BiggerPockets

I have 23 rental units now. I bought a duplex in '07. The next opportunity came in late '09 when I met a motivated seller, an elderly couple that gave the a great deal on my next 11 units/4 properties. This couple still has 52 units left. I had hoped to buy more from them, but they suddenly because less motivated and wanted higher prices. I continued to buy more from other sellers, most recently in December '10. I'm pretty happy with the 23 I have now, and although I'd like more, my rental business grew very quickly.

Last night I received an email from the daughter of the sellers of my units 2-11. Dad is about to turn 89, and wants out. He wants someone to buy ALL 52 of his remaining units and will give a good price to whoever does. Tax assessed value is $3M. I wrote back to the daughter and said thanks, but I don't have anywhere near $600K in down payment money to go through a bank for financing (I had brought up owner financing before and they said no way).

This morning I got an email back "We are willing to consider creative financing proposals. Please put together your best offer and get back to me."

So ... they've indicated they could give me a good price and good terms. Do I really want to more than triple the number of units I have? I'll be going through a property management company so it won't be as bad as if I was going the management myself, but it's still scary.

Also, I assume they're going to want at least 10% down. In order to get this much $ together, I'd have to liquidate stock accounts, possibly 1031 exchange a few existing properties, possibly borrow from my IRA and/or my parents. Basically all my eggs would be in one basket, which also scares me. On the other hand, I could potentially get a return of over 20% even with a management company doing all the work. What should I do?

Do you HAVE to buy all of them at once?

To me it sounds like you would be stretching too much to make it happen. Do you have others that may be able to partner with you to take down the whole deal if that is a requirement to get it done?

For starters, you know what they say about tax assessed values. I'm also not one to worry too much about putting eggs into one basket provided I've assessed the risk accurately. Plus I'm not a huge fan of diversification anyway (but that's another story).

Based on the little you've mentioned, I think you're in the driver's seat on this deal. I highly doubt you would be able to find that many lenders willing to finance all of those (how many properties is this?) units at once. On top of that, it looks like there may be some succession issues as well. If they really want to move all of them to one buyer, then they are going to have to carry back paper to someone regardless of what they want.

You have the luxury of seeming comfortable with what you have already. What's it going to take to make you a motivated buyer? You could set up favorable terms as well as an installment sale which you could pay by selling off a few of the properties here and there provided you aren't paying full freight for them.

Here are some #'s:
-The rents come to just over $30K/month. All 52 units are currently occupied.
-Property taxes run 1.8% of assessed value/year.
-Insurance I have ballparked at .4% of assessed value/year.
-That's about $51K/year in taxes + insurance.
-Property management fee would be 8.6%.
-Properties are in fair to good condition. There is some deferred maintenance due to the seller's age, but for the most part they've been kept up.
-I estimate repairs/improvements to be 20% of rents. I used this value for the properties I own in the same area, and I've found it to be a little conservative since my father-in-law does maintenance and charges less than a pro.

I'm considering making the following offer:
-Purchase price to be $2.3M.
-Owner finance @5% interest, 20 yr/ am., 10% down payment.

Any thoughts on this offer?

I know 5% interest is ridiculously low for an owner financed deal, BUT these sellers are so clueless I'm not sure that they know that. I also know that they refuse to invest in anything that's not FDIC insured and the proceeds of the sales will go into CDs earning about 1.5%. It seems to me to be a win/win situation.

I could certainly give them a higher interest rate but the price would have to be lower. If anything, I'd probably be better off leaning towards increasing the price and reducing the interest rate further.

I do like the idea of potentially taking on a partner to raise the funds I'm lacking rather than sell off all of my other investments. If the sellers agree to my offer, I'll approach family members first and if they aren't interested, I'll post again on BP looking for a partner.

Hi Mariah,

Wouldn't you be better off by decreasing the price and increasing the interest rate? Because if there's some sort of balloon payment, then a higher price would mean you have a higher payoff.

Let's say you end up getting 4% with the owner financing with a purchase price of $2.5M, but when you refi you will have a payoff of $2.5M and with a bank you will get a much higher interest rate than 4%.

True, but why would I refi with a 5% interest rate? I would make my offer without any balloon payment involved. I just meant in terms of the seller's acceptance, they're more likely to be enticed by a higher offer price.

I know nothing about your area, but your offer sounds high to me. I would estimate things like this as a first pass:

-Rents => $30k/month or $360k/year
-"NOI" (50% rule of thumb) => $180k/year

I would then capitalize the NOI at 10% to arrive at an offer of $1.8M. You would need to study things more to decide if this is an acceptable offer, but that would be my ballpark. This Google search:

Ray Alcorn's Article

will get you to Ray Alcorn's article on estimating stuff like this. Note that your MAO will move if your loan constant moves. If you require a high ROE your offer will likely move south a bit too.

So if the seller offers you better terms on the debt you can afford to pay more. Your WACC will be lower.

I would also suggest trying to get 30-year money for the debt instead of 20-year money. This will decrease your loan constant and increase your offer. If the seller is unsophisticated the offer price is likely what he will focus on the most.

My two cents...without studying it much.

M, you didn't say if the properties had any loans orliens on them, I assume they are clear.

I strongly suggest you keep a fresh eye on this deal and develop it as you can to the seller's needs which may provide you with long term financing. Don't screw it up trying to follow some guru plan, but having ideas from strategy may not hurt, especially on your exit if you need to go there.

If you were to take on any partner to gain control of the properties they would be in your pocket! Instead of allowing a partner having an equity, take it all and sell to them at a profit and you'll have the profit for equity in the properties left!

You need an over all plan first. You asked what we thought about the terms above....I think it's premature as you have not made a plan yet, get a partner, hold them all, buy and flip half, flip a few.....long term financing by your seller? you don't know yet. Don't assume, but look first at the options, then build the deal to accomplish that goal.

Playing on the desire of the seller to sell to one person is a very good play, Consider this aspect as I have been through that and you're right, if can be a life time's work and you're walking into it. It probably would not be wise to say you might flip some, but you can also sell to tenants who are close to loan qualification.

Good luck with it, just don't get in a hurry, the seller seems towant to sell to you, that's more than half the battle!!

Yeah....are you going to create a blanket loan across all of the properties with release clauses? How will you exit? What is your intention with the properties? Will you keep some and sell others?

IMO the fact that some properties may have debt on them isn't really a big deal unless you are worried about the due-on-sale clause. If you are capitalizing things at 10% it is unlikely the debt on the projects will be higher than that. You obviously need to investigate that though.

If you do end up purchasing a bunch of these, one way you can reduce your risk over time is to focus the cash flow you're generating from your overall portfolio into paying down mortgages. Paid off properties have very little risk in them, and the more you pay off, the more secure you make your business.

You also could sell off part of the new acquisition and use the proceeds to deleverage other properties, which would reduce your risk as well.

I may be a mortgage guy, but I'm a firm believer that leverage - while it can be good - can also add a lot of risk to your business.

Special opportunities are few and far between. Everyone on here is giving good advice but the bottom line is, is this the kind of deal you would dream of if you had a "dream deal," come across your desk?

As most folks have mentioned, doing your DUE DILIGENCE is the number one priority, all other items come after that.

Some folks talk about a return as the starting point for a price. While this is good, I usually don't start there. The first place I start is "market value." Try to come up with some sort of "market value range," a number you can show the sellers what the properties would sell for if they were retailed separately. Next, I would come up with a "deferred maintenance expense" that you will need to spend to make the properties "retail value ready." Next, there is going to be an "expediency expense" where the sellers want to unload all the properties at once. This could range between 10% and 30%.

As for the financing, you need to figure out what payment you are comfortable with. If the rents are $30,000 a month, personally, I would try to keep the PI payment at $10,000 a month. If all the other expenses come out to 50%, or $15,000, this leaves you with $5,000 a month positive cash flow. (The deferred maintenance can be figured into the 50% unless there is something catastrophic). So, just using round numbers, let's say you pay $2,000,000 and put 5% down ($100,000) and finance $1.9M for 30 years at 5% (Monthly PI $10,199.91), you make $60,000 a year on a $100,000 out of pocket investment. If $100,000 is a lot out of pocket for you, find a partner to put up 50% and you put up 50%. I am sure there are quite a few BP members, including me, who would make an investment like this, if the due diligence turns out to be positive.

Keep us abreast of this deal, it sounds like it would be a very interesting story! Good Luck.

(My numbers are just for example, they are not meant as any advice on this deal, or any other deal)