Some of the best real estate investing lessons come from watching other people’s wins and fails. Here are a few ups and downs we experienced recently when buying an 80-unit multifamily apartment building.
We bought this apartment building on the southside of Indianapolis, Indiana. It has been a great investment. We actually made some great things happen in the details—but we could have done better in certain areas.
1. Never Overlook a Deal
Never overlook a potential deal. Don’t brush off (or underestimate) deals that are brought to you without checking them out first. This particular deal was presented by a fellow team member as something that may be of interest to us. We dug deeper, and found that the property was running a 70 percent expense ratio. However, the majority of those expenses went toward renovating multiple distressed, vacant units and addressing outstanding building repairs (think decks). Those expenses didn’t affect us since the work was already completed. Many investors may have passed on it on first glance at the numbers—and many probably did. I’m glad we took the time to investigate it.
2. Put Everything in Writing
If finding a good investment is all about location, location, location, then the number one rule of negotiating and securing a good deal is put everything in writing; put everything in writing; put everything in writing. Did I say everything?
The roof on this property needed a replacement. There are two main ways to tackle roof replacement in this region. The first and preferred is a tear off, which means removing the existing shingles and starting over. The second and less attractive option for long-term ownership is an overlay, which means just covering existing shingles with new ones. It is a lot faster and cheaper. It will make the roof a lot better, but as Angie Hicks, founder of Angie’s List explains, an overlay doesn’t allow you to assess the condition of the underlying materials and leaks. In a cold climate, that can mean ongoing leaks and water damage. You may end up redoing the whole roof again much sooner and spending a lot more money in the long run.
The roof was negotiated to be replaced via tear off, which is more costly. Unfortunately, the tear off terminology didn’t make it into the final contract. It was just verbally agreed upon. So the seller skimped and got away with just doing an overlay. So make sure everything—all details—are in writing and signed.
3. Expect to Counter Offer
Whether you are a buyer or seller of real estate, your first asking price or offer needs to price in some room to negotiate. It doesn’t matter how great your first number, if you are inflexible, you will lose out. People want to feel they’ve won something. We started negotiating this when the seller was asking for $3.6 million. Our first offer was $3.1 million. We finally met in the middle at $3.35 million.
4. Negotiate with Your Lenders Too
Everything is negotiable in real estate, including loans, lender fees, and terms. We worked with a regional bank on the deal. They insisted on making it a recourse loan. I feel way better (and sleep way better) using non-recourse loans. It just makes more sense. Though for all the same reasons, most banks want to demand recourse, or will offer far worse terms in regards to rates, fees, and LTV. We managed to negotiate a recourse clause for only the first two years. For the remainder of the loan it will be non-recourse.
5. Find the Motivation
In order to have leverage in negotiations and to negotiate a deal that is really valuable and profitable, you have to dig in and find out what the motivation really is. In this specific case, the seller of this multifamily property was a builder who specialized in new-build single family homes. He needed some cash to put into his regular line of business. He really didn’t want to be in the multifamily rental business. We got him the cash he needed and got a good price on the property.
There are a lot of moving parts in a multifamily real estate transaction. If you remain diligent and negotiate, you can turn an OK deal into a great one. Miss a few critical things, like putting all of your terms in writing, and you might find it less profitable than expected.
What can you share about your experiences dealmaking on multifamily properties?
Tell us in the comments below!