Structuring a purchase of an 8-unit building - Posted by Craig (IL)

Posted by Rick Hall on July 14, 2007 at 20:32:21:

I have heard that 80/10/10 is not a problem, so you might offer 10% down with 10% carryback and 80% financing. Structure it so seller pays all transfer tax and as many costs as you can add in, as long as the apprasil will cover it. You can find better than 80% ltv if you shop. I recently closed my first commercial residential deal and got a 30 year term (first 5 fixed) at 85% ltv.
Hope this helps,
Best of luck

Structuring a purchase of an 8-unit building - Posted by Craig (IL)

Posted by Craig (IL) on July 14, 2007 at 12:51:18:

Two questions about buying an 8 unit building. Although I have a few SFHs, a duplex, and a triplex, I have never purchased at the commercial level before.

  1. Question #1 is your value of the property. With gross rental receipts of the six currently rented units is $2260/mo. (Would be higher if fully rented, but it isn’t, so. . . .) Rents are competitive in this, a small-town-in-a-predominantly-rural-county environment where rental rates, I suspect, don’t rise quickly. Property taxes are currently $4200/yr. I don’t have the hazard insurance figure yet. This is a 35-yo building claimed to be in good condition with virtually no remodeling/maintenance needed by me to start. Seller says he varies between zero and two vacancies in the thee years he’s owned the building. Seller claims the 8-unit it is appraised at $230K. Yes, of course, I will do more investigation of the seller’s claims, but what do any of you figure property’s value is, if the seller’s claims are accurate?

  2. Question #2 is about structuring the loan. Would you oOffer full asking price with seller carry back, or get negotiate a lower purchase price with a full payoff to the seller at closing. I have 32K in a 1031 account which I will use. If I can get a loan with 20% down I can drum up the extra 14K needed for a 20% down payment. Another option would be to ask the seller for a small carryback loan. How might you suggest it be structured? With a seller carryback, do commercial lenders still expect the buyer come up with a full down payment of the remaining amount? Or can I use a seller carryback as part of the down payment?

  3. Are any of you right now getting commercial loans with 20% down or you having to put more down? Less?

Thanks ahead for your informed response.

Re: Structuring a purchase of an 8-unit building - Posted by Jimmy

Posted by Jimmy on July 16, 2007 at 07:05:20:

here’s a few comments:

  1. I would crank numbers assumign you have 1 of the 8 units vacant at all times. that’s a 12.5% v-rate. I like to use a 15% factor. I generated this factor by examining my actual rent collections versus max possible rent. Year after year, my shortfall is right around 15% of max. as for determining value, pull some comps for 5+ unit buildings in your area. see how they get priced.

  2. commercial lending is different from home mortgage lending. lending policy and underwriting rules vary from bank to bank. not as regimented and uniform as the home mortgage game. 30 yr ams are out. so are 100% LTV’s. My banker will go 90% with me on an acquisition, but I had to earn that privilege. no way would he have gone there with me on deal #1. my banker will allow a seller to carry a small second, but he still wants me to have cash in the deal.