by Theresa Bradley-Banta
There’s been a lot of real estate activity on my block over the past year thanks in large part to an elderly couple who recently sold three of their large nineteenth century homes. They sold their primary residence—their kids are now grown and out on their own, some with kids of their own. The other two properties are multifamily conversions. These are large homes that were divided into smaller, individually rented units.
The couple bought all three properties in the 1950s—now was the time to cash out.
It’s been interesting to watch the new owners take over. Sadly, I think the new owners might wish that they had looked a little harder at the properties before signing on the dotted line. Or wish that they had negotiated a better deal. All three of these properties have seen better days.
With property renovations it’s not unusual for new owners to find themselves
- over time
- over budget
- in over their heads and
- short on funds
Which brings me to this post. Here are some great tips for a multifamily renovation.
Don’t believe everything the seller tells you
What repairs and upkeep has the seller completed throughout the period of ownership?
It’s not uncommon for a multifamily property owner who has very little debt and receives great cash flow as a result, to do minimal repairs. Bluntly put, an owner can suck the cash flow out of a property leaving behind a property in desperate need of maintenance and often major capital improvements.
Tip: With any multifamily renovation ask for a list of all capital improvements made to the property over the past 10 years.
Don’t accept the statement, “This property hasn’t had any problems for the entire time we’ve owned it” as having done your due diligence. Two of the three properties I’ve mentioned needed full sewer line replacements, which snowballed into costly landscaping expenses once the sewer line was completely dug up, removed and replaced.
Don’t get overly excited when you find a motivated seller
It’s pretty easy to get excited when you come across a retiree (or any other seller) who is highly motivated to sell.
But you need to go deeper with your inquiry about the seller’s motivation to sell. It’s easy to accept a below market price as a great deal. You might even find yourself thinking that your incredible bird-dogging and negotiation skills have finally paid off! But you’ll stop patting yourself on the back after the repair estimates start rolling in.
Tip: If a property will cost hundreds of thousands of dollars to repair it should be priced accordingly.
Bring in an expert multifamily property inspector
You might discover serious structural and plumbing problems. That’s exactly what happened to the owner of one of the converted multifamily properties I mentioned earlier in this article. You might end up owning a property that is not safe for the current residents and suddenly your fully occupied building is at 100% vacancy.
Worse? It will stay at 100% vacancy until costly repairs are made.
Do some investigating of your own. I loved to watch early Saturday morning house flipping shows until the shows went into reruns. In one episode some experienced multifamily house flippers discovered, after closing on the property, that the kitchen and bath hardware (faucets, bath spouts, etc.) were attached to drywall—but there was no plumbing behind the drywall.
There’s a simple investigative trick for discovering problems like this: run the water in all sinks and tubs. While you’re at it check out the color of the water (is it full of rust?) and look for leaks that might appear elsewhere in the home such as the ceilings on the floor below.
Simple right? Why didn’t they think of that? I’ve witnessed countless professional appraisers and property inspectors run the water at every inspection.
Tip: With some renovations plan for unexpected vacancies. Allow for the loss of property income in your renovation funds.
Extra Tip: Always bring in the experts.
Negotiate a deal that includes credits for repairs
The only way you’ll know if huge repair bills are on the horizon is to conduct a thorough property inspection. You must hire a third-party expert. Do you recall the owner with the structural problems and a property suddenly at 100% vacancy? He was an experienced multifamily renovator who did his own property inspection—an inspection that missed extreme structural damage and an old, worn useless sewer line.
Surprises will always come up with a renovation. Most can be uncovered with a proper inspection before you close. It’s the only way to negotiate a seller credit—you must negotiate a credit before you close.
Tip: In addition to negotiating a lower purchase price ask the seller for a credit for major repairs.
Talk to the neighbors
I wasn’t at all surprised to learn about the major structural damage at one of the properties. I’m a neighbor and I was fully aware that the owners had experienced serious flooding problems at the property for the past 10 years. I was also aware that very little maintenance had occurred at two of the three properties. A good mowing and new locks on the doors was about the only attention the properties received.
Had either new owner stopped by and asked us about their property, my advice would have included all the above.
Update on the new owners
So what’s happening with the three properties? One just received a makeover to the tune of hundreds of thousands of dollars. It’s now a beautiful 19th century home. A young family proudly calls the house their home and the cycle can begin anew.
One of the multifamily conversions is a single-family property home again. The new owners call it, lovingly I think, “The 40 year house.” With time and budget constraints the full renovation will take 40 years to complete!
The other multifamily property is still at high vacancy and it looks like the work has completely stopped. And this is what can happen with a renovation gone wrong. It’s easy to lose all motivation. The bloom is off the rose. The excitement of new property ownership has disappeared.
Fortunately, this can mostly be avoided.
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