Bad apartment buildings buy. Now negative in cash flow

[Mike A.]

Hey all, 

A friend recommended me to BP so I am hoping some people can assist with my delima.  I've been buying props for a few years in Hartford and Bridgeport with good success.  They are only 2 - 4 units, and very little issues.  Two years ago I wanted to grow faster so I purchased two apt buildings in Ansonia, and it's been hell ever since.  The mort./tax are 4600 a month.  The insurance is about 600 a month.  The PM is 1200 a month.  Utilities are 300 a month (main ones).  Water is about 400 a qtr.  Exterminator is 350 a month (two buildings).  Cash flow when originally received was fantastic.  During closing, four tenants moved out.  Over the last two years, six tenants had to be evicted.  They trash the place, so the turn overs are a fortune.  I have no idea on how to get out of this.  I have one offer from a buyer who owns apt buildings in the valley (Ansonia, Derby, Shelton, etc), but he only wants to assume the commercial morts. and pay me 250k over the the price.  My morts. not assumable and no one else is interested as the area is depressed.  Income from my other buildings are covering the 500  month overruns.  I have a locked 6.6% commercial morts. for 10 years, but if I leave prior to 2019, there is a pre-payment penalty of 5%.  I've dumped about 150k into the buildings to bring them current and upgraded.  I reached out to other brokers in the Naugatuck Valley, but it seems not many are interested in the Ansonia-Derby-Shelton area.

We've been in questionable areas before, but it took 2 years just to get rid of the crappy tenants.

Looking for advice and counsel.

[Nathan Gesner]

 You're paying $1,200 a month and it still takes two years to evict the bad tenants? You're paying $1,200 a month and still getting tenants that trash the place beyond two month's rent?

There are a lot of details missing but the biggest problem seems to be your property manager. You said it was operating well when you bought it, even though it had some bad tenants that needed to be removed. Either the seller cooked the books or your Property Manager is running it into the ground. I recommend you look for one experienced in turning around problem properties. 

You can start by going to www.narpm.org and search their directory of managers. These are professionals with additional training and a stricter code of ethics. It's no guarantee but it's a good place to start.

1. Ask how many units they manage and how much experience they have. If it's a larger organization, feel free to inquire about their different staff qualifications.

2. Review their management agreement. Make sure it explicitly explains the process for termination if you are unhappy with their services, but especially if they violate the terms of your agreement.

3. Understand the fees involved and calculate the total cost for an entire year of management so you can compare the different managers. It may sound nice to pay a 5% management fee but the extra fees can add up to be more than the other company that charges 10% with no add-on fees. Fees should be clearly stated, easy to understand, and justifiable. If you ask the manager to justify a fee and he starts hemming and hawing, move on or require them to remove the fee. Don't be afraid to negotiate!

4. Review their lease agreement and addendums. Think of all the things that could go wrong and see if the lease addresses them: unauthorized pets or tenants, early termination, security deposit, lease violations, late rent, eviction, lawn maintenance, parking, etc.

5. Don't just read the lease! Ask the manager to explain their process for dealing with maintenance or problem tenants. If they are professional, they can explain this quickly and easily. If they are VERY professional, they will have their processes in writing as verification that it is enforced equally and fairly by their entire staff.

6. Ask to speak with some of their current owners and current/former tenants. You can also check their reviews online at Google, Facebook, or Yelp. Just remember: most negative reviews are written by problematic tenants. The fact they are complaining online might be an indication the property manager dealt with them properly so be sure to ask the manager for their side of the story.

I hope this basic guide helps. If you have specific questions about property management, I'll be happy to help!