Posted by Mark (CO) on June 23, 2001 at 10:53:31:
I’ll be talking to the owner on Monday and will attempt to seek a better deal with the other house(s) included.
Thanks for your help.
Mark
First deal!! But not without your advice : ) - Posted by Mark CO
Posted by Mark CO on June 23, 2001 at 01:46:07:
Here is some information on a property we are currently looking at. We appreciate all input!
Details:
FSBO, was listed for 1 yr at 175,000. 4 unit, built in 1965, located 2-3 blocks away from the two main streets in residential area. Property needs some work: cleaning, carpeting in two units, new roof, painting in two units.
Only comp in last 6 months:
6 unit, built in 1982, sold for 272,000
Info from MLS sheet:
–Gross rent = 25,800 (2 x 500, 2 x 570)
–Expenses = 11,910
–NOI = 13,890
Asking 175,000
Negotiated 150,000
Owner will consider L/O-haven’t discussed the details yet
Currently 25% occupied (we asked that all but one unit be vacant due to unsatisfactory tenants)
Reason for selling is somewhat complicated-summery: Folks lived here and owned a restaurant. They bought the 4plex as well. Eventually folks relocated to another city, transferred property into son’s name. Son has owned property approx 3 yrs. Son/seller has had problems with poor choice of tenants, poor management. Property has some differed maintenance as stated above. Seller’s brother from CA was a realtor. I’ve talked to him(brother) on the phone and he’s basically the consultant to the seller. He is quite knowledgeable regarding creative real estate, currently L/O his personal home. Seller presents every idea to his brother first. Both seem flexible. Seller has two mortgages on property totaling about 148,000. It might be possible to assume the 2nd (60,000 at around 10%), but I’m not sure why.
Additional info:
There is a nice 2-car garage under one unit (thought about building individual storage units for each unit).
There is also a laundry room (I’ll need to supply a washer and dryer). The tenants do not have w/d hooks.
With fix-ups, storage, laundry, paint etc. we should be able to get 28,800/yr gross.
At this point I do not have numbers on what it would cost to fix up.
A couple finer details: seller seems motivated, he’s keeping 3 units vacant (either for us or just doesn’t want the hassles any more?realtor friend of ours says his office is getting lots of calls every day for rentals). So far seller hasn’t objected to our ideas/requests (price, possibly financing, L/O). He’s even let me know of a couple other houses he owns in which he would be interested in selling. Brother of seller called today. He will be in town in a couple of days and would like to talk. He was okay with the L/O idea. He said they (his brother the owner and he the consultant realtor?sorry this is confusing!) may be able to be even more flexible with the other properties.
I have some real estate mgt experience. I’ve been reading this site for a few months, have a couple REI courses and several books that I study. One course is Bronchick’s Alternative Real Estate Financing. I also have a equity line of credit-100K at prime + 0.5. My FICO score is 727.
I plan to protect myself in the l/o by:
?recording option
?having right to sublease
?having right to assign
?having right to extend lease (1yr)
?will not offer non-refundable money
?escrow the closing documents (title co holding executed deed and bill of sale for personal prop)
?record performance mortgage
?somehow verifying that the seller is paying his mortgage (escrow to collect my payment and make the seller’s payment or use bank account in my name that automatically sends money to sellers lenders by electronic funds transfer).
Thanks Bronchick for the above!
Questions:
-
How would you structure the “offer”? (I avoid using the word “deal”, I’ll let you be the judge if there is a deal here or not).
-
Do people generally offer to make payments to the seller equal to the seller’s payments?
-
Do I need state specific paperwork (contract, L/O agreement etc), or can I use Bronchick’s forms?
-
Who pays for the escrow (set up to verify that seller is making his payments)?
-
In a year or so when I exercise option and approach the bank, will the bank look at my situation as a purchase or as a refinance?
-
We would like to improve the property in the mean time. How is this worked out between us and the seller?
-
Who pays for repairs/improvements? Or, I should ask is this point negotable?
As always, thanks everyone for your help (here and elsewhere on this site)!
Re: First deal!! But not without your advice : ) - Posted by Ed Garcia
Posted by Ed Garcia on June 24, 2001 at 13:02:47:
Mark,
I think that you’re on the right track with your thinking. I’ve read what Bill W has told you and must admit that he gave you some sound advice. However I wanted to discuss it in a different sense.
When I said that I think you’re on the right track, I was referring to the fact that you’re offering $150,000 as a lease option. After all, the seller owes $148,000, so we know at this point and time, that they don’t have a lot of room for further negotiation. They’re motivated, and just want out.
My concern is the differed maintenance. The cleaning and paint is no problemo, my concern, is the CARPET in 2 units, and the ROOF. That can cost you, and could be the deal killer, depending on what’s going on with rentals in the area.
Let me take my shot at some of your questions.
- How would you structure the “offer”? (I avoid using the word “deal”, I’ll let you be the judge if there is a deal here or not).
I think, that your L/O of $150,000 is fine. Now remember, my answer is contingent on the information that your providing. I have to assume that you know what you’re talking about and have done your homework. You say that after the fix-ups, and the smoke clears, that you can get $28,800 Gross Rents.
You also tell us that a 6unit just sold for $272,000, which is $45,333 per unit. That times 4 units, would give your property a ballpark value of $181,332. This is not a correct formula, just a ballpark to put values in prospective, as to how much units in the area are worth per door.
Mark, there is so much information you didn’t share with us; such as what are the current monthly payments? What it will cost to do the fix-ups?
What is the unit brake down, how many 1 bed, how many 2 etc? I’m assuming for now that they’re all 2 bedroom. I smell a deal can be made here because the seller is motivated and you can turn this into a leveraged deal, meaning your going into it with no money out of your pocket and doing it on a lease/option with no real credit risk. It’s a matter of getting the numbers to work.
Again a rule of thumb on 4 units, and how it could look 12 months from now.
Gross Rents $28,800
Hit it for 30% expenses and 5% vacancy = $10,080, giving you a NOI of $18,720
When Bill was talking about financing, I’m afraid he was referring to multiple units, which from a lenders stand point, 4 units are not there. The financing on 4 units can be achieved from most residential lenders, which do from 1 to 4.
New loan at 80% which is $144,800 at 8.5% which gives you a payment of $1114 X 12 months = $13,368. You’re going to have the seller carry the difference as a second for 5 years with no interest, which is $5,200 and gives you a payment of $86.67. X 12 months gives you $1,040. $1,040. + $13,368 = $14,408 giving you a positive cash flow of $4,312. or $359.00 per month. I hit your deal pretty hard Mark, normally a lender will only plug in 25% for vacancy and expenses on a 4-plex because there is usually NO management on 4 units. Owners usually manage them their selves. Because of that, I will split the difference, and there could be another $1440 for you to play with, which could sweeten the deal even more, giving you $5752 or $479 positive cash flow per month.
Mark, Bill in his post refereed to “Cap rates” and that he had a preference to 12 to 15. I can’t argue with Bill because when I do a deal, that’s exactly where I’m coming from. But this is only 4 units, and I don’t think I would look at this deal from a standpoint of Cap, but rather from a stand point of GRM ( Gross Rent Multiplier). Not knowing what multiplier they’re using for the area, I’ll have to discuss Cap for now. But even at that, with no money down and at a 10 cap, this could be a deal. The reason I was reaching so hard is because it’s your first deal, and it would be nice to see if we could put it together with no money and a little positive cash flow.
- Do people generally offer to make payments to the seller equal to the seller’s payments?
In order to get to the deal we’ve just discussed you’ll need full cooperation from the seller. From this point on I would agree with Bill where he starts No. 1 and says, “If I was willing to do this, (and from the numbers, I would pass at the moment)”,
Bill is right Mark, I was just playing with numbers trying to reach for you, to see if I could make chicken salad out of chicken you know what.
Mark, I did all of this just to give you some more food for thought and possibilities that could be achieved.
Ed Garcia
Re: First deal!! But not without your advice : ) - Posted by todd W.(CO)
Posted by todd W.(CO) on June 24, 2001 at 01:37:58:
Where in CO. are you located,maybe I could help.
Todd Williamson
Here’s some answers - Posted by BillW.
Posted by BillW. on June 23, 2001 at 10:09:30:
Mark,
Without going into long detail, this propery is being offered to you at pretty close to retail. Listed expense ratios seem to be pretty much in line with reality at about 40 percent of gross, but 3 vacant units really kills the cash flow. Your capitalization rate (net operating income, divided by cost of the project),seems way too low, though. I see only about 9.2 percent. When large mutual fund companies buy prime complex’s (over 100 units in A+ locations, they often get 9 to 10 percent cap rates. I personally would be looking for more like 12 to 15 percent, especially on small deals and doubly especially on deal with large vacancy factors and repairs needed. Your additional fix up costs would make the return and the cap rate even worse. I would not be surprised if the repairs came to 10,000 considering you’ll need a roof, and that’s not counting the remodeling of the garages and laundry equipment. If I were even considering this deal, I’d ask the seller what other properties he will include to make the deal worth looking at.
I think this deal is way overpriced considering the facts you present.
Your other ideas on protecting yourself seem OK, IF you can get them agreed to. Some you might, some you might not.
To assure they’re paying, set up a collection account a a bank or an escrow company to handle the money and dispurse payments. To answer your numbered questions:
- If I was willing to do this, (and from the numbers, I would pass at the moment), I would put in a “net collected rents” clause. This would basically say that he would get paid about 85 percent of net collected rents. Any shortfall, he would have to pay himself. this would protect you from big negative cashflow. (After all, what is his negative cashflow right now?) I would also factor in a management fee for my company to manage and lease up the property as part of the expenses. (Can’t do this for free, you know.)Any type of master lease arrangement would be based on full occupancy after it became fully occupied.
- Sometimes. Depends on the deal and how bad the seller want’s to get rid of the property. This one is like a big alligator eating his checkbook. I would see how much he would be willing to contribute and for how long.
3.Unknown, but, I’d have my lawyer review any and all paperwork. - That’s up to the negotiations. I’d be willing to split the fees.
- Unknown, you’ll have to ask the specific lenders.
- Work it out in the offer. Be aware though, that if you don’t exercise the option and close, you’ll probably lose ALL of the money you put into this deal.
- Negotiable.
In summary, I think I’d keep looking. Too expensive for what you’re getting, and too many risks for me.
Good luck and let us know how it turns out.
BillW.
Thanks Ed - Posted by Mark (co)
Posted by Mark (co) on June 24, 2001 at 16:04:00:
Ed, thanks for your time and advice. As you say, to get this deal with little or no money down and some cash flow would be great. After your last response regarding my 100k ELOC, my wive and I have set a goal of 1 million in finaincing, using the ELOC as down pmt $. I’m sure it will be harder than we think since we’ll need to use it for fix-up costs as well. Maybe we should put fix-ups on our credit card?
Thanks again, I appreciate your help.
Mark
Where in CO - Posted by Mark (CO)
Posted by Mark (CO) on June 24, 2001 at 15:56:50:
Todd, we live in Montrose. Where are you located?