Seeing my 1st rental today. Any questions I should assk?

Question

I'm going to check out what would be my first rental property today.  The seller himself will be present.  Having never done this, that is both intimidating and intriguing as I may have a window of opportunity to get passed the agent and get information straight from the horses mouth.  Given that opportunity, are there any questions that you'd ask to help you better understand what you're getting into and make sure you know what you're getting yourself into?

The Good:

1. As it sits now, without making any improvements, its clearing the 1% rule at 1.35% (5 units at $380, asking $140,000).

2. It has potential for a 6th unit if I add back the shower that was previously removed to make that unit a storage space.

3. Current owner has made a number of improvements this year including a new roof and parking lot repair.

4. HVAC updated within the last few years.

The Bad:

1.The well and septic are strange - both either infringe on another property or are whole on another property.  I've seen this before, so I know it happens.  I designed a house that's septic was 3-4 lots away.  But still, not ideal.

2. It's a little further out of town than I'd like.  I'm in Lynchburg, VA - a 3 college town - but this is far enough away that I couldn't rely on college kids to always keep it filled.

3. It was previously under contract and fell through after the inspection.  According to seller's agent, the buyer didn't give them any details other than they were backing out.

I've read all kinds of real estate books, listened to 100s of episodes of the podcast, plus other podcasts, but this is my first step out of analysis paralysis and something, despite all the research, I still feel wholly unprepared for.  So any advice on things to be aware of or questions to ask would be greatly appreciated.

Nathan Gesner · Answer

Getting the story "straight from the Seller" may not be advisable. They may lie or hide information that a REALTOR is legally obligated to disclose.

Best practice: assume everything they tell you is untrue and verify it yourself.

Duane Hundley · Answer

I know the property you’re talking about the cash flow seems great. Only potential issue I seen is financing the property with the well issue and being mult family over 4 units. Most likely large dp and a commercial loan.

Doug Shapiro · Answer

Hi @Robert Fisher,

Just remember that the seller is just a person.  I like asking the reason why they are selling - most times the story checks out but sometimes it is strange and other times they reveal something about the property that is off.

Joe Splitrock · Answer

I find it strange that the buyer didn't provide details on why they backed out after inspection. In my market it is customary for a buyer to give the seller a copy of the inspection report if they back out. It is a courtesy and is used to help expedite release of earnest money. When I hear that someone didn't give them a reason, it sounds like a cover up to me.

It also seems strange to me that someone would convert a rental unit to storage. My guess is there was some problem that lead to this decision, either something not legal about the unit or something that made the unit hard to rent.

I would look the property up on Zillow and see if you can find rental history. Having the owner is a great opportunity to ask questions, but just be aware most sellers cover up problems, so trust but verify what he says.

Maxwell Fontaine · Answer

I like to check out any property with at least 1 of three people (my realtor, my contractor, my mentor). They are going to be very relied upon when I go look at properties. 1 They are going to look out for their relationship with you by not giving you bad or misguided advice to preserve their own interests in the future. 2 Hopefully, they have been doing this kind of investing long enough to see potential issues and what a quick fix could cover up. 3 Know what questions you should ask. Keep in mind that the seller is going to try to get out from the property for a reason, just ask a question and listen, if he's motivated enough they will reveal more than needed OR they will not have enough selling points which could be a bad thing.

ie; vacancy rates (leads to knowledge about the area or housing issues the tenants had), water usage (potential plumbing issues), appliances held in the units (leads to how old the electrical is in the home) CHECK IF THE OUTLETS ARE GROUNDED !!!

Robert Fisher · Answer

@Nathan G. Ha.  Luckily he has a selling agent we can check behind him on.  At least on things she actually knows about.

Robert Fisher · Answer

@Duane Hundley Yeah it'll be a 25-30% down payment with a commercial loan unfortunately.  I'm wondering if that's why he abandoned the 5th unit on the main property to make it storage?  I'm working with the same bank the company I used to work for did that built the house with the septic 3-4 lots away, so hoping that isn't an issue.  Granted that was in a nice neighborhood (Terrace View).

@Doug Shapiro I'm hoping it's just a tired landlord ready to retire.  From the documents I have seen, it looks like he bought the place nearly 30 years ago.  But yeah, asking why is a good question.  I asked that to FSBOs when we were looking for our personal home.

Seeing my 1st rental today. Any questions I should assk?

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