Motivated seller on apartment complex, how do I work this deal?

Question

I have a pair of 24 unit, 2 bd 1 bath apartments found. The sellers are an elderly couple in poor health and have conveyed to me how badly they need to sell the property. It is to much for them to take care of anymore. I have been talking with them for about a month now and they still haven't given me a solid asking price or any of the information I need to see if the property is gonna be a good deal.

What should my next move be?

Thanks

What should my next move be?

Thanks

Karen Schimpf · Answer

@Gary Dale McKee It doesn't sound like you have a Realtor involved, do you have a real estate attorney that can help you?  I know a real estate attorney can cost you money but it is worth it in the long run. You will want to make sure the transaction is done right to protect yourself.

Are the sellers wanting to do a seller carry or are you planning on getting financing for it?

If you are working on a seller carry,  I suggest getting an appraisal, asking for rent roll, copy of leases, 3 years plus year to date operating statements. You will want to know how many apartments are rented and how long the leases are good for. If the sellers can not provide 3 years operating statements than at least look at 2016's year to date.  You will need to determine if the property can cash flow and debt service the seller carry note. Remember you are investing to make money like a business.  Infact, owning investment property is a business.  Anyway, to make sure the property will cash flow with the seller carry debt, make sure you have a debt service ratio of a minimum of 1.25.

To calculate the debt service ratio:

Find out what the NOI is.  NOI is calculated by subtracting the Annual Operating Expenses of taxes, property insurance, maintenance, management fee and utilities from Annual Rents.The DSCR Calculation: The annual NOI is divided by the annual mortgage payment = 1.25+DSCR Example :-Rent Income is $81,000 -Annual Operating Expenses are $16,891 -Net Annual Income is $59,684-Annual Mortgage payment is $35,778. (Go on line and do a Google search for mortgage calculator to determine  the monthly payment. Plug in the loan amount, the rate and amortization  you agreed on from the seller to determine monthly Principal and Interest payment. Than times the monthly payment by 12 to get annual mortgage payment)The net annual income is $59,684 divided by annual mortgage PI payment $35,779, your debt service would be 1.67.  This debt service is higher than 1.25, the property cash flows and debt services the seller carry note.

Lastly if you have a seller carry note, use a Note Servicing Company (third party company) to track your payments correctly. The note servicing company can also set up an escrow account to collect  taxes and insurance.  You do not want the seller missing your payments.

Hope this helps.

Mindy Jensen · Answer

I'd ask them what they want or need to get out of the property.

Do they live in one of the units? If it would be worth it to you, offer to let them (and make sure it only has their names, not their kids or grandkids or nephews or anyone else) sign a life estate so they can live there for as long as they wish or until death, when the apartment will revert back to you.

Walter Shatford · Answer

Almost any lender insist you have some "skin in the game".  Usually the minimum is 10% of your own money.  Other than that, they usually don't care (could be 70% bank loan 20% seller second mortgage).

If you can find a banker willing to loan without you putting any money down that's fantastic for you.  Does he do it just for you or does he regularly do that?

Gary Dale McKee · Answer

So much great information, I haven't even thought of a real estate attorney but will definitely take your advice on that, @Karen Schimpf.  I am going to ask if they would be willing to owner finance the down payment.  My banker is on board as long as the numbers work.  I have asked for the rent roll and the other information you mentioned but they still haven't gotten me the info.

Mindy Jensen · Answer

@Gary Dale McKee, I like the seller financing bit, too. If this deal is super amazing, perhaps you offer to cover the costs of an attorney so they know it's all legal.

Ryan Cox · Answer

I agree with @MarkoCvetkovic - It's possible they are hesitant to start a negotiation in fear of losing their monthly income stream.  I would propose seller financing and explain the tax & cash flow benefits.

Marko Cvetkovic · Answer

Gary, I would ask them what they had in mind for a price, let them make the first move on the number. Do you know if they want to sell it out, or are they interested in seller financing? I would follow on what Mindy Jensen stated. Just my .02 cents

Gary Dale McKee · Answer

They stay there part time. They have a home a couple hours away. They have taken amazing care of the property. The two properties are in a great location also. This is my first serious negotiation and my first real deal.  I think it could be a great investment and don't wanna screw it up if it turns out to be.

Motivated seller on apartment complex, how do I work this deal?

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