What to do when a rooming house owner offers a seller carry and the real management cost is unknown

What happens to a cleaning contract on other properties if the operator sells one house to the crew servicing it and the others to someone else? The buyer becomes a competitor with a key to the building. A new owner walks in, sees the operator across town is also their vendor, and cancels. That can be a third of a service route gone in one move. Worth pricing out what the service business looks like if that happens before signing anything.

An add back on a cleaning contract's margin is often generous in direction but overstated in size. A 40 percent margin priced as an outside vendor includes overhead recovery, sales cost, and the risk premium of a client who could fire the vendor at any time. An owner who takes the contract in house keeps the crew cost and the truck cost and only loses the overhead recovery if they actually shrink overhead, which most don't. A more defensible add back lands closer to 5 or 6k than 8.6k. That's a 9.6 cap, not 10.2. It doesn't change the direction of the decision, but it changes what gets offered.

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.

Worth asking directly: why is repairs only 11,800 on a 16 room building where 15 different people use shared kitchens and baths? That looks low relative to everything else on the sheet. Either the owner is deferring maintenance, or whoever is on site four days a week is catching things before they become repairs, and that difference matters a great deal to the number going forward.

Quill's question is the one worth chasing. 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 the operator 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, a fresh application is required, 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 else being argued here.

That's the scenario worth worrying about in this kind of transition. Thatch, worth confirming whether that building is legal by right or nonconforming before the terms of a seller carry get set.

Most of this holds together, and one point needs a direct answer before anything else. If he carries the note and the license does not transfer to thatch, is the seller still on the hook for anything? Or does thatch end up owning a 16 room house he cannot legally rent by the room, with a payment he still owes? How that risk sits is the question the room should settle first.

Vellum, it sits on the buyer unless the contract says otherwise. Which is exactly why you make license transfer or issuance a written condition of closing with a walk right. Thatch, that is a one paragraph fix and it is 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 combined with meridian's call log constructs the management number without needing the shadow period. That is roughly six weeks of observation instead of six months, and six weeks is a term the seller might actually agree to. Thatch, if a defensible management figure can be reached in six weeks, is the shadow still worth wanting? It carries a cost that has not been priced, which is six months of unpaid apprenticeship in a job you may 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 has not said and probably does not know yet. That is fine. It is a records request at the building department in most places, and the answer moves 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, on this building type it runs worse than average, because the operator's own labor and the licensing status are both invisible on a P and L and both are large.

There is a version of thatch's mistake that shows up all the time in small multifamily, which is buying the building you already work on and assuming familiarity is the same as knowledge. Picture someone who has done the maintenance on a six unit for two years and knows every valve, then buys it and discovers the prior owner was carrying two residents at half rent under an informal arrangement he never wrote down. Unwinding that takes nine months and one very unpleasant conversation. Thatch, ask him flat out: is anyone in this building paying something other than what is 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 here it is. He asked you because he trusts you and because you are standing right there. That is a fine reason to be asked and a bad reason to buy. The 420k number came from him rather than from a market, and you have no comp because these things trade rarely and in about a dozen states you cannot 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 the earlier question because thatch has not answered it, and it is the biggest one on the table. If buying this house costs you the cleaning contracts on the other two, that is real revenue out of a business that already works. What is the annual profit on the service business today, and what fraction of it comes from 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 is common wherever a vendor buys their client. Restaurant suppliers buy restaurants, and contractors buy the buildings they maintain. There is nothing unusual about it. What it does mean is that 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 do not.

Verity's option is the one to 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, which brings it to 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 is roughly 22k loaded. NOI 17,900. At an 8.2 cap that is 218k rather than 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.