Learn from our Deal of the Year
Outline of our Deal of the Year
The following events occurred over 30 days and shows that solving problems and being creative is more important than having a lot of money. I chose to outline the event chronically as the deal evolved, because it shows how investors can earn large profits by being flexible and keeping their eye on the prize.
While performing my daily scan of the Fresno MLS I identified a 10-Unit apartment building listed at $220K. The pictures and the MLS description showed that the property was currently vacant, in disrepair and needed a new owner.
My original thoughts were this property is priced way too high and might be worth only 120-150K if it needed a cash buyer. I found the property interesting and added the listing details and agent contact info to my list of calls to make the next day. Remember I am not an agent and I have no special access to the MLS. Every Fresno real estate investor was free to review the same details and put a bid in on this property.
I called the listing agent and told him I was interested in his listing and had a few questions.
When I called the agent the first thing he said after I introduced myself was, "Hi Michael, glad to speak with you again." I wanted to say thank you for the card you sent me several months ago. I know that deal didn't go anywhere but I am sure we can make this one work.
I said, Nice to speak with you as well. What can you tell me about your 10 unit listing as it appears rough and frankly a little over priced given the market and the current condition.
Listing Agent: I agree, the building is rough but let me share the story and see if we can figure something out. The seller is the wife of the late husband who had done all the management for 20+ years. He passed away 6 months ago. She tried to keep up with it but she hired the wrong property managers who let in bad tenants and it was downhill from there. At this point she wants to give it up and just walk away. The list price is actually the loan balance.
"Interesting" I said and then I rattled off a bunch of questions. Does the Bank know the condition? Does the bank know they have an ugly foreclosure or short sale coming? Does the seller know they will have to bring some money to the table to pay agent fees, etc if we agree on list price?
Listing Agent: The bank is actually a local community bank and they say they won't discuss anything until they have a firm offer in hand. As for the seller she will be happy to bring some money to the table in order to put this problem behind her.
At the outset I didn’t know if we could make a deal work but it was certainly worth a shot, so I said lets write up the following deal that will satisfy the seller and force the bank to make a decision.
I will offer list price of 220k, I will put 20K down with 1K Earnest Money Deposit, and require the bank provide new financing at 6% interest Fixed for 10 years amortized over 30.
The listing agent said the seller will love it and now we have something to go back to the bank with.
While the real estate agent was walking the bank through our offer after getting the sellers signatures they indicated they would need more than 10% down. The bank initially felt the offer was very light on down payment and gave them little security.
While speaking with the listing agent about the feedback from the bank I suggested the bank should go out and look at the property because from where I sit I am actually putting 30% down. I am putting 20K down at closing and then investing at least 40K in make ready costs for a total of 60K. I want to help the bank fix their problem but they have to work with me. I told the agent I had zero plans of offering more than 10% down.
After the bank reviewed the property and discovered the poor quality, 100% vacancy and the general neglect of their current asset they decided they could not agree to a new loan. However, the bank did ask how I would feel about an assumption of the current loan?
The bank asked me to call them directly if I was interested so we can discuss terms, requirements and conditions of the assumption. The bank had not done an assumption in 20+ years but they were open to the idea if they could create better security.
The banks opening offer went something like this. We understand the quality of the asset is poor and we need to ensure we have security going forward. We would like you to put 40K in escrow to pay repair bills. We will give you 7.25% fixed for 5 years with a 5,4,3,2,1 prepay penalty. Then we will ask for a 1% assumption fee and normal escrow fees.
I found the offer interesting but I thought we could do a little better, so I went back with the following offer.
I said, I understand your need for security but I have no intentions of tying up 40K in an escrow account for repairs. Given our business, I plan to fund repairs out of monthly rental proceeds. However, I want to make this work so I propose the following. First let’s lower the rate to 7% fixed for 5 years and then I will open an account at your bank and place 18 months worth of mortgage payments in the account which you can automatically deduct going forward.
The bank representative found this interesting especially because I was opening a new account and growing my relationship with the bank. Their closing line was, I like the idea let me run that up the flag pole.
It took a few days but they called back and said they will take the offer with one additional requirement. They requested copies of receipts as we did repairs.
I thought that was more than fair but I did request we send receipts on a monthly schedule vs. weekly as they initially requested.
With that last tweak we had a deal.
We signed Escrow documents and we were the proud owners of another 10-unit building.
Let me summarize what we had done in 30 days. We found and secured a 10-unit building for almost nothing down (less than 4K) and the escrowing of 18 months of mortgage payments by simply reviewing the Fresno MLS.
Keys to deal:
I took action even though the price was much higher than I wanted to pay. The deal was found in the MLS and was available for anyone to call on. I remind you I had no special access to this deal and every investor could have made a bid for this deal.
A simple thank you card from a past deal that didn't go anywhere greased the wheels with the listing agent and he shared all the data required to put a creative offer in place. The agent wanted this to work for all parties and he took the extra time to show the bank the property on multiple occasions. The listing agent truly was the key to this deal as he worked with all three parties (Seller, Bank, and Buyer) to make sure everyone won.
We remained flexible to deal structure as bank shared their requirements and needs for security.
Having the bank be a local community bank was huge as I doubt one of the national banks would have done such a deal. They would have foreclosed and sold it for 100K-125K 6 months from now.
For those that follow my investment program here are the numbers. Expected Yearly Cash Flow once seasoned and repaired equals 18K. Out of Pocket Cash is 4K Closing Cost, $0 Down, and 40K in repair costs for a total of 44K. This produces a yield of just over 40%!!!! Not bad for a little creative thinking and lots of phone calls.
In the end we called this the deal of the year but in reality we try and find a deal this good at least once every other month.
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