Creating a note to purchase real estate - Posted by crechicago

Posted by David Butler on August 04, 2007 at 16:54:22:

Hello crechicago,

The problem isn’t the vacancy factor. The problem is… WHY the vacancy factor?

As to the value… keep in mind that when buying property, you aren’t paying for what it might be, or even will be, you are paying for what it is. There are occasions where it may behoove you to pay a small “premium” for that “potential”, but there must be some very compelling factors in play.

In the same vein, there are particulars of the deal itself that will need to be addressed, in order for a note buyer to evaluate, grade, and price the note. And they will look at many of the same factors that you should be - and considering the same purchase rule. The will buy the note for what the security is now, not what it “might be” down the road. So…

What is the actual value of the property now?
How was this value determined?
What is the sale price between you and the seller?
What is your down payment in the deal?
What are your Tri-merged credit scores?
Is there any existing financing in place?
Is the note being created to be in senior position, or junior to the existing financing?
How many rental units are in the property, and what is their configuration?
What is the scheduled rent roll?
What is the actual rent roll?
What is the operating history of the property for the past three years?
What is the historical vacancy factor?
Why is the vacancy factor more troublesome now?
Has it always been bad?
What is the DCR (debt coverage) of the property assuming new senior note with 240 month amortization at 9%?
What is the property location and demographics?
What is your own track record in turning around multi-family residential properties?
What is your own experience in managing multi-family residential properties?

I’ll refer you to some detailed discussions for things to consider when structuring a commercial note to sell shortly after closing.

“Want to sell my commercial note”
http://www.creonline.com/cashflow/wwwboard3/messages/10848.html

“buy commercial prop with 100% owner financing?”
http://www.creonline.com/cashflow/wwwboard3/messages/18644.html

“Commercial Note Deal Advice”
http://www.creonline.com/cashflow/wwwboard3/messages/10314.html

“Commercial Quandry?!”
http://www.creonline.com/cashflow/wwwboard3/messages/21056.html

“Multiple Question Test!”
http://www.creonline.com/cashflow/wwwboard3/messages/17817.html

“What’s My Note Worth???”
http://www.creonline.com/cashflow/wwwboard3/messages/15464.html

You’ll want to carefully consider those in thinking through your objectives here.

Depending on the deal structure, there may be a possibility that we may have an interest - or, we may want an equity position in the property, or additional collateral, to enhance the security of the note.

This should get you off to a sound start in doing the research you need to do, to provide clear, concise answers to the questions you need to answer here. Feel free to email me privately once you have put together this information in a usable format (you’ll observe that one of the posts I referred you to above, includes a workable format you can use for that purpose!):slight_smile:

Hope this helps, and best wishes for your success in getting this put together. And…

Have Fun For A Living!

David P. Butler
www.hotspurinvestmentgroup.com

Creating a note to purchase real estate - Posted by crechicago

Posted by crechicago on August 04, 2007 at 10:07:52:

I have found a multi-unit that is well below market. The problem is vacancy. The seller is willing to let me get the vacancy up so that it is more lender friendly. Once we have the tenants in place we will have a property worth approximately $1.5 Million. The note will be created by the seller to us for $900K but he wants me to find someone to buy the note at closing if possible even if it is discounted. So, in a nutshell there will be a $900k note on a $1.5M performing multi-unit. Can someone help me structure this because I am a total newby when it comes to notes. I appreciate anyones help.