Took a 60k discount on a 4-unit, gave back 71k finding out why

The line that stops me is 4,150 stated versus 3,050 collected. That's a 26 percent gap. On a stabilized basis that alone is roughly 13k a year of NOI, which at any cap rate you like is most of your 58k discount before a single repair. The repairs are the story you're telling but the rent roll was the whole loss.

What's an estoppel certificate? I've now seen it three times this week and I've been nodding along.

@vellum it's a form each tenant signs confirming what they actually pay, when the lease ends, what deposit they gave, and whether the landlord promised them anything. It exists precisely so the buyer hears it from the tenant instead of the seller.

I'd have skipped the estoppels too, for the same reason. Not wanting to be difficult with a friendly seller is a real force and nobody writes about it. How did you actually ask for the bank statements on the next one? That's the sentence I want.

The part that's underweighted here is the HELOC. You covered a 12k operating shortfall with borrowed money at whatever that line costs, on a building that was already not producing. That's how a bad month becomes a bad year. Cash reserve at close, sized to the worst rent roll you can imagine, would have changed the shape of this even if you'd still bought at 412.

4,000 for a shared alley agreement is the detail I'd have missed, and it's the one that would have been in the title work if anyone read it. Recorded agreements like that are searchable, and what gets recorded and how easy it is to find varies a lot by state and even by county.

I want to push back on the framing slightly. You didn't overpay because of the rent roll. You overpaid because you accepted 470k as market from the seller and then anchored your discount to it. Where did 470 come from? If comparable four units were actually trading at 425 to 440 in that condition, your 412 was market and there never was a 58k discount to lose.

Sourcing off-market gets you the only seat at the table. It does not tell you what the seat is worth. Those are two separate pieces of work and the second one is the one people skip.

@sextant is right about the 470 and I'd add the deposits. Did you get the security deposits transferred at close, and were they accounted for? On tired self-managed buildings they're often long since spent, and how a buyer has to handle deposit liability is set by state law, so that's a question for a local attorney before closing rather than after. I've seen a buyer inherit four deposits on paper and zero in the account.

Eleven weeks for the eviction is the number I'd hold onto. That's not a bad outcome in a lot of places and it's a very bad one in others, and it's knowable before you buy. Timeline varies by state and by court, and you should know your county's before you underwrite any occupied building.

Also, estoppels only work if the lease and the estoppel disagree in a way you notice. Read them side by side.

The pattern I recognize here is the friendliness, and I've seen it across five years running a service business. Sellers who are pleasant to deal with get less diligence than sellers who are difficult. It's completely backwards and I do it too.

Genuine question, could a decent property manager have caught the collection gap before close? Or is that only visible in the bank statements?

@plumb a manager walking the units would probably have smelled the non-paying tenant, because those units look different. The 600 versus 950 one, no. That's invisible without the deposits.

Cairn, you said it'll be fine in five years. Then it wasn't a loss, it was a very expensive tuition payment on a building you still own. I'd rather be you than the person who paid 470.

The thing I take from this is that I don't want to buy anything with people already in it until I know how to read what they're paying. That's not a small skill.

9,400 sewer lateral and a 7,500 roof section within two months of close on a 22 year owner-managed building isn't bad luck. That's the deferred maintenance backlog arriving on schedule. I now assume any building held that long by a self-managing owner over 65 has 15 to 25k of it waiting, and I put that in the offer instead of in my feelings afterward.

Reading the itemization again, 12,000 of carried shortfall over eight months means you were negative about 1,500 a month. Against a 2,190 payment that means you were collecting under 3,000 net for most of the year while paying eviction and turn costs at the same time. Anyone underwriting a four unit off a stated rent roll should look at that line and ask themselves whether they'd survive it. A lot of people wouldn't have, and they'd have sold into whatever bid showed up.

The seller thinking of lease amounts as his rents is the most useful sentence in this post. He wasn't hiding anything. He just hadn't reconciled anything in a decade, and that's true of a lot of the owners these lists surface.

Asking for twelve months of deposits before setting price is going to lose you some sellers, and I think that's the actual trade you've made rather than a pure improvement. Some tired owners will hear it as being treated like a bank and go talk to the next letter. Worth having a softer version ready, something like sitting with him while he pulls up the account on his phone.