By the time this post goes live, it will be the day escrow closes on my new fourplex! Woo hoo! I’m excited that this chapter will be closing today, but I’m also dreading it just a little bit because that’s when the real work is going to start. But before I get into all that, here’s how the building inspection went.
Scheduling the Building Inspection
We scheduled the building inspection for a Saturday, because I wanted to be sure to be there, and I work full time (attorney) during the week. We’ve been really, really busy at work, so there was no chance of me taking a day off for the inspection. The seller was not initially cooperative. He didn’t want to let his tenants know that he might be selling the building, so he was hoping we would do the inspection on a weekday when they wouldn’t be home. This probably means he wasn’t going to ask their permission or give them notice in advance. That would obviously be a bad move on his part.
In any event, I pushed hard to have it on Saturday, and the seller finally agreed. I thanked his agent for their flexibility. I didn’t know any really good inspectors, so I asked my friend (she’s a real estate agent) and she had a really good recommendation. I called them, they had a reasonable price, and they were willing to send out two inspectors, since there were four units, to try to get the job done faster. Great! In fact, I’ll give the Elite Group Home Inspections a shout-out here, since they did a very thorough job, and went above and beyond by sending me photos later. (FYI, I’m not receiving any compensation for mentioning them.)
So we showed up on that Saturday, the two inspectors, my uncle (who is also my real estate broker), and me. We walked up to the building and the owner met us outside. He was anxious and upset that there were four of us. He said he was told by his agent that it was just going to be me by myself. Literally, he said he thought I was going to come alone, without any inspectors. Uh, really? I said I was not qualified to inspect the buildings, so of course I was going to have inspectors with me. And the only reason I brought two inspectors was so they could divide and conquer, and we could all get out of his tenants’ hair quicker. Also, I brought my uncle along because he’s my broker, and more experienced, and he also happens to be the manager of the family business that loaned me part of the money to buy the building.
The owner calmed down a little, but still stressed that the tenants didn’t know about the sale, so we shouldn’t tell them what the inspection was for. I’ve been through this process before, most recently when we were selling our 22-unit apartment building in La Habra, so I reassured the owner that if the tenants asked, we would say that we were there to do a lender’s inspection.
The Good News and the Bad News
The inspectors got to work, and my uncle and I split up to go with each of them. I walked through the owner’s unit with one inspector, and my uncle did the external inspection with the other inspector. I was glad to tag along with one inspector, because I could point things out that I noticed and ask questions, so I felt like I had a better understanding of the process these guys use, as well as a better idea of what would need to be done to the unit. For example, I didn’t know this, but they don’t test the angle stops. (The water shut-off valves underneath the sinks.) They said they’re not supposed to test things that could break and cause damage just by testing them. It’s a little disappointing that they don’t test some of those things, but I understand that they don’t want to turn a corroded angle stop and start a water leak under a sink. That would be bad.
In looking through the owner’s unit, I noticed a lot of things that need to be fixed. Like, a whole lot. There was nothing really major, like a hole in the wall that leads to the outside, but there were a lot of signs of neglect. Loose faucets, lots of missing register covers, missing smoke detectors, external doors to water heater closets that were just pieces of plywood, things like that. Some photos are below, to give you an idea.
The good news is that the major components were generally in good shape. The outside of the building itself was in decent shape and just needed some paint, the plumbing all appeared to be in good condition (which it should, since it was built in 1981), the driveway/parking lot paving looks pretty good, and the roof looks great. The windows could use replacing, and I want to replace the old wooden garage doors with nicer roll-up garage doors and openers, but apart from that, the bones of the place seem to be pretty good overall.
Appeasing the Anxious Seller; Inspectors to the Rescue!
The seller was obviously very anxious the entire time the inspectors were doing their work. He was paranoid that we would be telling the tenants that he was selling the building. I saw the inside of one unit closely, and got a more cursory look at a second unit, and the landlord pulled me aside and said “is the inspector telling them I’m selling? He seems to be talking a lot in there.” I reassured the landlord that that wasn’t the case, particularly since the woman who was in the unit didn’t even speak English. Most of what he heard was me talking to the inspector.
Because the seller was so anxious, I didn’t get to see the inside of two of the units. The inspectors did, but it’s so hard to tell what’s going on just by looking at their report, because the report just lists things that are wrong, and doesn’t tell you what the kitchens or bathrooms look like. I know they took a lot of photos, but the vast majority of those photos don’t end up in the report. I emailed the inspectors’ home office, and told them that they had done a really great job (they did!), and asked if there was any way that I could get a copy of all of the photos they took that day, so I could get a better idea of what was in the units. I provided a cloud link to upload the photos (it would have been dozens of emails otherwise, which would have been a totally unreasonable request on my part). Fortunately, the inspectors agreed to take the extra steps to upload all the photos! I am so happy about that. Otherwise I would have no idea what to expect in those other two units.
Disappointed in the Prior Landlord / Seller
I have to admit that I had a certain narrative in my head of the landlord’s backstory. I knew he bought the fourplex in 2007, and he had lived at the place and managed it himself since then. His agent told me that he had somewhat recently gotten married, and his new wife was pressuring him to get a real house, instead of their fairly small 2-bedroom apartment surrounded by tenants. Based on that limited information, I guessed that the landlord was a hard-working blue collar guy who saved up his money to buy the fourplex, and that since the building was likely the largest part of his retirement plan, he probably kept it up pretty well. I got a distinctly different impression after doing the building inspection.
Take this kitchen, for example. When I saw the inspectors’ photos, I was thrilled to see that one of the kitchens already had granite counter tops. Well, sort of, but in a second photo, I could see that it really was counter tops, as in plural. Look at the photo on the left, and then the one on the right. Notice anything?
See how the granite to the left of the stove has a straight edge, and the one on the right has a rounded lip on it? It’s different granite. The seller must have found these counter tops on Craigslist or on the side of the road or something and pieced them together. Sigh. Come on, dude!
And remember in my last post how I talked about the importance of inspecting smoke detectors and heater/air conditioning filters every once in a while, and checking while you’re in there to make sure your tenant hasn’t moved in a bunch of extra people? Clearly this seller/landlord never got the memo. Two out of the four units were missing heater filters entirely, including the owner’s own unit. Of the two units that had filters, one hadn’t been replaced in quite a long time, and another looked like some mice had made it into their own apartment complex.
Also, one of the units had way too many people in it. These are all two bedroom units. In this particular unit, one bedroom had two twin beds and two full/queen beds, and the other bedroom had another twin bed and another full/queen. HUD guidelines would require that I allow 5 or more people to live in the unit, but counting the number of beds, we’re at a headcount of 6, at least. Since the owner admitted that there was a married couple living there, I’m guessing at least one of the full/queen beds is occupied by a couple, so really we’re looking at 7. And guessing by the number of toothbrushes in the bathroom, I’m guessing the real number is more like 8.
Why does it matter? The wear and tear on the unit, the fixtures, and the appliances, for one thing. Also, the tenants’ water is paid by the landlord, so if you have a few extra people in each unit, you’re paying for all of their extra water, too. Finally, there’s just not enough SPACE. Here’s what happens when you have all of the clothes and shoes and other possessions of 8 people in a 2-bedroom apartment:
My Plan Going Forward
Now I know why the landlord was getting only substandard rents. It’s not because he was naive about the market rental value of the apartments, it’s because he didn’t want to put in any work to make the place nice enough to command those rents. I have a lot of work ahead of me to bring these units up to par. My uncle and I crunched the numbers, and it seems like putting in the necessary work will pay off in a reasonable amount of time, given the rent increases that should bring. But since this post is already really long, I’ll go into details on that another time.
What do you think? Am I making a huge mistake? Would you buy a building in this general condition and make the effort to fix it up, or would you settle on an already-rehabbed 1960s building for about the same price, or maybe even a little less?