Five Questions to Ask a Broker Before or While Touring a Property

This is our first post for 2023 and we hope that you and your family enjoyed the holidays these past two weeks. We decided it was best to take a break from writing blog posts in order to enjoy time with our families.

This post is inspired by a recent business trip my team and I took to Des Moines Iowa to tour a few deals, meet with brokers, and talk to capital markets professionals. While touring those deals it struck me that there are certain questions to ask brokers and property owners that may not be obvious to people who are new to the multifamily world. These questions are crucial to know the answers to so as be able to sharpen your underwriting and avoid unforeseen consequences that could be very costly. With that being said, let’s jump into this post.

Why does the seller want to sell?

This question of why the seller wants to dispose of their asset hadn’t struck me until months after teaching myself about multifamily assets. This question is important because it gives you an understanding of how much leverage you have during the negotiation phase when taking a deal under contract. Most often you’ll hear one of two responses when you ask the broker this question. Either you’ll hear that the seller simply thinks it’s a good time to sell or that they’re getting close to retirement and no longer want to manage the asset. If the seller simply thinks it’s a good time to sell then chances are that they are willing to wait for the highest offer. That’s understandable because why sell an asset if the seller can continue collecting cash flow and building up equity in their property? On the other hand, if the seller is older and perhaps wants the money to retire, they may be more inclined to take one of the first offers they receive even if it’s at a significant discount to the listed price.

Prior to touring one of the deals in Des Moines this past week, we asked the broker this question and heard that the seller simply thought it was the right time to sell. For this particular deal my team and I concluded that it only made sense to give an offer far below the listing price due to the amount of deferred maintenance (the roof and HVAC needed a full repair). After touring the deal and speaking with a different broker who turned out to have made a low offer on behalf of a buyer, it was obvious that the seller was in no rush to sell. The fact of the matter was that the seller had likely paid off all or close to all of the debt on the building and was cash-flowing nicely. Perhaps he was thinking of disposing the asset now at a decent price and investing once prices come down further. We can’t be sure, but we know the seller was willing to wait for a better offer to come their way and we weren’t going to offer anywhere close to what they were asking for.

When were the roof and boiler last replaced?

When touring a deal, especially one that is run by a mom-and-pop owner, asking when the boiler and roof were last replaced could save you thousands in unexpected capital expenditures. As a rule of thumb, boilers and roofs usually last up to 15 years, however, that varies depending on the material used on the roof and what type of boiler was installed. Surprisingly enough, my team and I have heard of and toured properties being 40+ years old and still having their original boiler. If you hear that the boiler is original on an old asset, definitely get a quote on how much it would cost to replace and factor that quoted cost into your capital expenditures budget. In terms of the roofing, if you hear the roof is roughly five to seven years old you can likely get away with patching it up for another five years before it needs to be replaced. If a roof is ten or more years old, you should request a repair quote and factor that into your underwriting similar to how you would if the boiler is old. If both the roof and boiler need replacing, a subsequent question to ask yourself is, “do the economics of the deal warrant me replacing the boiler and roof?” In other words, is it worth it to put all that money and time into the deal given the upside potential?

What is the tenant base like?

What is sometimes forgotten when owning or purchasing a multifamily asset is that as an owner you are responsible for a community. It’s critical to understand the needs and wants of the tenants in your community so you can keep them happy and retain them as a result. In addition, knowing the type of tenants that are living at a certain property makes it easier to target a certain demographic and be more effective in filling vacancies when they occur. More so, having knowledge of your tenant base allows you to refine what type of renovations you want to incorporate into your budget if you are planning to renovate a property. For example, if you’re looking to purchase a property with a tenant base that is comprised of working professionals, you’ll likely want to have a business center at your property. If the tenant base consists of primarily seniors, you’ll likely want to have a large community space for activities so the tenants don’t get bored. Put simply, try to match the unit and property amenities at your property with the needs of the tenant. The same can be said for the atmosphere of a property. Ask yourself, “is this property a place where the tenants would appreciate the atmosphere?”

Are the units individually metered and who pays for utilities?

These questions are easy to answer when on a tour, but for newer investors, it may not be so easily spotted unless these questions are specifically answered. When units are individually metered (i.e. submetered) it means that a property owner or manager can easily bill back for utilities since units are tracked in terms of how much utility output they produce. If the units are not individually metered then the property owner or manager must implement a ratio utility billing system (RUBS) where tenants are billed back for utilities depending on certain criteria (size of a unit, number of residents in a unit, etc.). What you may notice is a trend in properties run by mom-and-pop owners is that when the property is not submetered, the tenants are usually not billed back utilities. If that is the case, that represents an opportunity to bill back tenants which in turn increases the property’s income. Property owners prefer apartment buildings that are individually metered because it makes it easier to bill back utilities. Something to note is that while the units of a property may be submetered, that doesn’t necessarily mean the property owner or manager is billing back the tenants for utilities. Thus, it’s important to ask the broker or property owner who pays for utilities.

Conclusion

We now find ourselves at the end of the first post of 2023. I hope you continue to learn from these blog posts and specifically hope this one has helped you learn about questions you should be asking when touring properties. I’ll continue to write these posts for as long as I know I can derive value for you, the reader.

As my team and I expand our horizon of potential markets to invest in, we’re spending an equal amount of time building relationships with brokers, lenders, and a multitude of real estate professionals. The markets seem to be heading in our favor not only based on what we believe, but based on conversations with other professionals. We remain hopeful that 2023 will be a great year for our investors at JP Acquisitions!

As always, I hope you enjoyed reading this post as much as I have writing it. Best of luck!