Shortsale Fourplex and Due Diligence Hinderances

[Sean H.]

Hi Guys,

Long time listener of the podcasts and have been reading more and more of the forum lately. I have a question for you guys that I haven’t been able to find in the forum search.

I have a fourplex property I am under contract with. It is a shortsale, and the seller has more than $130,000 in default payments on an $800,000 mortgage taken out in 2006. The property will be delivered vacant, as the current tenants are not paying rent.

My issue is that it appears the owners have not been receiving rents, so when I am going through my due diligence checklist there are many items that they will not have. Rent roll will be non-existent or incomplete, operating expenses will not be accurate, I doubt we can even get tax returns or copies of insurance policies (if they exist). So essentially I won't have a verifiable source to get real property data on rents and expenses.

So my question is when you’re dealing with a shortsale multifamily that has just been left to die by the current owner, how do you go about getting the typical due diligence items? Is the only way to be successful is to get the property at a price so low that you can be off by 10-20% with your estimating numbers? My plan is to use market rents and discount it by about 10% to determine my market rent and GOI.  

Anyone with experience in this or with any advice would be greatly appreciated!

Thank you! 

[Simon Campbell]

That is an easily remedied solution. Figure out market rents based on the condition you will rent out the property (AS IS or repaired). Now remove a vacancy rate. Generally it is good to estimate 10%. (BTW is rental demand strong because this will affect your ability to fill the units after closing.)

Then apply the 50% rule. This rule states that an average investment property will require 50% of the gross income (that is before vacancy) to cover expenses including taxes, insurance, maintenance, owner utilities and capital reserves. It does not include mortgage payments or property managers.

If the property can cash flow with at least $100 per unit/per month profit, then it should be a viable opportunity - even without actual income/expenses.