3 Tips to Avoid Buying a Nightmare Property

Every deal looks amazing in the pictures¬†ūüôĆ

But there may be more to uncover about that deal.

Here are 3 ways to prevent you from buying a nightmare property that will cause you major problems down the road.

1. Bad Debt Write Offs

This one deserves to be listed first. Simply put, bad debt is a negative income line item that occurs when a payment can no longer be collected because the tenant is unable/unwilling to fulfill their obligation to pay. This could be the actual rent amount and/or any other income items.

It’s critical to look at the trailing 12 month financial statement and analyze how efficient collections have been recently.

However, what you see on the T12 is almost useless. The T12 will show only what the current owners have written off.

When underwriting a potential acquisition, you should request the 30/60/90 day delinquency report. This will show you a current snapshot of who is behind on their rent now.

So if the owners haven’t written off any delinquent amounts, the T12 could show the last 3 months having¬†$0 in bad debt.¬†However, the current delinquency report could show a substantial amount of delinquent tenants behind on rent payments now.¬†This is not something you want to find out 2 weeks before closing.¬†

2. Online Reviews

This is something I always take a glance at when underwriting a deal. I simply Google the property and look at the online reviews people have recently left for the property.

This can help you understand what is really going on at the property. However, I wouldn’t let a few bad reviews deter you from buying. Sometimes residents only leave a review when something bad happens and never when something positive happens.

I look for trends in the property reviews. Are the last 20 reviews from people complaining about crime? Are the majority of the reviews complaining about mold or a serious pest problem?

Use these reviews as an extra data point when underwriting a potential acquisition.

3. Below the Line

Capital expenditures are the big-ticket repairs and replacements. Usually, these will happen infrequently but be more costly than normal operating expenses. Capital expenditure items are listed below the net operating income on a financial statement.

So when looking at the below-the-line items, you can see what the current owners have (or have not) spent money on.

For example, you might notice the current owners have repetitive expense items for the boilers, plumbing needs, or roofs.

So did the owners replace a boiler recently? Or are the current boilers falling apart and needed to be fixed constantly. Similarly, constant plumbing expenses could suggest there are issues with the plumbing lines and clean outs.

Use these 3 methods as data points when underwriting your next acquisition!