can help add value that is realized and tangible, rather than potential. 

2. Google the property: I will always search Google for non-disclosed immaterial facts from here out when analyzing a deal. A few months before we bought this property, a kid accidentally shot and killed his sibling in one of the units. The parent was arrested and it is able to be found in the news still. This was not disclosed, and does not have to be, but it would be valuable to know. We would have still moved forward with the purchase, but a week ago the current tenant asked me about it, indicating her kids are screaming and pointing at night--which is some spooky stuff. She googled  and found the news story. That tenant signed her lease with the former owner before I closed, so I actually thought she knew, but I will likely disclose that to future tenants.

3. If possible, talk to neighbors. This property was owned by a guy who also owned, at one point, the adjacent properties on either side. Since closing, I have spoken with neighbors and tenants who have lived there for a while, and learned that the plumbing is unique because it saved money and time to configure it the way it is configured. For instance, the cleanout for the back units is in the neighbor's yard, and I have to jump a fence to access it. 

4. If you're local, ride by on Friday night. I am close enough to this property to ride over when necessary, and during due diligence I went by on a Friday night. As a result, we asked for one of the units to be delivered vacant because I observed drug use and a party scene that I didn't want any part of. The seller complied. I probably would have had to evict that occupant soon after closing (he was also behind on rent), and since I self-manage, I wasn't interested in having to unclog a sink during a scene like that.

5. When we were looking at this one, we considered another 4-plex that we ended up passing on, but learned to check TMS numbers and plats for subdivision. That 4-plex turned out to have been subdivided into 4 separate parcels at some point, and I learned from my agent (who sold it to the buyer later), that they had to remedy that somehow to avoid 4 separate closings, which would have been a deal breaker for us.

Live and learn.