Consider this: You are looking for a multifamily apartment building to purchase. You’ve put in a lot of time running the numbers on every listing. Now, you have finally found one that looks like it works. But you don’t know how much it will cost to rehab the units. By rehab I mean do the repairs plus any updating. That number could be small (probably not) to astronomical. You have to get into those units.
You get ahold of the seller and they let you in, but only to two vacant units. They don’t want to disturb the other tenants. Sure, they will let you see them all, but only after it’s under contract. You start to feel the frustration – how can you possibly make an offer based on the appearance of 2 units? Yet, you have to make an offer in order to see the rest. It’s a chicken-or-egg scenario that sellers often set up.
The Owner’s Perspective
Let’s be clear, as a landlord, you don’t want to have a bunch of lookiloos traipsing through your building on multiple occasions, only to walk away. Tenants can get uneasy, wondering what all this is about. There is a lot of uncertainty with a new owner, and it’s understandable to resist that change. Landlords like stability. Multiple random-seeming unit inspections causes instability. Going through every single unit also takes time. Multiple that by every interested buyer, and the cost shoots up.
How to Make Your Offer
When writing up your offer, make sure you have an inspection contingency that allows you to back out for any reason whatsoever. You haven’t even seen the whole place. Perhaps there is a floor plan abnormality that kills the rents – like a shared bathroom. That would be a huge problem, so you need to make the seller aware that your offer price is based only on what you have seen. You shouldn’t try to predict what the other units are. You should expect them to be pristine. Avoid taking the seller’s word or pictures that the place is in a certain shape. You need to see it for yourself (and your building inspector). When you make the seller aware that your offer is based on an expectation of rentable units, then you set both of you up for a successful negotiation after the full inspection. If the seller doesn’t like this, they can reject your offer without any harm done.
Your initial offer should be based upon rentable units as-is and not rehabbed. Rehabbed units will give you more income and the cost for this should come out of the buyer’s end. Repairs should come out of the seller’s end.
There are other contingencies you should have as well, and this post shouldn’t be construed to be all you need to make an offer. It just should give you an idea for how to frame that initial offer for those places that the seller won’t let you enter until after the offer. Remember to set expectations well before you sign that first offer.