Hey guys, I was recently put in touch with an individual who is nearing retirement and looking to sell his SFR portfolio. I have been going over the numbers which seem to be looking pretty good based on what has been given to me so far which includes asking price, unit count, addresses, rent roll, property tax, net income, and cap rate. What documents should I request to back up the data that has already been given to me and what other pieces of information should I request to help give me the full picture of all the properties and exactly what I will be taking on?
Another issue I’m having is valuing the portfolio. I know with multi-fam and commercial properties the value is usually derived by the income the investment is producing. If this were a commercial property with the cap rate he is offering this would be a home run deal; but if I average the price of the properties based on the count and his asking, his asking per property is at least 25-50% more than these properties would be worth individually in my market. Should the properties be valued closer to market value or am I essentially paying a “convenience” premium because the portfolio has already been built? For background, the portfolio contains more than 50 houses.
I always hear these fantastic stories on BP of people hacking these deals together and getting their foot in the door with no money down. I was thinking about trying to structure a couple of different purchase options to present to him and see if I get a bite. Obviously I would love if he did some type of seller financing, but I’m wondering how likely that is considering he’s 72. What’s the structure look like of some seller financing that you may have done or seen work recently?
I do not really feel comfortable putting all the information out there but if someone is willing to lend a hand, I would be eternally grateful; I do not have a problem sharing all the nitty gritty details of the deal via private message.
Wow, you have a good problem here. You just have to sort the wheat from the chaff.
First of all, are you able to swallow 50 houses at once? If not, you may still want to get the full chunk under contract and the parse out portions of it to other investors. I am not in the market for SF properties myself, but have a network of friends looking for rentals so would be happy to help you sell of chunks, if needed.
You are correct in your assessment of how valuation is done. Of course, you are free to pay whatever you want for his single family portfolio. If you like the returns, you may feel fine with the aptly coined "convenience fee". However, what you cannot do is force a bank to recognize that valuation. The bank will (almost) always do an appraisal and then decide their loan based on the appraisal and your financial strength. On the positive side, that may give you leverage to get the price down on the total portfolio.
I would also note that what may look like a great cap rate on paper, may not be a great cap rate once you factor in actual vacancies, skips, evictions, etc. Best bet is to ask for his property bank statements or tax documents to verify.
Seller financing still could be a good option. If he gets a pile of cash, what is he going to do with it. His money gets 1% at most banks. He could get a lot more lending to you. Because he is 72, he probably won't want to give you 30 years to pay it back but you could do a 30 year amortization with a 10 year balloon or something like that. However, I expect he would want a big chunk of cash up front, which may mean you use his owner financing as a second mortgage. Again, a lot of it comes back to what you can swallow financially.
Private message me if you want more 1:1 discussion.
What city are these in anyway? Freeland appears to be pretty small, but I see you are not far from Saginaw and Midland.
@Greg Scott Yeah you aren't kidding about the good problem. I am meeting with the owner to feel out exactly what he is hoping to gain from the sale. It's just like you said, realistically what is he going to do with a windfall of cash at this point but on the same token It's unlikely that he will want to carry the note for 30 years. I believe that he actually has a management team in place for the portfolio, so a stipulation of sale if we carry forward is I want his team. The portfolio is scattered about the tri-cities area.
Hi Alex, my team and I broker Portfolios around the country and have experience working with very small and large buyers/sellers.
If he's not open to seller financing, how do you plan to fund the portfolio? Local banks usually provide the best terms, but you'll most likely need to meet specific net worth and liquidity requirements. If you can't me those, Colony American Financing and 5Arch are other good sources. Most banks will send appraisers out to each property for a sales comp and income approach valuation, then they'll total values out.
Typically, we provide buyers with a rent roll and P&L. Many buyers with experience in the market don't care about current operations as much as they are all proforma driven. Looking at tax returns and bank statements is typically a due diligence item.
Can you supply some basic details? Asking price, avg. rent/home, occupancy, and any deferred maint?
I know Michigan is a stronger yield market, but where we're at in this cycle, we don't see many portfolios selling at higher than retail values.
Portfolios should be valued the same as multifamily. It's to your benefit to procure a financial model to understand key metrics (including several assumptions) such as return on equity and DSCR.
@Mark Allen I tried to add you to discuss some of the details of the deal, not sure if you received it.
The portfolio should be priced LESS than the sum total of the individual property values because you are providing HIM with the convenience and cost saving of being able to sell them in one transaction. The number of buyers for a 50+ SFR portfolio is limited and the exit strategy is one of the primary issues for these owners.
The price and the cap rate (unleveraged ROI in the case of SFR) can't both be above market....something does not add up. If I had to guess, you are missing some portion of vacancy, management fees, maintenance, cap ex, and other expenses.
Seller financing may be an option if he does not have a use for the sales proceeds, is interested in some mailbox money, or is facing a large tax bill on the sale due to capital gains or depreciation recapture. Finding out his needs is a great decision.
@Mike Dymski I am second guessing my original determination of 25%+ over market. I think i was assuming the amount I have purchased many of my properties is the market when in reality I may have gotten much better deals than I assumed at the time. If I am going by city value the portfolio is selling at about a 20% discount, but I wasn't sure if that was a good tool for determining value. Looking at for sale properties on Zillow, it looks like properties are priced right at what he is asking, with many of the recently sold a bit lower than his asking; my market was hit very hard in 2008 and has taken longer than most markets to recover due to the sheer amount of inventory coming back.
@Mike Dymski any thought to how much less than the sum of the total of all the properties? 10%?