Posted by Gene on February 12, 2010 at 12:12:46:
My experiences could be anecdotal but the few old timers I know are good people. This area is pretty small…I have crossed paths with the same folks several time.
My impression is that they don’t give away profits but they are fair and honest.
75 year old asked me to take over - Posted by Questions
Posted by Questions on February 10, 2010 at 07:50:18:
I have been in business for 11 years and have done all kinds of deals but have never ran across an opportunity like this before.
I recently ran back into a landlord that I met when I first got in the business. He told me that he has heard a lot of good things about me and has been considering asking me if I wanted to take over his entire operation.
He is 75 and is ready to get out of the business. He is tired of dealing with the headaches, and would rather spend the time he has left doing things he enjoys. He gets social security now, and all he would want from me going forward is to take over the payments on his mortgages, and to send him $1,000 per month to help support his modest lifestyle. He even mentioned that we could structure things so that if he passed away, whatever I owed him would be forgiven.
He has 3 full time (40/hr/week) employees that he pays $10/hr each to handle repairs on all of his properties. It is important to him that I keep the employees since they have been loyal to him for so many years. Of course, I would be responsible for paying them going forward. I currently use independent contractors for everything, and was planning to eventually hire some actual employees at some point this year anyway.
He has a blanket mortgage of approximately $400,000 (payments of $4,000/month, balloon in 5 years)
2 - 10plexs (each are 8 - 1br and 2 - studios); 2 vacancies in each
1 - 6plex (all 2br units, totally vacant and needs wiring and plumbing throughout bldg)
= A total of 26 units with 16 occupied and 10 vacant
He has a different blanket mortgage of approximtely $200,000 (payments of approx $2,000/month)
2br condo (currently occupied)
3-plex (fully occupied)
4br single family house (tenants moving out this month)
3br house (occupied)
2br house (occupied)
duplex (2 bedrooms each, both occupied)
4br house (occupied)
2br house (occupied)
= A total of 11 units with only one that will be vacant soon
Free and clear properties
2br house (vacant and has a clouded title due to a mistake on the deed - he said it will cost approx $500 for a lawyer to fix)
2br house (vacant and also has clouded title due to mistake on the deed - he said this will also cost approx $500 for a lawyer to fix)
4br house (occupied)
1br house (occupied)
3 unit commercial building (currently used for storage and needs totally rehabbed)
= A total of 7 units; 4 residential (2 of which are vacant) and 3 commercial units (all 3 are vacant)
He has made it clear that for income tax and personal reasons, he doesn’t want to be paid off too quickly, so whatever I propose should be an installment sale.
The $1,000 per month payments to him should not be fully amortizing, since he said he doesn’t know how long he will live, and his 2nd biggest fear (after huge capital gains taxes) would be for me to pay him off too quickly and then he runs out of money.
I am considering giving him a junior mortgage on one of the properties and structuring it so that the payments would be interest only at the $1,000 per month he is requesting. I could cover that expense by renovating and filling 2 of the vacant units in the 6 plex.
I am not sure how I would easily cover the monthly employee overhead ($10/hr X 40/hrs/week = $400/week X 4 weeks/month = $1600/month X 3 employees = $4,800/month in employee labor costs). My cash reserves are pretty low since lately I have been buying houses cash and paying for the renovations out of pocket, since my new year’s resolution was to use banks as little as possible this year.
I will be meeting with him later today, to get rent roll infomation, as well as more information on unit conditions.
There is a lot of information here and I am trying not to get paralysis of analysis. What I am looking for is some input on how to structure this deal.
2 Questions
What input do you have for me regarding this deal?
What could we do so that the mortgage (that I would give to him) would be released in the event he did pass away?
test period - Posted by ken in sc
Posted by ken in sc on February 11, 2010 at 08:24:22:
One idea might be to have a test period where you basically pay him $1000 per month for the right to run his business and keep all remining profits. This way each of you could only commit a little, not 100%, and see how both parties like the deal and each other. He might stay on as “advisor” during this time, and you could arrange it to where it can roll into the full deal at the end of 12 months with both parties blessing.
I dont know how you would legally structure this, but if you both agreed to it you could have a competent attorney figure that out.
My thought is that you can analyze this for weeks and still not really know how it all works, but running it for 6 months or a year and you will know for sure.
Also, if those 3 guys are any good, and you have other business, you could continue to pay them just not always about these properties.
Good luck. This could be the best thing that ever happened to you…I hope it is. But watch your 6.
Re: 75 year old asked me to take over - Posted by phil fernandez
Posted by phil fernandez on February 10, 2010 at 09:50:22:
My problem here is constantly paying these three employees. My guess is that they are not working a solid 40 hours a week, yet you have to pay them their $10 per hour. There is no need to have three, or even one full time employee for the rental business.
Sub the work out like you are doing with your other rentals. It will give you alot more flexibility. You don’t call unytil you have a problem to fix.
Also what about unemployment benefits, health care;taxes and the other government paperwork you would be involved in with employees. You don’t want employees.
Other than the employee issue, you might be on to something here with a flexible seller.
Hmmmmm… - Posted by JT-IN
Posted by JT-IN on February 10, 2010 at 09:03:52:
Yes, there is a lot here to analyze, so lets address one small protion of it here.
The biggest issue are the employees and the obligation to keep them. So how I would look at this deal is this…
I would do a balance sheet; Asset value of each property; liquidated value. Then liabilities; each of the mtgs or notes that exist, and in addition to that number I would add another 500K. (Essentially that is the cost of the employee payroll as it equates to long term obligations, comparing to a mtg in cash out each month).
Now if at this point you still have a positive number then I would continue to analyze the deal with different criteria. If you are negative then I would address the harness of the 3 employees long term, and what a negative that this is against the deal. Ask him which is more important; his cash flow of 1K mo or keeping the employees on and in tact…? Essentially you have 1 employee for each 14 rental units. Unless these are some unusual rental properties, why is that labor force needed for such a small number of units…? Sure, short term needs if rehabbing, but not long term for rental mgmt…
So you have 42 units (sort of) and 600K in debt, plus another 500K in quasi debt with the employees; totaling 1.1 mil. Are the units worth an avg of 28K each…? If so, then you have a break even net worth, (w/o addressing his 1K per mo). If you have liquidated asset value of 35-40K per unit then you are in better stead.
So how we lookin so far…? Are we ridin or walkin, at this point…?
Great advice - Posted by James - Michigan Investor
Posted by James - Michigan Investor on February 12, 2010 at 08:05:44:
I like this idea for several reasons.
Old ‘landlords’ getting out of the business (as Rick mentioned), can be slippery. This will help solve this.
Also, you are showing him that you are ‘smart’ and not afraid to protect yourself AND him while you test the waters.
James
Re: 75 year old asked me to take over - Posted by Questions
Posted by Questions on February 10, 2010 at 12:02:29:
The number of employees didn’t surprise me as much because 4 or 5 years ago, I am pretty sure that he had close to 300 units. I don’t beleive he could have lost or sold all of them.
In fact, I bet he still has most of them, but is only telling me about these ~40 units to test me out, until he is confortable giving me the “keys to the kingdom.”
I’ll ask him about the other employee expenses that you mentioned though.
Re: Hmmmmm… - Posted by Questions
Posted by Questions on February 10, 2010 at 11:57:39:
I currently have an 8plex in the are that is worth $275,000, so I would guess that each 10plex of his should be worth $300,000 to $350,000.
My rough estimates of property values from me driving past and seeing the outsides.
10plex #1 $300,000
10plex #2 $300,000
6plex $75,000 rougher area and pretty rough condition
Condo $60,000
Total $735,000
I haven’t seen the rest of the properties yet, but I definitely see some value from the neighborhoods most of them are in, at least $50k for each of the single family houses.
As far as the employees, I mentioned to him that I may need to convert them to independent contractors, and that I would be happy to keep them busy if they do good work. Another alternative I mentioned, was that when I took over, I could reduce their hours to part time until it becomes obvious who was the best worker, and move that one to full time.
Re: 75 year old asked me to take over - Posted by Jack
Posted by Jack on February 10, 2010 at 20:34:39:
As others have stated, one full time worker is more than enough for ~40 rental units. Perhaps you can use the other two guys on other projects. $10/hour is extremely low, perhaps you are in Louisiana or something, thus I have to conclude they have no skills beyond pulling weeds and sweeping. Just a random thought.
Re: Hmmmmm… - Posted by Brian_wa
Posted by Brian_wa on February 11, 2010 at 12:08:24:
Without these facts, it would be tough for anyone to help you make a decision.
Brian
Old sharks are the ones to watch - Posted by John Merchant
Posted by John Merchant on February 10, 2010 at 13:00:12:
I’d be extremely cautious that this “poor old” guy maybe taking some advantage of your generous nature.
Sounds to me like he “wants his cake and eat it too” in that he wants you to guarantee you’ll keep his staff employed, etc.
FYI, law says for you to “convert” his employees to Ind. Contractors, you’d have to give up management of how and when they did their work so they’d become truly indep. and not be under your thumb as to how, when, what tools they used, etc.
Lots of such “ind. contractors” have over the years sued their “employers” and won, basically proving they were NOT Ind.Cons. but were in actuality employees all the time.
OR, getting their employer sued when his employees injured somebody else.
Re: 75 year old asked me to take over - Posted by Questions
Posted by Questions on February 11, 2010 at 20:09:16:
I am not in Louisiana, but in my area are a lot of guys who will work for $10-15/hr if you pay them cash and don’t 1099 them.
Hell, if I wanted to, I know where to get workers who only ask for $20 for working 4 hours or $40 for working all day (8-10 hours).
Surprisingly, many of those guys do very good work, it’s just that they refuse to go home without SOME money, ANY amount of money in their pockets - YES, the economy is THAT bad for some people.
At that rate ($20), I could hire a person for 29 half days without having to 1099 them. That’s basically a full month. I just couldn’t hire the same person again that year or else they would be at the $600 per year amount that I have to report.
When I first got in the business 10 years ago, I was 21 years old. My 2nd deal was an apartment building that needed to be rehabbed. I was broke, so I’d find homeless people and let them sleep in my building in exchange for them doing a few hours of work for me every day. No work no stay and I mean leave NOW - I wished it worked like that when “regular” tenants stopped paying.
Worked for me - plus I had free “security” keeping an eye on my building every night.
Worked for them - sleeping on hard woods beats sleeping on hard concrete any day.
Re: Old sharks are the ones to watch - Posted by Questions
Posted by Questions on February 10, 2010 at 14:38:54:
Thanks,
I’ll keep that in mind. I plan to treat them like my other independent contractors- having them sign independent contractor agreements for each job, using their own tools (if they don’t have any I buy their tools for them when they start the job and take the cost out of their labor charge when they finish the job, if they have tools I don’t pay any advances- only when the job is complete), and setting their own hours with a per day penalty if they miss the completion deadline that I set on the contract.
I would also encourage them and refer them to work for other investor friends of mine - after all if they do good work at good prices, I don’t want them to get too far away from me.
I went to see the 6 plex today and met 2 of the 3 workers. I was definitely impressed with their work as most of the plumbing and electrical was completed and I was able to see everything else they were working on.
I’ve been buying cash houses (foreclosures) that cost $5,000 - 10,000 so they usually require a minor rehab - furnace, ductwork, water heater, pex plumbing in the basement (to replace the stolen copper that was exposed), some drywall patching, painting throughout, wiring in the basement (to replace exposed wiring that was stolen), light fixtures, switches, and receptacles - things that these guys are definitely able to handle as they are currently doing it for the other guy.
My goal is to acquire 100 of these types of houses this year, and someone is going to have to do all of that work. I’d love to have some consistency in workmanship, and of course affordable labor prices.
Re: 75 year old asked me to take over - Posted by James - Michigan Investor
Posted by James - Michigan Investor on February 12, 2010 at 08:02:24:
Awe, you sound much like me. 
I think everyone has answered the biggest problem here: employees.
Employee to IC is best like you’ve stated. If they are IC, make sure to get a contract for EVERY job
and follow the same contracts for each job.
Homeless people…lol. Can’t say I’ve done that, but with those big projects…you gotta be creative.
Good luck, don’t get too far ahead of yourself and go with your gut - you’ll do fine.
James
Legal test is “control” - Posted by John Merchant
Posted by John Merchant on February 10, 2010 at 17:04:59:
Sounds like you’re doing it right, especially getting their written IC agreements.
Just keep in mind the legal citations on the subject say that “Control” or right to control by somebody is THE test of whether that person was an IC or E’ee.
A very smart lawyer friend of mine, Oscar, fell into this trap when a client of his hired Oscar to draft an IC Contract and somehow Oscar forgot what he was doing and wrote in that owner had the right to control where, how, when, etc.
One of the co’s truck drivers got killed while driving the co. truck and his widow was able to collect Workers Comp death benefits because the e’er co was held to be an employer and his truckers e’ees because of that control issue.
Re: Old sharks are the ones to watch - Posted by SedonaSam
Posted by SedonaSam on February 10, 2010 at 15:54:16:
Old sharks are wiser, and usually more ethical.
Oh…really…! - Posted by Rumpel Stiltskin
Posted by Rumpel Stiltskin on February 14, 2010 at 13:42:04:
“Old sharks are wiser, and usually more ethical.”
The above remark is a “line” that has been used over the centuries to trick and mislead the young.
Most of the Best Con Artist have been Seniors who have used their fine tuned acting skills to “sell” the Honest Old man Technique and literally rob people of millions.
This is, without a doubt, the most pervasive, the most common, the most successful, and the most dangerous of all the tricks in The Con Artists’ Guidebook.
There used to be an old saying…“don’t trust anyone over 40!”…and its more true today than ever before.
Watch It!
Re: Old sharks are the ones to watch - Posted by Gene
Posted by Gene on February 12, 2010 at 09:52:28:
If you are in a smaller market it should be easy to find people that have dealt with the seller in the past and could give you incite.
In my area, there are only a few “old sharks”…everyone in the business knows them. And in terms of ethics they raised the bar. In a small rural area like where I invest…you will not last long if you are unethical.
BTW… - Posted by Rumpel Stiltskin
Posted by Rumpel Stiltskin on February 14, 2010 at 14:12:56:
BTW…that old Con Technique was used and is still widely used by the OLD BOYS CLUB. The OLD BOYS CLUB exist in every county and civilization since the dawn of man.
Re: Old sharks are the ones to watch - Posted by Kristine-CA
Posted by Kristine-CA on February 12, 2010 at 10:46:54:
Gene: is it so much better on your part of the county? Is that the
effect that the lake has on people? Some of the old timers where I am
have been successful for many decades, but are dishonest business
people. Specifically in the area of lease options and land leases, not to
mention some professional slumlording…no raising the bar
whatsoever.
IMO the reason it stays that way is that there is a continuous market of
uneducated poor people…with no one to call out the unethical
practices. It’s practically a legacy thing…3rd and 4th generation
landowners and 3rd and 4th generation renters and leasees…maybe
it’s an oil town thing?