100% occupied. Sounds great right? That is just what we want to hear when we are looking to purchase a multi-family building to add to our portfolio. However, not everything is always as it seems.
Trying to sell a building is easier if you can tell perspective buyers that the building is 100% occupied. The buyer thinks that there will be less work involved in taking over the building when the sale closes. They will not have to advertise, they will not have to do showings, they will not have to spend money rehabbing the apartment to make it rent ready. There will be a smooth and easy transition.
But, as I said, not everything is as it seems. Sure the building may be 100% occupied. But, what if the current owner rented the last few apartments to anyone who could fog a mirror just so they could say the building was 100% occupied? What if the people they placed in the building had been evicted from their previous residence just a few months before?
Don’t think the above happens? It happened to me when I bought a four-plex several years ago. Yes, I did my due diligence and reviewed all of the leases and the income and expense statements. Everything looked fine. But if I had bothered to check a simple and free database I would have noticed that one tenant had just been evicted and had a drug arrest as well. No one in their right mind would have rented to this guy, unless you were trying to say 100% occupied.
So what happened? You guessed it. As soon as we closed, he stopped paying. Four rent free months later, after going through the expensive and lengthy eviction process I had a dirty and damaged rental unit back in my possession.
On the bright side, I learned a valuable lesson. Check out the current tenants as best you can before you close. The court and criminal databases are free here as they are in many jurisdictions. It is as simple as typing in a name. If you do find something odd, go back to the seller and discuss and if you need to, renegotiate. It would not have been so bad kicking the guy out if I had gotten a little bit better price.
