An owner I clean for just offered to sell me his house

What happens to your cleaning contract on the other two houses if you buy this one and he sells the others to someone else? You'd be a competitor with a key to their building. Some buyer walks in, sees the operator across town is also their vendor, and cancels. That's a third of your route maybe.

Have you priced what your service business looks like if that happens?

Your add back on the cleaning margin is right in direction and I think you're being generous with it. 40% margin on a contract you priced as an outside vendor includes your overhead recovery, sales cost, and the risk premium of a client who could fire you. As an owner you keep the crew cost and the truck cost and you lose the overhead recovery only if you actually shrink overhead, which you won't.

I'd add back closer to 5 or 6k, not 8.6k. That's a 9.6 cap, not 10.2. Doesn't change your decision but it changes what you offer.

The management hours question has a cheap answer nobody's mentioned. Ask him for his phone records. Not the content, just the call volume to and from the building's residents over a three month stretch. If he's fielding six calls a day that's a job. If it's four calls a week, his four hours might be honest.

Also ask your crew lead to just log what he sees for a month. He's already there.

Sorry if this is basic, but why is repairs only 11,800 on a 16 room building where 15 different people use shared kitchens and baths? That seems low to me relative to everything else on the sheet. Is he deferring, or is your crew catching things before they become repairs?

quill's question is the one I'd chase. A 71 year old operator who wants out has usually stopped spending on the building two or three years before he stops talking about selling. Pull the last three years of repairs, not one, and look at whether the line is going down. Down is bad.

Separately, check whether the license is tied to him personally or to the property, because in a lot of jurisdictions the operating license is issued to a named operator and does not transfer with a deed. That varies by state and often by city. If it doesn't transfer, you're applying fresh, and a fresh application can trigger a full current code review on a building that's been grandfathered for decades. That's the number that could dwarf everything you're arguing about here.

parcel just described my nightmare. thatch, do you know if that building is legal by right or nonconforming?

I follow most of this but I'm lost on one thing. If he carries the note, is he still on the hook for anything if the license doesn't transfer to thatch? Or does thatch own a 16 room house he can't legally rent by the room and a payment he still owes?

Genuinely asking, I don't know how the risk sits.

vellum, it sits on the buyer unless the contract says otherwise. Which is exactly why you make license transfer or issuance a condition of closing, in writing, with a walk right. thatch, that's a one paragraph fix and it's the cheapest insurance in the deal.

On the meals and services side, does this house provide anything beyond cleaning? Because if he provides any service at all beyond the room, the licensing category can shift and so can the insurance.

The number I'd want that isn't in your post is the resident tenure distribution. Not average, distribution. If eight of fifteen have been there over four years, your turn cost and your vacancy risk are one thing. If eleven of fifteen arrived in the last fourteen months, you have a churn machine and the 90% occupancy is being bought with constant leasing work that he's also doing for free in that four hours a week he claims.

You can get this. You clean the rooms. You know who's been there.

orchard's tenure point plus meridian's call log basically constructs the management number without needing the shadow period. That's maybe six weeks of observation instead of six months, and six weeks he might actually agree to.

thatch, if you can get to a defensible management figure in six weeks, do you still want the shadow? The shadow has a cost you didn't price, which is that for six months you're doing an unpaid apprenticeship in a job you might decide you hate.

That last line is the thing. thatch, you've been in this building five years doing work you're good at and you've never done the part that would become your actual day. Cleaning 16 rooms and housing 16 people are different businesses that happen to share an address.

kestrel, to answer you, thatch hasn't said and I suspect he doesn't know yet. That's fine. It's a records request at the building department in most places, and the answer changes the price by more than any of the expense arguments in this thread.

Reading this whole thread as someone brand new, the thing I keep noticing is that every single reply found a different number that isn't on the P and L. Is that normal or is this asset class especially bad for that?

rigging, from what I've read here it's worse than average for this type, because the operator's own labor and the licensing status are both invisible on a P and L and both are large.

On the small multifamily side I've made a version of thatch's mistake, which is buying the building I already worked on and assuming familiarity was the same as knowledge. I did the maintenance on a six unit for two years before I bought it. I knew every valve. I did not know that the prior owner was carrying two residents at half rent because of an informal arrangement he never wrote down, and unwinding that took nine months and one very unpleasant conversation.

thatch, ask him flat out: is anyone in this building paying something other than what's on the rent roll, for any reason. Ask twice, a month apart.

cairn's point about informal arrangements is the one I'd put money on being live here. A 71 year old owner operator who's been in a building fifteen years has arrangements. Someone does the yard for rent credit. Someone's brother stays occasionally. None of it is on the sheet and all of it becomes yours.

thatch, does he have written agreements with every resident, and are they current? In some states the type of tenancy and the notice you owe depends on what's written and on how long someone has occupied, and that's a local attorney question before you set a price, not after.

Nobody has said the obvious thing so I will. He asked you because he trusts you and because you're standing right there. That's a fine reason to be asked and a bad reason to buy. The 420k number came from him, not from a market, and you have no comp because these things trade rarely and in about a dozen states you can't even see what they sold for.

What did the other two houses in his portfolio cost him and when?

On screening, if you take this over you inherit fifteen tenancies you didn't screen. Do you have his applications and his criteria on file, or does he pick people by conversation? I ask because if there's no documented process, you're starting your own from zero while managing people who were selected by a process that doesn't exist.

Circling back to my earlier question because thatch hasn't answered it and I think it's the biggest one. If buying this house costs you the cleaning contracts on the other two, that's real revenue out of a business that already works. What's the annual profit on your service business today, and what fraction of it is his three buildings?

So thatch is trying to buy an asset where the seller's profit is partly made of thatch's own invoice, so the price is partly built on his own cost. Have I got that right? Is that a common situation or is it just weird here?

juniper, it's common wherever a vendor buys their client. Restaurant suppliers buy restaurants, contractors buy the buildings they maintain. It's not weird, it just means the reported NOI needs restating before it means anything, which is what thatch already did and what I argued he did too generously.

thatch, what does the boring version of this look like? He wants out of two. Could you take a management contract on both instead of buying either, at a real fee, and see what the work is while getting paid? Then buy in two years if you still want it, or don't.

verity's option is the one I'd underwrite first because it has the best information-to-cost ratio in the thread.

On the price, restate it properly. Start at his 34,400. Add back the cleaning margin at thicket's 5,500, that's 39,900. Now subtract a real management load. If the actual number lands at 12 hours a week including leasing, licensing renewal, and after hours, that's roughly 22k loaded. NOI 17,900. At an 8.2 cap that's 218k, not 420k.

If management is genuinely 4 hours a week and mostly phone, call it 8k, NOI 31,900, and 420k is a 7.6 cap on restated numbers.

So the entire spread between 218k and 420k is one unknown, and everything else in this thread is decoration on top of it. That is why the six week observation windlass described is worth more than any further argument about repairs. Go get the number.