Continued from Part 9: Her interest did not rise to enthusiasm, but she still went to drive the area and walk the property. Her promise to the agent not to get out of her car didn’t count because her fingers were crossed.
The current owners appeared to have had a longstanding “no maintenance” policy and the property showed it. A cautious Emily pulled directly in front of the building, and then backed the car up a full length.
This gave her a view of the front and one side of the two story building. It was stucco, had a crawl space, a pitched roof, and was fenced. The garages were at the back of the lot, fronting the alley. That was the good news.
The roof was thick with cascading layers of asphalt shingles, sun damaged on the southern pitch, and probably ready for replacement. A thick roof indicated the underlying shingles were not removed before additional layers were installed. Shingles are heavy, and there is only so much weight any roof can sustain. Emily didn’t remember how many layers were legal, but she figured the old roof had more layers than the Building Code permitted. It would soon have to be removed and an entirely new roof installed, and that sounded expensive.
Due to the weight of the super-shingled roof, Emily pulled her auto registration from the glove compartment and held the paper horizontally in front of her eyes, aligning it with the ridge line of the roof. She was checking for a distinct dip. A sagging ridge line suggests structural damage and is not a small thing. The ridge line was straight, as far as she could tell.
While she was at it, she turned the paper vertically and used it as a guide to estimate whether the building corners were straight up and down. She aligned one edge of the paper with a convenient lamp post – she thought surly the city street lights were plumb – and moved the opposite edge as close to the edges of the walls as she could. They looked straight, too.
The stucco was patched in some places and cracked in others. Exterior molding showed peeling paint and what appeared to be dry rot around a window frame. All those were generally fixable. The concrete foundation walls appeared sound, but she couldn’t be sure until she walked around the building. Settling cracks didn’t bother her too much. What she didn’t want to see were displaced cracks, the ones that were higher on one side than the other. She thought that somehow those might be more serious.
Emily drove to the alley behind and parked. The rear building contained four small one-car garages. They might or might not fit a contemporary family-sized car. If not, they could surely be rented as storage spaces. Their condition was worse than the front living units: apparently structurally sound, but even more cosmetically challenged. The side gate was open.
People had been giving Emily their business cards for years. Every once in a while she cleaned out her glove compartment and threw away the cards that had photographs, keeping the cards that didn’t. The name on the card made no difference. Emily could assume the female name, and would claim a man’s name was her boss and she was just doing what she was told. The card didn’t even have to be fresh. She had some that were five or six years old. In fact, she preferred a worn look. That way she could credibly respond “No, you can’t have it. It’s my last one!” There would be no record she was there. Emily learned the business card trick somewhere, maybe from a re-run of Murder She Wrote.
Her favorite business cards were from insurance agencies. Insurance bored normal people to death (meaning the conversation would be brief) but everybody had to have it (which explained why she had a business purpose to be almost anywhere). Insurance cards were perfect.
Emily slid an insurance card into her purse and walked through the gate. The first thing she did was inspect the side of the building that she couldn’t see from the street. She was looking for problems she could handle. Emily thought properties came in two forms: (a) tenant problems, and (b) those that could be fixed with a check.
It wasn’t that she was loose with money. She wasn’t. It was simply that a problem that could be fixed with a check stopped being a problem and became only an expense. And expenses could be controlled. Her thinking went along the lines of “Patch the roof now, then replace it in two years” was not a problem. It was an expense. Seriously cracking foundation walls was another. (“Bad foundation? I can get quotes. I may not want to buy the property if the repair cost is too high, but at least I’ll know in advance the cost to fix the issue. Or maybe I’ll just make a low-ball offer . . .”) Expenses were resolvable. You could budget them over a period of time and they had an end.
What Emily did not want to deal with were tenant problems. Her understanding was that usually meant that tenants got free lawyers. She would have to pay for hers. This led to unknown costs with no timely resolution, and at the end another big expense when the unit was trashed anyway.
As she circled the building she noted dry rot on the eaves and several of the window frames, the need for exterior painting, and confirmed the necessity for a new roof. The foundation had only settling cracks. Gas meters had the tenant’s last name and turn-on date written in black waxed pencil. While some names were weather-worn and no longer legible, she noticed that two units were re-let last year.
Finishing her walk-around, Emily made a mental note to check the local MLS to see if last year’s data on the rentals might still be available.
Satisfied with the cursory exterior inspection, Emily drove the area. She was only mildly interested in the stores on the major streets, noting mostly if there were banks (suggesting a generally employed population) and nail salons (indicating disposable income).
She drove slowly down the side streets, because as Yogi Berra once said, “you can observe a lot just by watching”. Emily noted the cosmetic condition of the neighborhood properties, which certainly included their landscaping. A neighborhood of well tended yards said something very positive about the area. She looked for “vacancy” signs on the rental units and “For Sale” signs in front of the houses, to develop an estimate of housing turnover. She tried to see if there were security bars on the windows or graffiti in the alleys. She particularly searched for groups of men or boys just standing around, staring at her. That would be a deal killer.
She liked the area. Except for the older building she just walked around and two or three others, almost all of the apartment buildings looked like they were built in the 1960’s or 70’s. The neighborhood wasn’t perfect, but there was more good than bad.
The first thing Emily did when she returned home was to refresh herself. It was not something she liked to do outside. Then she sat in front of her old desk-top computer and did a Zillow search for current rentals in the zip code the fourplex was in. She searched for 1 bedroom units of 900 to 1500 sq. ft. Nothing turned up. Then she deleted the size requirement and got a bunch of one-bedroom rental listings at between $950 and $1200, but they were all well under 900 sq.ft. Emily then ran a separate search for units in the zip code that contained between 900 and 1,500 sq., with no bedroom restrictions. She found mostly two-bedroom units with rents up to $2,100. There were a couple of three-bedroom units offered at $2,800. There was a big difference between ones and threes, probably because three bedroom units competed with single family home rentals.
Emily’s opinion was that she was likely to get more of what she wanted if she negotiated directly to the listing agent. The name of the game is money, and if an agent double-ended the transaction he might be incentivized to talk the seller into accepting a lower offer. Theoretically, the property could sell for a 50% reduction before the agent’s commission dropped beneath what it would be if he had to share the commission. Not that so much of a discount is likely to actually happen, but it does illustrate that the listing agent’s motivation can’t always be expected to totally align with the seller’s, or at least Emily thought so.
Filing the Zillow information away, she called the listing agent to make an appointment to inspect the interiors. This single act was the beginning of negotiations. Emily had only once before bought a property, but over the last couple of years she’d bought a lot of stuff from estate sales. She’d developed a particular negotiation style standing there in a stranger’s front yard haggling over some $15 item. Her preferred approach was to (a) establish respect for the property and an obvious desire to own it, thereby convincing the seller that she was a really sincere potential buyer. Sometimes this took several minutes of talking the item up. Once the desire to buy was established [i.e. the seller was convinced this discussion would end with an exchange of money], then (b) make an offer at about half (or less) the offered price. If the low offer was not accepted, it was (c) justified by pointing out one of the deficiencies in the object. This last was a bit of an art form in its own right. The seller would reduce his price and Emily would point out a deficiency in the item. She would appear to struggle to find a reason to raise her offer. Once a justification was found, she would then bring her original offer up a token amount. The seller would usually reduce his price. She was looking for the seller’s decrease to be a lot more than the token increase of her counter-offer. Then she’d point out a new deficiency. Wash, rinse, and repeat. Essentially, the seller was negotiating against himself.
The game ends when the seller can’t or won’t reduce anymore and Emily can’t find even one additional deficiency. Then the buy / not buy decision is made. In Emily’s estate sale experience, the one who ultimately wins is always the one who cared the least.
It turns out that real estate agents park one block over and wait for the appointed hour. Then at the last minute, they race to the proper address, breathless but exactly on time. They all do it. It’s probably somewhere on their test. And that’s exactly what this agent did.
Emily arrived a few minutes early, noted that the agent hadn’t yet arrived, and began creating the first scene of the negotiation play. She knew the agent would form an opinion the first moment he saw her, before she even opened her mouth. She intended to stage that moment. She was dressed professionally as she walked a couple of lots down the street to another newer and much better maintained three or four unit building, and stood there seemingly enthralled.
From the corner of her eye she noticed a car race up to the subject and pull to the curb. An old man got out, short and scrawny, looking like he had a lot of hard miles on him. He paused and through a gimlet eye in her direction. She took no apparent notice of him, making him to walk to her. When he approached, Emily – still enthralled with the building before her – asked, “Do you think they would sell this?”
From the agent’s perspective, Emily had turned into an active buyer, but perhaps not of his listing.
He ignored her question, saying as he handed her his card showing his name to be Stuart Delano Chicken. “Just call me Stu”, he said. She reciprocated with her card and said, “Emily”. They walked back to Stu’s listing where Emily took care to walk around the building like she’d never, ever, stepped on the property before. She stared at the layered shingles, asking Stu D. Chicken if he thought so many layers of roofing would pass a code inspection. Emily made her point, but he pretended to not hear this question, either. She guessed he only responded to the questions he wanted to.
Emily paused at the dry rot and looked at it but did not say anything. If you tell the other side – everything you’re thinking, it spoils the surprise.
They entered the building and went up the stairs to the second floor units. Stu unlocked the door to Unit C and they entered, Emily first. This was one of those cases of stacked units where “you see one, you see them all”. Although she inspected each unit, they were pretty much indistinguishable, each being oversized and cosmetically dated.
The living room of each unit was in front, looking towards the street. Behind it was the tandem dining room with built-in hutch, then the kitchen. The bathroom was behind the kitchen, with the rear bedroom having a view of the small back yard and garages. Emily thought of film noir from the late 1940’s. In her mind, Humphrey Bogart or Gloria Grahame might have lived here. The windows were double-hung. Each unit had one aging window air conditioning unit in the bedroom, which may or may not work. Every unit had its own gas wall heater. The kitchen had a linoleum tiled floor, ceramic countertops, and gas stove / oven. There was a small refrigerator, but room enough for a much larger one. The oversized bathroom in each unit had a porcelainized iron claw-foot tub, ceramic tile flooring, wainscoting, and small sink. There was no shower.
Disclaimer: This article is for informational purposes only and is not intended as professional advice. For specific circumstances, please contact an appropriately licensed professional.
Klarise Yahya is a Commercial Mortgage Broker. If you are thinking of refinancing or purchasing five units or more, Klarise Yahya can probably help. Find out how much you can borrow. For a complimentary mortgage analysis, please call her at (818) 414-7830 or email [email protected]
If you’ve missed some of the prior articles, basic guidelines on successful investing are in my book “Stairway to Wealth” available at www.LuLu.com