When MLS Financials Make No Sense

Question

I'm a SFH landlord interested in getting into a fourplex. Brandon says spend every day analyzing deals. So I do. And I am. But how do you analyze when the information multifamily MLS listings provide often makes no sense? One fourplex property owner I came across today, for example, listed his insurance at $2400/yr. Isn't that a bit much?  And he didn't write down the complete rent roll. How can I work with that?

I can't go ahead and ask for schedule E before even seeing a place. But how do I get through deal analysis practice if MLS listings are incomplete or have exaggerated profits?

Also, how do I determine what my bottom line offer should be? Is it the going cap rate in my area? Is it what I can afford to borrow? Are closing costs generally 3 or 5 percent? Will there be points? It seems like I'm guessing pretty wildly in many of these practice deals, so I can never trust the output the spreadsheet provides.

Most multifamily listings don't show interior of apartments. How am I supposed to practice estimating rehab costs if I can't take an initial internet pass at the inside? Do I just look at actual properties with my broker every day? He will slay me!

And lastly, AUGH!

Thanks very much, all.

Amy

Sarah D. · Answer

@Amy Zemser  I just went through something very similar in purchasing our first 4plex.  Here are my thoughts:

-Insurance: just get or go with a rough estimate.  Your broker or insurance agent can advise.

-Rent roll: know what market rents are for units in each area based on condition.  Use rentometer, craigslist, etc

-Condition: If there aren't interior pictures, google the property address to see if you can come up with recent rental postings of the property.  Look at the outside using google street view.  In my experience a lack of interior pictures means a lack of interior renovations.

-Rehab costs: Think about your target renter for each area and just take a guess at what rehab you will want to do.  For high value areas you may want to take down walls and gut bathrooms, whereas for mid value areas you may want to just replace flooring and buff the kitchen

-Closing costs: just ask a lender you are considering using.  See if they have any closing cost credits available.

-Offer price: Think about what value you want to get out of the property (cash flow per door, COC return, IRR, etc).  Then figure out what offer price will get you there.  Subtract your closing costs and rehab costs and you will have a rough offer price.  Run it by your broker if you need another pair of eyes.

After you've looked at enough properties you will just get a feel for numbers in your area.  I made a spreadsheet that spit out the numbers I specifically needed to decide whether to look into a property further; that spreadsheet probably went through 10 versions before I got it working the way I wanted.  Don't stress your offer price too much; even if it is accepted you will have a due diligence period to confirm the assumptions you used when making the offer.

Best of luck to you!

-Sarah

Cree Quaker · Answer

Hi Amy,

As a broker who spends a good amount of time valuing properties in Kingston, I can tell you it is frustrating.

You'll also find the GLA is also missing on many multi-family properties, or an all-round lack of info.

Best thing to do is to hook up with a competent buyer's agent who can help you garner the information you need.

Its a listing agent's job to sell the property and its the buyer's agent's job to get YOU the best deal possible and all the information you need to value a property.

I hope that helps some...

Cree

William E. · Answer

check out this link.

there is a lot of conflicting information out there.

"do your due diligence"

"don't rush in"

"just do it"

"don't wait"

"get educated first"

it is difficult to know what to rely on. search out apartments and small multi family buildings and talk to the realtor that is showing them. ask them how they pulled their comps for the seller and if they can send you a copy. maybe this could give you some insight.

find the owner of a similar property and call them up. ask them some information. many people truly like to share their knowledge....not all people, but in my experience a majority do.

i know i didn't answer your question. because truly i was looking at a 5 unit for the last fewweeks trying to figure out comps and i decided to pass on it, because i didn't get enough information to make an informed decision.  i think it is better to not get a potential great deal, than it is to lose out because of a bad one.

thoughts?

B

Russell Brazil · Answer

4 unit properties do not trade based on cap rates...so throw that out. Without knowing the cost or location of the property its hard to say if that insurance is high, low, or on point. Also the owners insurance needs could very well be different from yours. You might only need say $300k in liability and have an umbrella policy after that...for all you know he has millions of liability coverage on the property.

But it seems like you have enough questions that you should seek out the guidance of a real estate agent.

Johnathan Alesso · Answer

Hi Amy,

I might recommend viewing this in a positive light.  If information is missing, there's a good chance that other investors will skip over it.  These listings may also be great contenders to rehab projects if the seller is concealing unsavory information.  I've heard of one investor who focuses on listings with only one pictures as he assumes there must be something wrong with the house.  If you're willing to visit the property, estimate the rehab costs, and fix it up, you may just stumble upon a hidden treasure.

In fact, this could be seen as the e-version of driving for dollars!

Let me know how it works out.

Johnathan

John Leavelle · Answer

Hello @Amy Zemser

Take a deep breath and relax.  Don't let your head explode with information overload.  Let me address some of your concerns:

1.  With small Multi-Family properties (2 - 4 units) you need to use comps like you do SFR.  You want to compare similar buildings structures, age, square footage, finishes, and rent rates to the one you are analyzing.  Also, what was listing versus sale price.

2.  You do not need to visit properties everyday.  Only when you find a potential deal would I physically go by or tour the property.  As previously mentioned by others you can request additional or missing information from the listing agent.  You will never have totally accurate information until you have the property under contract and go through your due diligence.

3.  Yes you will need to analyze possibly 100 properties to find 10 that meet your criteria for submitting an offer.  The key is what are your criteria?  What are you looking for?  Properties under $300,00? Under $100,000?  Or maybe a per unit price like $50,000 or $75,000.  Do you have a minimum Cash Flow per unit requirement?  Are you wanting to purchase distressed properties at a discount or turnkey ready rent ones.   Just like buying a car you need to know what you want going in.

My recommendation is to clearly define what your criteria is for purchasing Multi's.  Find a broker/agent experienced in small multi-family properties.  Work with your agent to find and help analyze good deals.  When you find what you believe is a good deal then post the data here on BP to get extra eyes on it.  Then get it under contract and start the real process.

Hope that helps.  Good luck.  :)

John

Jeff B. · Answer

MLS is very misleading and if you're interested in a property, call the listing agent and tell'm you're interested in making an offer BUT - - you need

• the GSI for the property and
• the NOI for the same year

GSI - NOI = the expenses

Now you have a 'rough set of numbers' to guesstimate if there's any reason to continue.

Timothy Cole · Answer

Hi Amy. I see you're in Kingston, I'm in the Albany area. I suffered the same analysis paralysis when buying my first investment property. I analyzed nearly 100, looked at 20 or 30 and made several offers (including a few that were accepted). After 8 months I finally closed on a very nice Fourplex and now a year and a half later I'm under contract with another 4 Unit for a very attractive price. Here are a few things I learned in my experience thus far:1. Weed through the bulk of your listings with a simple RTV metric rather than calculating Caps and Cash Flow for each one. Typically each property in a given area has similar taxes and vacancy costs so most things are equal.2. Use your agent, don't feel bad about making then work for their commission.3. Remember that you have contingencies and so no offer you make is truly "final".4. It's said that you can never know too much. When it comes to investing, this is a fallacy. By the time you know everything there is to know about a deal, someone else will already have taken it. At the end of the day you have to accept some risk if you're going to make money.5. Use as little out of pocket as possible, take advantage of OPM including liberal use of seller's concessions.6. Good luck!

Amy Zemser · Answer

Thank you all.

1 - I thought that "comps" don't apply to multifamily buildings.

2 - If a novice should practice daily deal analysis, then by everyone's advice here I guess I have to visit a multifamily unit every day? And get more accurate information from the broker? I was under the impression that you run through practice deals on a spreadsheet to get a sense of how much you should offer (as a practice vehicle).

3 - According to Brandon, you make a lot of offers. You do a quick analysis via the internet, figure out your bottom line, and throw out a (often low) number. Most sellers won't bite. But Brandon says, throw it out there anyway. You never know.

I just don't know how one is to make any sort of offer without acquiring accurate information. But acquiring accurate information seems to involve much more than just running a listing through your excel machine.

Jim C. · Answer

Don't trust anyone's numbers, other than your own. If you are familiar with the area (and you should be where you are investing, you would know the rents and vacancy %'s). You can call Insurance agents to get a general number for insurance. After speaking to a Mortgage officer you will have an idea as to points / % down, etc. Only then will you have the information you need. Then you can offer contingent upon performance / inspections, etc.

When MLS Financials Make No Sense

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