Posted by Michael Morrongiello on March 02, 2008 at 19:49:25:
Dan:
You need to get your credit profile back up a bit and those credit scores.
This structure might very well work for you if you can handle the debt service.
Remember the RISK is also part of the unknown performance by you on this unproven, new Note, where you have acquired the property with no funds put at risk.
Let me know if there is interest in pursuing.
Warmly,
Michael Morrongiello
1st 40% for mini storage, What yield? - Posted by Dan
Posted by Dan on February 29, 2008 at 16:15:29:
I have found a local mini storage with huge growth potential for sale. The owner wants $50,000 cash and will carry paper for the rest. He owns the properties free and clear so his position and luckily his mentality are open for creative options. The total price is $380,000 (asking).
My thought was to create three notes. A 1st at less than 50% LTV that would meet his $50,000 cash requirement plus what he would be expecting over the next 3 years as a payment on the balance. ie. $330,000 8% 20 yrs @ $2760.25 =
$99369 for three years payments.
So, I would need to create a note with a discounted value of $149369. Then I could create a 2nd for $100,000 with no payments for three years and a 3rd for the balance with no payments for five years.
All of this should please the seller as well as minimize my outlay during the early years of ownership to solve the high vacancy/bad reputation issues.
And to skip the step of replying to questions about the wisdom of buying a business with problems- yes, the price is based on the last three years actual numbers not future possibilities. If no growth is experienced it will be a break even proposition after the second takes effect, but will have good cashflow for the first three years leaving me the option and funds to pay off the third in five years and run at a break-even worst case.
Simple security measures (high break-in rate) will cure the reputation problem.(45% vacancy) And some cheap TLC will greatly improve appearance. Room for fee improvement is huge with other facilities in town charging 50-75% more.
My question is this: What yield should I expect to sell the 1st at? I need to know what face terms to use that will ensure an at closing sale. I would like a 20 year term to increase cash flow but know that I should go with a 15 year term to increase the value of the note/ decrease the discount. I also want the face rate high/face value low because if things go well I will be refinancing as soon as possible.
Bear in mind that I have horrible credit. I know that is key, but will be able to show a $60,000 positive cashflow from the motel I am buying right now as well as the income from the mini storage.
By the way, I would be willing to trade a great self written excel program for quickly evaluating any R.E. deal for some handy note software. I am sure I’m not the only person that loves playing with numbers out there.
Thanks in advance,
~Dan
Discounting spreadsheet - Posted by John Behle
Posted by John Behle on March 02, 2008 at 15:44:45:
There are a couple of free Excel spreadsheets that might suit your needs or at least be interesting at:
http://www.papergame.com/download.htm
One is called “Easycalc” and is a basic discounting spreadsheet. Basically it lays all the variables out just like the written yield worksheets that I have always used. Each cell has a formula that references another hidden part of the spreadsheet. Each cell in that hidden part contains a formula that will compute the answer if the other four variables are entered.
Until four variables are entered, the spreadsheet kind of goes nuts. Formulas are referencing cells that just contain other formulas or are blank. So “error” pops up everywhere. But once you enter any four of the variables, it automatically computes the fifth at lightning speed. In Excel, it is sometimes necessary to turn off automatic calculations and make them manual. I program in Quattro Pro, so it works more smoothly there.
The second spreadsheet titled “uneven” handles much more advanced calculations with uneven cash flows.
If you find those interesting, send me a copy of your spreadsheet at cre2008c@papergame.com
I have a much more advanced one if you find those interesting. I took the first two and merged and expanded them into a much more capable spreadsheet. It is in Quattro Pro and I haven’t tried to export it to Excel, but would do so if you wanted to look at it and possibly polish it up a little. My programming days ended with “GWBasic” for the “Tandy TRS80 Model 4”. I don’t pretend to know much about programming spreadsheets. I would so love to have the one I did in the CCIM courses. I think it burned in my fire. I took the CCIM courses and was bored silly, so I wrote a lotus spreadsheet that took all of their forms of APOD’s, Cash Flow Statements, and projections of every kind and interlinked them into one large spreadsheet. That was a few years ago. I was the only one with a laptop in the room. I think I had a dual floppy Tandy Model 1400 laptop and people were staring at it like it had come from outer space.
Two pages of simple input put out about 20 of their excellent analysis forms and projections for properties.
Lets Build to suit the deal… - Posted by Michael Morrongiello
Posted by Michael Morrongiello on February 29, 2008 at 19:32:54:
Dan:
A few questions to clarrify or provide additional insight to:
How much “skin in the game” will you have? (Intepretation; how much of your own cash will be put at risk in the form of a down payment towards the purchase?)- BTW - YES we would prefer to see you have cash at risk
What is the bare minimum cash the property seller truly NEEDS at the time of closing? You mentioned $50K but then also indicated $149,369.00?
What are your “horrible” credit scores?
Where exactly is this mini storage located?
What is the local competition from other national chains (Shurguard,etc.)
6)What is you management experience for this type of property? (it can be VERY management intensive)
With some additional detailed input regarding the above issues we can as I like to seay more effecitvely “build to suit” a transaction like this for you.
Best to your success;
Michael Morrongiello
www.sunvestinc.com
Author of the following home study courses;
Paper Into Cash - The Convertible Currency - How to Effectively Create Marketable Real Estate Notes
&
The Unity of Real Estate & “Paper” - Advanced techniques for both the acquisition and disposition of properties using Real Estate “paper”
Re: Lets Build to suit the deal… - Posted by Dan
Posted by Dan on March 01, 2008 at 16:14:20:
#1 -$25,000, yes that’s right, negative. I will be structuring the deal to receive cash at closing for security improvements/ TLC/ maintanence.
#2 Seller WANTS (per his RE agent) $50,000, and also WANTS to carry paper on the balance. I also want to offer enough to justify no payments for three years on the balance so that my only outlay monthly is on the “to be sold” first. It will need to be structured for a term that will put the payments around $1000-$1200 per month to accomplish my cashflow goals.
#3 Think in terms of 480-500. With currently outstanding (not for long) state judgements.
#4 Central Washington
#5 None. Only other small better-but-not-good mom and pop operations. This is a portfolio of three properties which together account for over half the units in town and sit on some desirable comm. property in a growing area that will not reverse in the next ten years, only possibly slow slightly.
#6 My background is residential/ municipal construction specializing in waste water facilities as well as property management. I am currently purchasing a motel in a nearby town and can handle all of the paperwork/ collection/advertising duties from there in my free time. I will be installing coded gates and CCTV upon puchase. I also will be able to be onsite as needed for repairs or other issues with reasonable notice and have a relative who can be onsite within 5 minutes at a low hourly wage as needed to handle “owner lock” issues and other unscheduled items.
How much cash I need to bring to the closing table through the sale of this note will depend on quite a few factors. The main answer I am looking for is what yield can I expect to sell this type of a 1st note at if the LTV is under 30%? Under 40%? Under 50%? I can reverse engineer the note once I know what the purchase yield will probably be.
Thank you for your quick reply. Even if it not this particular property, I like this type of a deal structure and will eventually use it on something I am sure.
~Dan
Risk Vs Reward… - Posted by Michael Morrongiello
Posted by Michael Morrongiello on March 01, 2008 at 21:41:12:
Dan:
Here is what you stated;
#1 -$25,000, yes that’s right, negative. I will be structuring the deal to receive cash at closing for security improvements/ TLC/ maintanence.
#2 Seller WANTS (per his RE agent) $50,000, and also WANTS to carry paper on the balance. I also want to offer enough to justify no payments for three years on the balance so that my only outlay monthly is on the “to be sold” first. It will need to be structured for a term that will put the payments around $1000-$1200 per month to accomplish my cashflow goals.
#3 Think in terms of 480-500. With currently outstanding (not for long) state judgements.
#4 Central Washington
#5 None. Only other small better-but-not-good mom and pop operations. This is a portfolio of three properties which together account for over half the units in town and sit on some desirable comm. property in a growing area that will not reverse in the next ten years, only possibly slow slightly.
#6 My background is residential/ municipal construction specializing in waste water facilities as well as property management. I am currently purchasing a motel in a nearby town and can handle all of the paperwork/ collection/advertising duties from there in my free time. I will be installing coded gates and CCTV upon puchase. I also will be able to be onsite as needed for repairs or other issues with reasonable notice and have a relative who can be onsite within 5 minutes at a low hourly wage as needed to handle “owner lock” issues and other unscheduled items.
How much cash I need to bring to the closing table through the sale of this note will depend on quite a few factors. The main answer I am looking for is what yield can I expect to sell this type of a 1st note at if the LTV is under 30%? Under 40%? Under 50%? I can reverse engineer the note once I know what the purchase yield will probably be.
Thank you for your quick reply. Even if it not this particular property, I like this type of a deal structure and will eventually use it on something I am sure.
~Dan
So your not putting any cash down…
You have sub 500 credit scores…
You are seeking CASH OUT at closing as well…($25K)
Any other Wish list items… (smile)
Bluntly, given your lack of any cash into the deal and credit issues, this new unproven management intensive commercial pproperty note carrys a TON of risk associated with it.
To offset that Risk - there must be the potential for handsome reward.
Here are some “rough” #'s… Lets assume the 1st lien seller held Note is $110,000.00 @ 10.50% interest, payable $1,215.94 P & I installment payments per month and amortized over 180 months with a 36 month balloon payment due of $99,329.99.
One main concern is your ability to get your credit back on an even “keel” so that you can take out the future balloon payment.
To generate $75,000.00 in cash ($50K to the seller + $25K additional cash) the above Note would be sold. Preferably after a few months of payments have been established on it. However it may be possible to purchase it out of escrow.
Michael Morrongiello
www.sunvestinc.com
Re: Risk Vs Reward… - Posted by Dan
Posted by Dan on March 02, 2008 at 17:45:00:
So the short answer would be that for my personal circumstances I am looking at an investor wanting a 26.63% yield in order to expose himself to the perceived risk? I appreciate the long version and example as well. Any thoughts on the general deal structure as a strategy for purchasing underperforming properties with identifiable “quick fix” issues causing the decreased revenue?