12 Must-Know Items to Ask When Buying Apartments

Investors are chasing different asset classes for a healthier return, but it is important to understand some key elements of Multifamily real estate before jumping in.

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Here are 12 items you MUST KNOW before purchasing an apartment complex either as a Limited Partner through a syndication or a JV with only a few partners.

1. Why is the owner selling?

Multifamily property owners come in different shapes and sizes. 

Understanding the motivation behind the sale is critical to positioning yourself much better. 

Is this a motivated owner or ownership group? Below are some examples of motivated sellers: 

  • Tired Landlord
  • Poor operations 
  • Partner or Family fighting
  • Divorce
  • Bankruptcy
  • Health Issues
  • Retirement
  • Relocation
  • Inherited Property
  • Code Violations
  • Desire New Property
  • 1031 Exchange
  • Loan Terms not favorable

Getting the story of the property will help you create a viable solution that is a win-win solution for you and the seller.

Perhaps you are considering investing as an LP, does your sponsor have a story for this deal? Is this an opportunity that they know intimately and got off-market for 10% less than anyone else wanted to pay for it due to relationship?

2. Exactly what is included in the sale?

We recently were negotiating on a small apartment complex with a seller. Developers in the area are building and selling townhomes for $450-600k each. 

The Property itself barely cashflowed at current rents; however, we were given the impression that a large lot next to the property was included. This lot would add $350k in profits to the deal. However, once a survey was conducted, the lot next door was NOT included. 

Understanding what is included in the transaction may seem obvious, but ask. Perhaps there is a laundry facility; however, the washer/dryer units are not included. Perhaps an adjoining park is not included. 

3. How long has the property been on the market?

This information would be readily available from the listing broker and can be very insightful

  1. It is brand new on the market the agent is “pre-listing’ it as off-market which means you have an opportunity to make offer prior to many others. 
  1. It has been on market for a long while which means everyone has provided feedback to the broker and the seller about this property and the seller has not accepted any offers to date. 

Both provide advantages. If you are receiving a truly off-market deal from a broker you have a genuine relationship with, there is an opportunity to strike a fair deal for all parties involved. This is due to the broker trusting you to get deals done and recommending to his client to accept. 

If a listing is sitting for some time, it is likely that this deal has a seller that cannot or will not negotiate, or there is something structurally wrong with the property. These are items to uncover that can help negotiate a better deal for all parties. 

4. Has the property repeatedly changed ownership over a relatively short period of time?

Understanding the ownership tenure can uncover a story. An owner who has only owned the property less than 2 years may be in a motivated position to sell: 

-Bridge Loan could be coming due

-Overspent on renovations

-Overall mismanagement

An owner that has owned a property for 10-20 years may have different motivations: 

-Retiring from Landlording

-Realizing capital gains for another purchase

-Does not want this type of asset any longer (moving into a different class of apartments or into different real estate)

Low interest rates and a surplus of cash in the open market has brought a lot of attention to the multifamily space. For this reason, there have been deals that have traded hands much faster than the business plan called for with rents escalating 8-20%. 

Owners have been able to “renovate” by painting and adding new lighting and see an immediate return on investment. 

When walking these properties, take note of potential capital expenditures that could be on the horizon. 

5. How did the agent decide on the asking price?

This is going to boil down to 2 factors: 

  1. Cap rate
  2. T12 or Proforma

Agreeing on a market cap rate can be relatively easy. If properties are trading at 6 cap, then it is reasonable to have a property listed at a 5.5-6.5 depending on condition. This is assuming it is an equal class/structure property. 

What is more important to understand is what the cap rate is based on. Did the agent and seller determine sale price based on ProForma numbers or actuals (T12). This usually makes a big difference. 

If current NOI on a property is $1,000,000 and market is 6 cap, then sale price should be: $16,500,000. 

However, if that same property is being marketed as “value-add” with “upside potential in rents” and a ProForma NOI is presented of $1,200,000, the agent/seller are expecting $20,000,000 at the same 6 cap market rate. 

This is a $4 Million difference in price and should be considered before making an offer and purchasing. When seeking financing on this property, the bank will review 12-month and 3-month financials and will offer terms based on this, not potential or Pro-Forma rents and budgets. 

6. What is the minimum price the seller will accept?

This seems obvious; but, not everyone asks it. It is especially impactful in direct seller conversations. 

This is not usually a question to ask immediately unless you want a repeat of the sales price. 

If you have developed a rapport with the seller or have a very strong relationship with the listing broker, it is possible to not only uncover the story of the property, why they are selling and also what a lowest possible accepted offer would look like.

7. What offers have there been so far?

If the property has been listed for some time, finding out what offers have been made (and therefore rejected) is a great way to uncover seller desired price (above). 

It is possible that offers were reasonable; but, the potential buyers did not display a strong ability to close and therefore, the seller/broker did not want to remove the property from the market to wait for a buyer that was not able to close. 

8. Has any major work been done to the property?

As discussed earlier, getting insight to what work has been done will affect your capex budget and therefore your offer. 

Understanding age of roof, air conditioning units, type of heating (does it have a boiler?), potential parking lot repairs/ upgrades. 

9. How old is the property?

The age of the building can affect your overall operating budget. Older buildings have older plumbing, older electric, older everything. 

Old = Increased Maintenance costs

  • Roof
  • HVAC / Furnace / Boiler system
  • Parking Lot
  • Electric panels / wiring
  • Plumbing 

These are key capital items to be aware of when considering a property.

10. Will the owner do seller financing?

The option of seller finance on a deal can make or break some opportunities. If the seller is looking for exit management responsibilities; but, will miss the cash flow, seller finance is an option to get both. 

In addition, if the sale price cannot be agreed upon due to current market conditions, putting an offer together at the asking price contingent on seller finance terms makes a win-win situation. 

By avoiding traditional bank financing, a transaction can be closed with agreeable terms mutually agreed to by both parties at a quicker pace. The seller gets at or close to his desired price point and the buyer is able to take over the property and begin optimizing before getting bank financing involved. 

11. What is the screening process for new residents?

If the financials show that there is a higher than average bad debt or perhaps the turn rate is not in line with the market, it is potentially an opportunity to improve operations based on up front tenant screening. 

The current process can be checked through asking the owner/ property manager; but, it is good practice to “secret shop” a property you are interested in purchasing. 

This means, “playing the part” of an interested tenant and calling / visiting not only the subject property; but, properties nearby that would qualify as comparable. 

-is the subject property too lax on tenant standards 

– on the reverse side, requirements can be too strict causing too few tenants to be approved and signing leases (also a problem)

12. What kind of financing is currently on the property?

Does the subject property have an underlying mortgage that they need to pay off or is the property owned free and clear? 

Is the current loan a bridge loan that had a temporary low interest rate and it is coming due? 

Does the current loan have a significant amount of time left on the note?

Knowing the underlying debt will add to the story of why the seller is selling and true motivation. 

If you would like to learn more about the various types of real estate investments and syndications we have coming online, please join our investor club to gain access. 

As a top-performing sales professional in supply chain/logistics for almost 20 years, Jeff Davis has been putting his commissions to work for him in real estate since 2015 and is now partnered in almost 2000 units across 4 states in the US