Hi everyone. I’m glad to have the opportunity to share my latest investment transaction in hopes of inspiring anyone in need of a nudge or offering some valuable information. I recently just closed on a under-performing and value-added commercial real estate opportunity, which is a self storage property in Kern County, CA.
I initially saw the property through an auto e-mail inquiry from LoopNet, based on my criteria. I know that to some investors, LoopNet is a graveyard for deals, but I like it for that same reason because, as some listings can become stale on the MLS, I feel that my chances of finding a motivated seller is higher. Plus, I know how to identify the value-added opportunities.
This property is a 100 unit under-performing self storage REO property on 3.5 acres in Kern County. The 100 units alone is barely occupying one of the acres, leaving 2.5 acres of flat graded gravel still available for expansion or for RV/Boat storage.
I saw this listing back in September 2014, and what got my attention was that I used to own a multifamily property in that area from 1999-2004. So, I knew about the area, including demographics, the micro-economic driving forces, steadily increasing population growth, etc. I didn't take any action at the time because I felt it was way over-priced, based on its existing financial condition. It was listed at $500k with 30% vacancy factor and an annual Net Operating Income (NOI) of roughly $35,000. I need to go in at a 10% cap rate to meet my acquisition criteria. At a 10% cap rate, my max purchase price would be $350K. So, I flagged the listing to notify me of any changes, in case there was a price reduction or if it was no longer available.
After a couple of months, I received an alert that it went under contract, so I just went about my business and put it behind me. Another couple of months go by and I receive another alert that it was available again, and that’s when contacted the listing agent to express my interest. I gave him my perspective on it and why it wasn’t moving at their price. I added that I’m the right buyer for this property, but that it had to be at the right price. I didn’t want to get in already treading against the tide. I have to get in, where the existing income will be able to cover the hard costs (taxes, insurance, utilities, payroll, etc.) and with enough spread to cover the mortgage payment. I didn’t want to pay for an income stream that wasn’t there. If I had to create the income by off-setting expenses and filling vacancies, then I should benefit from it. It took a few months of going back and forth on negotiating a price, mainly because the seller was an entity with a board of directors, which all had to agree on the responses. So, it would take like a week or two to get an answer, but that was okay because it allowed me to line up my financing.
The story behind this property is that it was purchased and constructed in 2006, a time when everything was over-inflated. This property had a $1,000,000 note that had been called, including almost another million in out-of-pocket costs from the previous owner. That doesn’t justify a value, but it does indicate the reason for the under-performance, management inefficiencies, and potential value.
I started my offer with $270K, and after a few months of going back and forth, we finally agreed at $325K and opened escrow in August with 5% down. So, I got it under contract below my max price of $350K and with tremendous up-side. One of the other reasons I feel that this deal came together successfully, besides knowing about the area, was that even though I’m a licensed agent and could have submitted my own offer, I would rather have the listing agent represent me and double-end the commission on the transaction, as long as they’re able to present my offer(s) and provisions effectively. I always try to use this method initially. I’ll talk with them, try to build rapport, and see if this is what will help get the deal done.
As I mentioned earlier, during these months of negotiations, I was trying to line up financing and found a lender that specializes in self storage properties. Everything was going smoothly with the lending process except that we couldn’t supply the lenders with their requirement of three previous years of tax returns of the business. The inability to obtain these documents became too risky for the credit committee to approve the asset, and I was ultimately declined for the loan. So I turned to plan B.
As you may or may not know, I'm also a real estate agent and specialize in representing investors, who buy, fix, and flip residential properties. Throughout the projects, I'm always talking about my other specialty, which is identifying under-performing and value-added commercial real estate investment opportunities. I feel this is a great way to set yourself up to obtain a JV partner or private financing. While still going through the loan process, I knew things were looking bleak, so I reached out to the last four investors, who I've worked with this past year and presented the opportunity to be my lender, just in case the loan didn't go through. I wrote down, showed, and explained my analysis on the investment opportunity. I explained my plans how I was going to stabilize the property, the income and value before and after after I stabilize it, how long it would take to stabilize it to refinance the private loan, and how their investment was going to be insulated from loss, which was based on my purchase price.
One of the investors responsed within a day, mentioning that it was a coinsidence I had brought the opportunity up at the right time because they were considering investing in another asset class. We then preceeded with escrow. I drafted the Note and Deed of Trust with mutually beneficial terms, and presented it to escrow, which reviewed and critiqued it for editting before it was executed. I was hoping to get 100% financing and get my down payment back at closing to move into the next transaction that I was looking at, but they insisted I keep my skin in the game. Instead, they’re funding me on the next one, and they’ll keep on funding me as long as I perform on the agreement(s). We just recently closed ealier this month and already making an offer on the next. I would say that our relationship during our initial transactions opened up the door for this type of opportunity.
Thank you all for reading and allowing me to share this experience. I’m hoping any of you can take some valuable nuggets or well needed inspiration from this. I’ll follow up on this with more accurate monthly numbers because we’re currently at 90% occupancy and our expenses have dropped dramatically, especially the annual taxes. Please feel free to share your thoughts and comments.
@Tim Soto Congratulations! Just goes to show that timing is all about following the market systematically and knowing a deal when you see one. I am currently looking for deals myself, so thank you for an inspiring story.
@Tim Soto - Congratulations on your new acquisition.
Clearly, you demonstrated a methodical approach to this purchase, in that you knew the neighborhood and its potential, stayed calm when another buyer attempted to purchase property and failed, remained firm with your purchase ceiling, had dual funding plans and your to do list was ready to take action as the ink dried upon purchase.
Thanks for taking the time to outline a step by step methodical approach to REI, without injecting emotions in the transaction.
Good luck with this purchase and your future acquisitions.
Great job on this value play. Wondering how you got the property leased up, or what type of marketing you did? If you don't mind sharing what was your NOI at 30% and after your lease up?
How did you draft a Note and Deed of Trust, is it so easy that any one could do it or would you recommend an attorney draft such a document?
Again brilliant write up!
Wow, nice work Tim!!
That story got me fired up! What an awesome work of art @Tim Soto !
Keep it up!
@Jonahvan Rico . The existing on-site manager was leasing the property up during escrow without any changes in marketing. The NOI at 30% vacancy was roughly $35,000/annually. Right now I have to recalculate the numbers, because not only did we fill some vacancies, but the expenses decreased as well, which brought up the NOI even more. We closed on the 8th of October, so there were some prorated rents deducted. November will be my 1st full month of actual numbers. This reminds me... One other stradegy I forgot to mention is that I always try to close on the 3rd of the month. So even when there's a delay with escrow, I was still able to close as early as October 8 and still collect 20+ days of prorated rents, without really having to pay any operating expenses. All of the operating expenses for the month were payed by the seller on the 1st, and I don't have a mortgage payment until November 1st. This enabled me to pay my closing costs, including property taxes for this half of the year, insurance premiums for the next 12 months, and the rest in reserves.
In regards to drafting the Note and Deed of Trust, I have done it in the past, but it's been a while and forms change, so I used a existing templates and submitted them to escrow/title for their feedback. They're not going to let me execute and record a document that isn't 100% accurate. So, we went back and forth with my mistakes until I got it right. I could've easily just had an atotrney draft it up for $200, which I would totally recommend, but I wanted to have a template of my own that I can use again. Thanks for the great questions.
Keep it up!
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