buying a note- slam dunk deal
Real Estate Investor · New York, NY · Member since 2009 · 20 posts · 0 votes
I would like some feedback on an opportunity that was presented to me by a lawyer that I was interviewing to be a part of my team.
buy a 650K note at 10% interest on a multi-family mixed use building.
the owner has defaulted on the note and it was accelerated
the note seller is asking for 350K
exit strategy #1
foreclose on the property and flip it. the RR is 80-100K so will easily sell for at least 800K. we turn 350K into 800K
exit strategy #2
current owner will find a way to pay the accelerated loan and stay in the property. we turn 350K into 650K.
Let me say that I do like this lawyer so far, he is an investor himself (obviously) and he professional and courteous. He was recommended by others at a REIA meeting. Should there be any concern on my part that he is both the lawyer and a partner in this deal?
Besides that I would really like feedback on the deal itself. What am I not thinking of? What could go wrong? It sounds like a slam dunk.
I am not an expert in apartments or mixed use, but there is more to purchasing a building than just rent roll. You need to know the condition of the property. Some questions that I would need answered before considering a purchase like this is
How old is the roof?
How old is the boiler and what type of fuel does it use?
When was the apartments last updated?
Are any units rent controlled or rent stabilized?
What is the overall condition of the building?
Who owns the note (bank, private lender)?
If the property in located in nyc, use these four resources to get a better idea about what you are purchasing.
First,
The City Register where you can view the mortgage on the property, who sold it, who purchased it and who financed it
http://a836-acris.nyc.gov/Scripts/Coverpage.dll/index
Second,
NYC Department of Housing Preservation and Development (HPD) where you can check on complaints and violations. This usually can give you a pretty good idea on the condition of the building and what the tenants are complaining about
http://167.153.4.71/hpdonline/provide_address.aspx
Third,
NYC Department of Buildings - Also has complaints from HPD and also building altercations and any fines that were handed out
http://a810-bisweb.nyc.gov/bisweb/bispi00.jsp
Fourth,
NYC Department of Finance - Check out taxes, unpaid taxes, appraised value, unpaid fines, number of units in building, owner, etc...
http://webapps.nyc.gov:8084/CICS/fin1/find001i
Fransisco,
It's great that you're putting together the team, that's a big piece of a successful business.
My only push back on the mentioned exits are:
1. Judicial foreclosure, used primarily in NY state, may take up to two months. What are the vacancy numbers and will it satisfy all costs with rent payments? Is the number of buyers at that price point adequate to sell "easily?"
2. Even if someone that defaulted on a previous contract concocted a means to pay an accelerated amount, highly unlikely, their trustworthiness and stability is already in question.
David great questions,
according to the attorney, a "Receiver" would be assigned to collect the rents or "intercept" them as I understand it. The building is fully rented and I have seen all the leases for all the tenants. I think the building would EASILY sell for 800K because it currently rent rolls for 100K/yr. Even if we went with exit strategy #3 which I did not mention, buy/hold, the property cash flows and covers expenses. This brings the question.... "well then why did the current owner default" When I asked this question the answer from the attorney was that he was not 100% sure, but that basically they believe the owner is pocketing the rents and engaging in a form of "equity stripping". If that makes sense to anybody, please elaborate.
I am not an expert in apartments or mixed use, but there is more to purchasing a building than just rent roll. You need to know the condition of the property. Some questions that I would need answered before considering a purchase like this is
How old is the roof?
How old is the boiler and what type of fuel does it use?
When was the apartments last updated?
Are any units rent controlled or rent stabilized?
What is the overall condition of the building?
Who owns the note (bank, private lender)?
If the property in located in nyc, use these four resources to get a better idea about what you are purchasing.
First,
The City Register where you can view the mortgage on the property, who sold it, who purchased it and who financed it
http://a836-acris.nyc.gov/Scripts/Coverpage.dll/index
Second,
NYC Department of Housing Preservation and Development (HPD) where you can check on complaints and violations. This usually can give you a pretty good idea on the condition of the building and what the tenants are complaining about
http://167.153.4.71/hpdonline/provide_address.aspx
Third,
NYC Department of Buildings - Also has complaints from HPD and also building altercations and any fines that were handed out
http://a810-bisweb.nyc.gov/bisweb/bispi00.jsp
Fourth,
NYC Department of Finance - Check out taxes, unpaid taxes, appraised value, unpaid fines, number of units in building, owner, etc...
http://webapps.nyc.gov:8084/CICS/fin1/find001i
Thanks G.Founder.
I do know that the note is coming from a note broker and that the source is an investor who purchases 1-4 family notes in bulk and this 6 family commercial note happened to slip into that lot. That is why he is selling it at 350K.
G. Founder
additionally, thanks for all the resources, I've used some of them before. Also thanks for providing me with some of the questions to ask.
My only counter point about the rent roll is that, If I had the chance to buy THIS building for 350K given what I know about the property I think it would be a no-brainer with an 80 or 100K RR. Am I being nieve? If so please point it out.
If not, then I reiterate, even if I become a landlord then this property still cash flows. Again I've seen the leases of all 6 tenants, and at the current rent rates, this property seems like a deal.
answers to other questions
Q:How old is the boiler and what type of fuel does it use?
A: I found a permit for the following in 9/2008. Replace low pressure boiler and oil burner
I also found a mechanics lien for $1,405.00 that expired in July 2009. Does expiration mean that it was paid?
Assuming that now, I know it's an oil based boiler, what should I conclude about maintenance and or expected life of boiler?
Francisco,
I do not know the specifics of New York, but I represent banks with commercial notes all over the country. If you can purchase a note for around 50% of FMV, then you are doing good and the outlined exit strategies are correct. The only other possible scenario is bankruptcy, which would take a little longer and more legal fees to get it to foreclosure. Either way, you will make money - go for it!!!