Welcome to the world of Multifamily Units or Apartment House investment properties. Whether you’re doing your first purchase as an investment or you’re going to live in one unit and rent the rest you’ll find this is a different process than buying a single family house or condo.
This would also be a good time to point out the importance of engaging or working with an agent that specializes in this type of property, especially if this is new to you. If you’re the buyer, the normal and customary practice is your agent will be paid by the seller. In some states and in some cases the same agent can represent both parties as long as all parties agree.
The way apartment house sales work for most part is, offers are made subject to inspection. In other words, you and your broker will evaluate the property by reviewing the operating data provided by the seller and the listing broker and then do a drive by of the subject property. If that all works out to your satisfaction, it’s time to structure an offer for presentation to the seller.
Your broker will then present your offer along with your good faith deposit and evidence of funds to preform including a lender qualification letter. Notice it is a good faith deposit, not a down payment yet, and this process is to demonstrate to the seller that you are a serious buyer and you want to open up negotiations, and have a closer look at the proposition he has in the market.
Let’s assume an agreement is reached and the process goes to the next step. Unlike single family resident deals, the income & expense data supplied by the brokers is what is most important. A process of verification is used to determine accuracy, and the lender will analyze this data for the purpose of determining the loan amount the transaction will qualify for.
Next will be the physical condition of the property and the verification of the utility services is conducted. At this stage you should engage a property inspector who has a sound knowledge of construction, local building codes and permit requirements. This inspection process is an important part of your due diligence and your broker will help guide you through. Your broker will collect disclosures from the seller, agents and third parties as required and will present and explain them to you. If there are some issues that need to be corrected or treatment for termite eradication etc. that needs to be addressed these conditions will be discovered in this due diligence process.
By now you should now have all the information you need to make your decision on the property. Next step is to determine if the deal is as you expected, and if it is NOT, can adjustments be made and agreed so you can proceed with the deal or the deal doesn’t work and you can cancel and move to another deal. It is not unusual to negotiate or adjust terms to align with property conditions discovered on inspections. There are different solutions depending on the issues. I generally favor an adjustment in terms or price that allows the buyer to resolve it to their satisfaction, since they’ll have to conduct business there after close of escrow.
Properties that are well priced go quickly even in this buyer’s market and so it’s best to have a strategy in place to act quickly and efficiently. That strategy should be, identify a likely property, and make an offer that will get you the right to inspect it. Conduct your due diligence inspections and decide if this property is for you or not. Between what you know of the physical condition, the location and the loan offered by the lender, you can determine if this transaction meets your investment criteria.
If you’re an investor doing an IRC Sec. 1031 tax deferred exchange, you’ll have time constraints that you will need to abide by so it is important you follow the process above and nominate this as a property you’d like to use in the exchange process is this is an orderly delayed exchange transaction. The least time spent between the close of the down leg and the close of the up leg the less money you lose by having the money idle in the accommodator’s account. If this Tax Deferred exchange is new to you, please see the bonus section at the end of this book on the benefits of deferring your taxes.
I know if you haven’t done this before you might be a little nervous about this process. Don’t worry! This will all work and has done so for many times over the years. The key is to hire the best brokers to help and follow their advice. You’re on your way to building your portfolio and I wish you the best of luck.
