The lure of multifamily deals got me hooked early. I love underwriting deals, making the purchase, and building equity. But, in the rush to purchase, it is easy to miss important details that can be a huge headache or even tank the deal. Let’s look at a few of them today.
- Financing. It’s easy to delude yourself thinking the rate you get is lower than what you actually find. This is why you need a financing contingency, but it can tank your deal if your actual rate is higher than the one you predicted. Talk to your bank early and often and try to get a rate locked in.
- Insurance. Sellers have a bad habit of getting the lowest insurance rate, usually a high-deductible insurance product that is for the actual cash value. This valuation is usually much lower than it would cost to rebuild, which you will need to do if the place is lost to fire or other cause. If you don’t get a quote and pay for replacement cost value, you’ll be looking at a big expensive decision when rebuilding.
- Security Deposits. It’s baffling to me that many purchase and sale agreements don’t specify what to do with the tenants’ deposits. It’s conventional wisdom that these should go to the buyer, but don’t make this assumption. Put it in the contract.
- Rent Payments. Another frequent miss in the contract is how rents which are due but not paid are handled. It’s easy for the seller to ‘forget’ to be aggressive on rent collection because they don’t really care, as that money goes to the buyer anyway. Decide how the rent is prorated so buyer and seller get their fair share. Decide what to do when the rent is not yet paid. Who is responsible to collect it? What part of it goes to each party? I recommend that the buyer is responsible to collect, but keeps 100% of rent unpaid by the time of closing. Put it in writing.
- Maintenance. Deferred maintenance is a huge dollar item and it’s easy to forget to do the proper inspections to find this out. An important one is the sewer. I’ve had a few times where I’ve failed to get the sewer scoped and have a $10,000 landmine of repairs to a main sewer line that collapsed or had a tree root grow into it. Pay for the scope and put it in the purchase and sale agreement so you have the right to do the scope (it sometimes has to have a wall opened or a toilet removed).
- Leases. Go over all the leases. Make sure there isn’t any non-standard language in there that could cause you problems with tenants in the future. These issues might be very long leases or additional payments which are due. Make a spreadsheet of the leases and write down anything unusual before buying
There’s plenty more things to watch for, but these are the ones that are common and have high dollar amounts attached to them. Let me know if you have others.
