Advice Needed on Being the Mutual Connection that Helps Create a Deal

[Scott Scharl]

Hello all. I have a question about how to connect two acquaintances to make a deal:

1. The first person

In a recent conversation, I have learned than a former landlord of mine is seriously considering selling three of his properties in the booming Arcadia neighborhood of Phoenix, Arizona. Each of the properties is a multifamily. The landlord does all property management and most maintenance himself. While multifamily properties all around are being renovated or razed and rebuilt, his buildings remain the most outdated and worn on their respective blocks. Tax records show that he owns each of the properties in his own name. Since he has owned each property for a number or years, it seems that his long-term strategy has been to cut corners and avoid capital expenditures, betting on appreciation in the end.

It seems to me that two of his parcels in particular would be excellent candidates to be torn down and replaced with high-end apartments or condos; the same thing is happening across the street with another, much nicer (but much larger) multifamily property.

2, The second person

Currently, I am building a mentor-mentee relationship with a local investor who has fix-and-flipped over 200 properties. This investor has an excellent track record raising private capital, and has already done work in the neighborhood flipping single family homes. He is also starting a brokerage and I will most likely hang my license with him when I receive it in late August.

All this is to say: How can I best leverage both my relationship with this motivated (retiring) seller AND my relationship with a successful local investor to help make a deal? How might finders’ fees work in this situation? Should I wait until I have my license, or should I act ASAP to connect these two before the seller liquidates and moves on with his life?

Thanks so much for any advice you might have.

[Juan Cristales]

Great question! My personal opinion is that you ACT NOW... whether you decide to wholesale it over to the investor, find a way to participate in the equity capture and/or cash flow on the deal, etc. If you aren't completely comfortable with that just yet, by "bringing this potentially GREAT deal to the investor," you are strengthening your mentor-mentee relationship anyway.  Best of luck! Keep us posted @Scott Scharl.

[Scott Scharl]

Thanks for your two cents, @Juan Cristales. It seems like decisive action to connect them is definitely the way to go.

@Dick Rosen, I'd be interested to hear your thoughts as well.

[Christopher Telles]

You are in a good position to work your way into a deal. You really didn't say what you preference is in how to approach whether you'd prefer to broker or participate in the transaction on the equity side. I'll give you my take in either of those two scenarios. First, as an unlicensed person you are not able to received a commission on a sale. Although you perhaps receive a finders fee from the buyer ( not familiar with AZ real estate laws so you want to check what restrictions are in place and what you can and can't receive in terms of a fee). The better option is to create value to earn your way into the deal. It seems you've already done a little research on the sellers property. At this point why not ask him what he wants for the property. Ask him for the financials for the properties that you "and a partner" would have some interest in looking at the properties now. Tell him you've been in the market looking and your aggressively looking. Probe him to see if he's willing to finance the deal by carrying back a note. Avoid any conversation about your ability to buy by deflecting his questions and using your "partner" as the source if he presses you. If you have some ideas of values for similar properties in the area then you might make him an offer at a discount to what the current value is under the guise of its functional obsolescence. Put that specific term in a cover letter with the offer "we arrived at our offer after underwriting the property and taking into account it's functional obsolescence to the units tenants find desirable in the direct marketplace of the properties". Using creative financing techniques, in the offer ask him to carry a note for X % (say 80-90%) at Y % interest for a term of 10 years. Even if you don't have the initial money to put down you'll be able to get the money if the price is right whether from your mentor guy or someone else. Depending on the price you negotiate you may end up owning a piece of a great value add opportunity. Once you've started the negotiation with the seller then go to your mentor dude and tell him you're negotiating a great deal on a three property portfolio that could potentially be bought for X price that after a value add rehabilitation will rent for Y dollars per unit providing a new value of N when the refurbishment and re-tenanting is complete. Now is the time to work up a budget on what you think the refurbishment will cost per unit in each building, what exterior improvements will cost and what time frame and cost you will incur in getting the refurbished units rented to higher paying tenants. Then use the new projected rents to work up a proforma to determine a projected cash flow from the refurbished properties. If this sounds like a lot of work it is, but it's how every value add investor approaches a value add deal. You need to understand what you can pay for the property as it sits based on what the rehab and re-tenanting will cost. And once complete what the property cash flow will look like which will help you determine what the new values would be for each property when your done. This will help you also determine your exit. You and your investment partner will have to figure out whether you'll exit to earn the gain or if you'll refinance them to retain the cash flow. Now, as for negotiating your position in the deal. If you don't have the ability to make an investment of equity then ask for a percentage of the upside in the deal. That could be anywhere from 5-50% of the deal. Since it sounds like you don't have a lot of experience in these matters then get what you can in terms of percentage and use the deal as a hands on learning experience. Keep in mind that if your walking into a meeting with a potential partner with a deal in process or a negotiated deal you'll have a bit more leverage to get a bit more equity. I'd go for the equity play over earning a fee.

[Scott Scharl]

UPDATE: I called the landlord this morning. He wouldn't give me a price, and said that he was still "figuring things out" and did not want to be bothered with phone calls from buyers at this time. Sounded like he is still needs to run some numbers of his own and figure out what he wants.

I assured him that I would respect his wishes and not send him unwanted referrals. What's my play from here? I have to believe that every person has his price... how do I keep this alive while making it a mutually beneficial experience for all involved?

[Scott Scharl]

Also, thanks @Christopher Telles for your tips! I want to figure out how to implement your strategy and work myself into this potential deal.

[Dick Rosen]

Hi Scott, I think you are in a pretty good position for a few different angles, my question is what is your goal from this? I think my position, if I were in your place would be to work more closely with your mentor. If he is a truly worthy mentor he's going to help you make this deal happen one way or the other and make sure you benefit in some way. If your mentor is a fix/flipper but not experienced at negotiating with sellers, you may want to have some discussions with area wholesalers. From the conversations you've shared so far the seller doesn't really sound very motivated but that just means more time and more follow up. Eventually he's going to find out that his properties are worth nowhere near (from what you told me) what the neighborhood is worth and he should take whatever he can get. But he's not there yet... that's why I say more time and follow up.

[Christopher Telles]

Originally posted by @Scott Scharl:

UPDATE: I called the landlord this morning. He wouldn't give me a price, and said that he was still "figuring things out" and did not want to be bothered with phone calls from buyers at this time. Sounded like he is still needs to run some numbers of his own and figure out what he wants.

I assured him that I would respect his wishes and not send him unwanted referrals. What's my play from here? I have to believe that every person has his price... how do I keep this alive while making it a mutually beneficial experience for all involved?

Well you took action, and now you just needed to follow up with the seller once week or every ten days or so. 

Not to sure what you mean by "send him unwanted referrals"?

Stay on top of him, and don't let his deal slip away to another buyer. My best advice would be to go talk with your mentor buddy and develop a strategy to engage this seller in substantive dialogue concerning a possible sale. Being prepared with the right bits of information and the right questions on the next call with the seller is imperative to helping you have a chance at making this deal happen. It may not happen now because the seller isn't ready, but if he is contemplating a sale then when he is ready you'll be in position to act again.