No rent financials on duplex - should I be concerned?

Question

Hello BPers! Newbie here in contract for my first rental property (duplex with both sides occupied). Thanks to this great community for getting me here!

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Couple questions regarding contract phase:

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1. Seller does not have much info on rent financials. Should I be concerned? What can I do to avoid issues if I close on this property?

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2. I am going to do delayed financing - if there are not a lot of comps for similar duplexes in the area, how will the lender’s appraiser determine value ?

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3. We are going to submit remedy requests based on the inspection. We indicated we will buy as-is except for major repairs over $500 as discovered by the inspection. Do I need to put together valuations of these major repairs?

Thanks for your thoughts!

Nathan Gesner · Answer

It's not unusual for a mom-and-pop investor to keep poor records. Many people buy or inherit investment property and as long as the rent is higher than the mortgage, they don't think much about it. However, you should get as much information a you can.

You don't have to worry about "how" the appraiser will determine value. It really doesn't matter if they use 50 comparable duplexes or black magic. What they say is what the bank will use so you're stuck with it regardless of the "how" question.

Talk to your REALTOR about how to handle repairs. Generally, you will want a professional estimate, not just a guess based on the home inspector that may/may not specialize in that area.

Tyler Gibson · Answer

@Ashley Cao Nathan is right many mom and pop landlords do not keep detailed records. As long as they can provide you a lease and deposits or signed documents attesting there are no deposits then you should be fine. I imagine you want this property because rents are before market right now so records of what they used to charge for rent is likely irrelevant. Many times when asking for price reduction based on things found in the inspection the sender will ask for a copy of the quote and even if they don't ask for it supplying it to them helps to justify the reason you are asking for the reduction. As for the appraisal again Nathan is right the how doesn't matter because your will be stuck with whatever the appraiser comes up with. I always over estimate my repairs and underestimate the ARV when looking at a deal so that I reduce my risk if I'm wrong on one or both of the numbers.

Caleb Heimsoth · Answer

@Ashley Cao I’ve been in this situation before.  It’ll go one of the ways.  The tenants will keep paying and nothing changes or you’ll evict them.  So be prepared to evict.

Anthony Wick · Answer

@Ashley Cao . I would just do my own due diligence. Ask for estoppel agreements for both tenants and copies of leases. If no lease, then they are MTM. Write in the purchase agreement that damage deposits will be transferred at close. If no damage deposits on record, I would request damage deposits in the amount of 1 months rent from the seller. Or, you can require damage deposits from current tenants when they sign a new lease with you (only IF it is documented there have never been damage deposits paid). In the purchase agreement make sure you write prorated rents to be paid at close (whether or not the tenant has actually paid that months rent). Also, verify with the utility company who is paying for all utilities, how much they are, and what the current balance is. Also verify that if the tenants are paying, and they are in arrears, who is ultimately responsible for said backpay of utilities.

And, better yet, if the tenants are on MTM and their rents are way below market value, tell the seller you want the entire building delivered to you empty and broom clean at closing. And do a walk through to verify on the morning of close.

And after all this, adjust your offer accordingly to how much more out of pocket you will be paying. Then, after close, do a thorough walk though inspection and checklist with the tenants to assess current damages. You cannot use their damage deposits when they move out if there is no documentation on what damage they actually caused. And make sure you get them under your lease asap, even if that means they must apply (reapply) like any other potential tenant.

Ashley Cao · Answer

@Michael Ablan @Anthony Wick @Nathan G.

Thank you everyone for your responses!

Since I am looking to BRRR, I've been using primarily comps to put together a conservative ARV. I've also heard some appraisers take into consideration the NOI and Cap Rate for ARV similar to larger multi-families.

Is this common, or should I base the calculations on the comps?

Has anyone had experience challenging an appraiser's valuation?

Thanks everyone!

Account Closed · Answer

If it’s just a duplex then it’s not like your taking over a 50 unit apartment complex;) You should have an idea of what each unit should rent for. Get the items mentioned by @Anthony Wick and your off to the races.

Michael Ablan · Answer

@Ashley Cao -  I wouldn't be overly concerned, but I would definitely use it as leverage to negotiate a better price.  However, if you're in a hot market then you don't really get that luxury.  You really need to know a few things

1.)  What big expenses am I looking at in the next year..2 years...5 years.

2.) What's the average rent for a unit in similar condition?  Whats the rent for a unit fully renovated?  What will it cost me to do that renovation?

3.)  What are the comps for a similar building in this area?

4.) What's my positive cash flow per door?  What happens if I have to evict one tenant and go without 1x of the rents for 1-6 months?  What happens if both units aren't paying?  Can I afford the mortgage without either of the rents?

Ultimately you should do at least the following

- Get your own quotes on insurance

- Get copies of utility bills.  They have them.  Don't let them tell you they dont

- Ask for proof of deposit of rents.  Something like a bank statement with all info blacked out other than the rent payment hitting the account and the date.

-Make sure you have it writing that deposits are to be transferred at the closing table.

I've purchase many properties without ANY information.  I've been burned a little for different reasons on every single one. You need to make sure you're being compensated in some way for taking on all of these unknown risks.  Compensation is typically made in regards to purchase price.  I'm not taking on this risks unless I'm getting a DEAL

Brent Paul · Answer

I don't see too big of issues here unless something big is found during inspection.  It's pretty common for smaller operations not to have good records.

No rent financials on duplex - should I be concerned?

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