All Forum Posts by: Tony Karns

Great book. I have listen to the audio at least 3 times now. Please see my updated post about my meeting with the owner.

Originally posted by @Jaysen Medhurst:

@Tony Karns, to answer your questions directly:

1. Including late fees as part of income isn't unusual. I've seen it on larger properties, though. You'd expect 3-5% of tenants in a 200-unit complex will be late. In a 9-unit it's a red flag that the asset isn't well managed (e.g. bad tenant screening).
2. Another red flag about management. This could be a reflection of late rent. I.e. a tenant pays 2 months rent in one month, so it all gets booked against that month's income.
3. This is fine. It's essentially a pass-through expense then. If he's showing it as an expense, he should show the income, too.
4. Poor management/bookkeeping.
5. Could be a lot of on-going "bandaids" or there was a big HVAC bill and he's paying off a bit at a time, maybe?
6. That might work, but if this is usually included in rent in your area, you could put yourself at a competitive disadvantage.
7. Poor management/bookkeeping. Seeing a trend here?
8. I don't know what this is.

I disagree with @Bjorn Ahlblad, I'd definitely sit down with the owner. Worst thing that happens is you get some experience negotiating. That being said, I'd do a very rigorous pro forma exercise beforehand and determine what YOUR price is. Bring your analysis with you. If he pushes back, you can kindly walk him through the reality of the numbers.

Don't get anchored to what he's asking, that's irrelevant. Got time to read a book? "Never Split the Difference" by Chris Voss is an outstanding resource.

Originally posted by @Tony Karns:

Recently a realtor contacted me about this 9 Unit property. Once I received financial a lot of red flag went up. I reached out to the agent and he was able to setup a meeting between myself and the owner of the property. My experience so far has been with duplexes, so I want to get it right. Here are some of the numbers

Asking price: 900K

# units:9
Rent Monthly:5769 = 68886
Operating Expense: 35899
Operating Expense: 17345
NOI: 43148
Net Income: 25805
Calculated Cap Rate:5%

Red flags ( my view point open to different thoughts)

1-owner is calculating late fees as income in the rolling 12

Question: Is calculating late fees as income when marketing you property normal practice?

Post meeting Update:

Owner confirmed that is the way he has always factored in his late fee. I think I will write up my numbers without adding that extra as income.

2- rental income varies significantly on a month to month basis. Some times the rent income is 2k above other months 1k below the expected rental income.

Question: This is a major topic that I will explore with the owner. The financial give no explanation.

Post meeting Update:
Owner was unable to explain the wide swings in rental income during a 3-6 month period. Not happy about that

3-Owner appears to be calculating electrical payment as income. As far as I know the property appears to have a single meeting and the owner is just charging for the electrical bill that he receives. Not sure how this is considered income worth  adding to your rent roll when all you are doing is billing back the tenants for what you are charged.

Question: Can the money received from billing your tenants for an electric bill your receive monthly be counted as income? Can the Electricity be billed via RUBS to tenants in the same way water is?

Post meeting Update:

Owner corrected my initial assumption that the property has a single meeting. Each unit is individually metered  from a single main line. I suppose sing the main power is in his name then they would have to pay him for him to in turn pay the electrical bill. Not sure this is the best way, but I get it. 

That being said I did not understand why he is paying 54/month for someone to go to the property and read the  meters.

4-Insurance coverage on the property in the rolling 12 is paid monthly for 3 months, then is missed for a few, then a large payment mid year and none for the remainder.

Post meeting Update:
Owner 's explanation was that he pays a large portion of his insurance up front since he has multiple properties and gets a bit of a discount

5-Recurring charges monthly for paint, HVAC, and building material and supplies
Post meeting Update:
Owner addressed it as routine system and property maintenance, That being said it appears to be band-aids not  issues that continue to exist

6-Owner pays water, and gas.Also there appear to be a charge for meter reading monthly ( my view is that I would try and get the tenant to pay this stuff on their own or ensure i have a bill back process.)
Post meeting Update:
Owner Confirmed that he does pay the water and gas bill Monthly and does not charge the tenant for these items

7-Owner appears to also absorbing tenants credit check fee

8-Unallocated Prepay is being counted as income ( not sure what the owner is referring to)
Post meeting Update:
Owner was unable to clearly explain this issue had to call his property  manger. Explanation was the was if a tenant paint the rent early Only issue I have with this is that for 5 of the rolling 12 the value is negative

With the owner willing to sit down and talk with me, I think that I have a chance to show him why i can not buy at his asking price and maybe get him to consider an offer significantly below what his asking price currently is because I am estimating about 200K in remodel for the property in order to raise rents to comps in the vicinity. I am unable to post the proforma info here, but everything above is from Profits and Loss statement sheet. Please share you thoughts. 

I hear and understand you point. I agree that my time is worth money and that I should not waste it when there is nothing to gain. That being said if real estate is about relationships and networking then this is a great opportunity. If all I get out of this is the chance to help a fellow investor see what he might be able to do differently and maintain his propoerty then that is also a win in my book.

Originally posted by @Bjorn Ahlblad:

@Tony Karns not having seen the property but judging by the description it is likely a waste of time to even sit down with the owner. You would have to get the price down a crazy amount-hundreds of thousands! Let him/her keep it and go find a better deal. That's my 2 cents. All the best!

@Tony Karns See what his number is. Try to get a best guess of what the current appraisal would be and the ARV .. without these, you may be throwing darts in the dark. Get a number (amortization) that works which will keep you with the ability to renovate successfully, while also providing a payment that will be assured passive income in his mailbox every month.

If he plans on retiring in 20. Offer a 20 year amortization, even a balloon if you know what would be a comfortable timeframe to pull your investment back out and pay him .. stay worst case in your own mind as far as time, since he's open.

The years can be adjusted if he is uncomfortable with any initial proposal. Key is to give him what HE wants and what you WANT. Win. Win.

When you make an offer, don't provide one for a yes or no answer, provide multiple scenarios as people in that scenario may choose instead of saying yes or no, gives a better opprtunity for a proposal to be accepted.