In this article, I want to talk about one of the biggest mistakes apartment and commercial real estate investors make when buying a property. This has to do with the actual purchase agreement and, just as importantly in examining the leases.
One thing I highly recommend when investing in any type of income-producing property, whether that is an apartment building, a strip mall, or office building, is to include clauses in your purchase offer that will protect you.
I do not recommend filling the offer with ridiculous contingencies that make you look like a complete amateur, but to use prudent clauses and language in your purchase offer to protect yourself. These will make sure you are not making a huge mistake in purchasing a building.
You are probably wondering what kinds of contingencies to include?
Of course laws vary from state to state, and I cannot cover everything in this article, but some examples of purchase offer contingencies I recommend are:
Seller to provide the following for buyers examination and approval in the next 30 days:
1) All lease documents
2) All property management agreements and records
3) Current Rent Roll
4) Accounting ledger detail and bank information
5) Property Income and Expense History for the last two years
I could go on and on, but those are some big ones that I recommend investors use.
Even after including these clauses, there is one mistake I have seen investors make in purchasing a property, and that is this:
Just because a property is leased, does not necessarily mean that the tenants are paying rent.
That is correct. What I am saying is that just because there is a written lease in place on apartment 204, that does not necessarily mean they are up-to-date on their rent.
I have seen investors take over large apartment projects, and thinking they had gone through their due dilligence ensuring leases were in place, found out after closing that up to 50 percent of the residents were behind on rent.
Imagine trying to clean that mess up on a 178-unit property.
This is especially true in today’s economy where the job market is very soft and we are in an era where foreclosures are commonplace. Once tenants are say one or two months behind on their rent, how motivated do you think they are to make that up, and pay the rent?
Make sure you look at the details of the property ledger to ensure the residents are actually paying rent and up-to-date on their payments. This is especially true on larger properties, but even for smaller purchases, as well. Get copies of leases and examine them before closing, but also get copies of the deposit registers to make sure they are paying rent.
Including the right contingencies in your purchase offer and examining not only the leases, but also that residents are actually paying rent can literally save you thousands of dollars in costly mistakes when buying.