Breaking into the Houston MF Market

18 Replies

My business partner and I recently syndicated, and closed on a 62 unit multi-family property in Houston, Texas. I am writing this for the benefit of those interested in venturing into the commercial arena.

It started when a broker that I worked with in the past called about the property. He had decided to branch into Houston and made a cold call on a 155 unit property. The owner happened to be there and said that he would not sell, but did have another property that he would consider.

The other property was a 62 unit C class property in a C neighborhood. The owner had bought it two years earlier as an REO at 60% occupancy. Shortly after take over and tenant repositioning it was down to 40% occupancy.

The seller stated his price but my broker negotiated him down by 250k and brought the deal to me. By this time the property had 3 make ready units and 7 down units, at an occupancy rate of 84%.

Houston was a new market for us and we were in the middle of a San Antonio deal with two other investors. We had to consider our resources before taking on a second property at the same time. I started to communicate with some Houston investors I had met on BP, and they checked out the area and walked through the property for me. With my broker’s opinion and the opinion of a local, I made the offer my broker had suggested. Once we had the property under contract, I also had three property management companies give me their opinion of the property and location.

The first phase of our due diligence is the financial phase. From our offices we reviewed the seller’s financial statements, rent rolls and verification of expenses. . After a thorough underwriting, review and confirmation we were satisfied with the performance of the property and made travel plans for our on-site due diligence.

Once on site we conducted a thorough investigation of the sub market. We drove the surrounding area to assess the condition, competition and employment opportunities. We made it a point to stay at a hotel near the property and drove by the property at various times of day and particularly at night, especially Friday and Saturday night. We took every opportunity to meet with the seller, talk to local store clerks and restaurant staff, and nearby neighbors to get a full spectrum opinion about the area.

Prior to our scheduled inspection with a local property inspector we conducted our physical due diligence. We walked every unit, documented inventory, conducted a lease audit and reviewed other documentation. . During our numerous visits and meals with the sellers we obtained many details about the property.

As part of our research we visited the city’s building and safety, flood control, code enforcement, planning, and the fire marshal to learn about their requirements and confirm compliance. We had the fortunate timing to attend a community outreach meeting with the police department and spoke with the beat officer for our property. We also had a visit with economic development.

While in Houston, we interviewed property managers, looked at properties they manage, met with BPers and potential investors we knew, and looked at other properties in the market.

Satisfied with the property, market, submarket and management, we returned to continue the due diligence and acquisition process, including securing the loan, finishing the Private Placement Memorandum (PPM), securing insurance quotes, and forming the entity that would hold the property. Once the entity was formed and the PPM complete, we were able to accept investor funds and close the deal.

We closed on the property on February 21st and are now working with the PM to reposition the delinquent tenants, bring the down units on-line and conduct capex repairs.

Congratulations, Jeff! I know you have been working on this for a while - how long did this take from start to finish?

Also, would you mind sharing any numbers about the deal? Thanks for the update!

Originally posted by @Jeff Greenberg :
I am writing this for the benefit of those interested in venturing into the commercial arena.

Congratulations and thank you for taking the time to outline your process! Very helpful.

Thanks for sharing Jeff. I appreciate hearing about your thorough due diligence!

Great market!!! Almost evergreen:

1. Texas

2. Supermax sea port

3. Energy Sector


Congrats Jeff. What differences do you see between the Houston and San Antonio MF markets?

@David Edgerton That was the short version

@Sharon Tzib We actually went under contract in late June, so it was a long process. Part of the slowdown was getting a lender and then satisfying a very rigid insurance requirement from that lender. We started with an 11 cap, but the increase in the insurance costs brought it down to a 9.5 cap deal. A lessor deal would have been killed by the insurance.

@Jon Klaus I like both the SA and the Houston market. Houston is a larger city with stronger job growth. It also has a lot of distressed properties. The SA deal we walked from was the total opposite of the Houston deal in so many ways.

Hey Jeff! Would you mind elaborating on why it was so hard to find a lender, and then what was so rigid about the insurance (was there a flood zone involved or something)?

Also, can you give us an idea of price/unit, or are you preferring not to share purchase price? Thanks!

Hey Jeff! Would you mind elaborating on why it was so hard to find a lender, and then what was so rigid about the insurance (was there a flood zone involved or something)?

Also, can you give us an idea of price/unit, or are you preferring not to share purchase price? Thanks!

@Sharon Tzib When we went under contract there were 10 vacant units putting it at 84% occupied killing off fannie mae. The property is within 25 miles of salt water( the bay), in a 100 year flood plain with the elevation 1 foot under flood elevation. Add 1963 construction and the lenders drop off. We fought for two months threatening a sit in, in the previous insurance office to get them to give us a loss run, just so we could get an insurance quote.

The issue with the lender's insurance requirement was they wanted us to insure for replacement value. Now you might think, what is wrong with that. Well we bought the property for 1.3 mil (here is your number) and replacement value at $60 a sq foot would have put it 3.2 mil. Our plan was to insure for 2 mil. If the property was destroyed and we received the 2 mil plus sell the land for 600k(assessed value), we could walk away with the investors very happy and the lender satisfied.

The lender would have accepted the 2 mil, but without co-insurance. Of course we could not get it for 2 mil without co-insurance. I hope that there is someone on BP can explain the logic of co-insurance, but here is what it ends up meaning to us. An insurance company may require a co-insurance of 80-90%. So let say the replacement value of the property is 3.3 mil and I decide to insure it to a cap of 2 mil. Now 2 mil is less than 80% of 3.3 mil or 61%. Therefore the maximum they would pay out on my 2 mil policy would be 61% of the 2 mil policy or 1.2 mil. So if we really wanted a 2 mil policy we would have to carry an additional 800k to cover the shortfall on the 2 mil policy. This ended up costing more than the 3.3 mil full replacement value.

So if you wondered what took so long, contacting a half a dozen insurance brokers and waiting for a response, does take time.

Lesson learned: find out early if you are in a flood plain and get firm quotes early.

A recent update, the good news is the property assessed for 2.1 mil, the bad news is the property assessed for 2.1 mil. We are in the process of contesting the assessment.

Yeah, Jeff, I know there are flood plains throughout Houston, so I kind of figured it had something to do with that. But wow, what an ordeal! I have never heard of co-insurance- I too hope someone can chime in on that.

Thanks for sharing your price :) You did very well my friend. Ok, one last question, lol! Were you able to get the seller to provide any financing, or would the lender not allow that? Kind of curious about what the financing piece of the puzzle looked like. And speaking of the seller, how did you get them to hang in there with you all this time - that seems like a negotiating feat in and of itself.

Once again, thanks for sharing all this. Seeing the "in the trenches" details are incredibly valuable. And good luck on that assessment!

@Sharon Tzib The lender would not allow any secondary funding so that was out. We sometimes try to bring the seller in as a equity partner, but then we would have to show our projected returns, which could upset a seller that gave us a great price. The sellers were very reasonable about the extensions. We held this property with 3k ernest money and no additional for the extensions. The seller also continued to work on the property. At close we paid him extra for the three units he brought up. We closed with only three units down. The last of these should be up this week. We are currently up to 95% and have started a RUBBS program.

Wow, that's awesome Jeff about the EMD and the seller being so flexible with you. Seems to me RUBS is becoming more and more common place in Houston now. Congrats on getting to 95% so soon! You must have a great team in place there.

Originally posted by @Jeff Greenberg :
We fought for two months threatening a sit in, in the previous insurance office to get them to give us a loss run, just so we could get an insurance quote.

Hi Jeff, what do you mean but this? What is a loss run? Did you try to use the insurance issue to renegotiate the price?

Also what kind of hold time and exit cap are you projecting? Thanks and congrats!

@Bryce Y. A loss run is any insurance claims. We needed the last two to three years. Insurance companies use these to determine your rate. This like having a cars insurance record following the car. We got the deal at 21k a door in a 25-35k door market, with a great seller that we want to work with again, so no we did not try for a discount on price.

Hold will be 5-7 with an 8.5 cap sale projected.

@Jeff Greenberg

Congrats on the deal and thanks for sharing the process. It's always great to hear from other investors how larger transactions are not always as fun and glamorous as some people think they are.

Also I'm shocked you tied up the deal with only 3k in earnest money....nice job!

@Jeff Greenberg

1. What area of Houston are you in (zip code)?

2. Have you visited any RE clubs/meetups in Houston? If so, which 2 or 3 did you like best?


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