Offer Countered, advice please!

Commercial Real Estate Investing
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Offer Countered, advice please!

Rob Krach
Lender · Chicago, IL · Member since 2013 · 82 posts · 27 votes

Hi All,

There is a 6 unit complex that I made an offer on and the owner came back with the below counter as the owners are old and ready to retire:

Purchase Price of 525K

Down Payment of 100K

The Seller would Carry the financing for 2 or 3 years

Fixed $2,250 a month payment to the seller

and a purchase price at the end of 2 years of $371,000 or at the end of 3 years of $344,000.

It is fully rented and updated through the 90's / early 2000's so it isn't in the worst of shape but not the prettiest building in the world.

The Numbers are below:

Rent: $5250

Taxes: $12,000 annually

Insurance is $2400 (this is the quote I was provided)

What is my best approach, I can't afford 100k, I have 10k, do I lock this up after performing due diligence and then wholesale it?

What due diligence do I perform?

What am I forgetting?

Do I go to every single bank Online and Physical in an attempt to get the funds?

Thanks all,

Rob Krach

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Pat G.
Rental Property Investor · Northville, MI · Member since 2015 · 179 posts · 92 votes
10y

Rob:

I agree with @BrandonHicks. You need to find out where the Sales Price came from, a listing from a broker, a pie in the sky figure, or what it was worth several years ago. 

If you explain your offer to the seller based on numbers, they will either agree and ask for a counter offer based on the numbers, or they will think you are crazy and walk away. If they walk away, that is OK because you didn't get yourself into something that you will stress out about for a long time. Ask me how I know that??!!

We also have not covered the Debt coverage ratio that the banks are going to be looking for of 1.25 when you finally cash the seller out in 3 years down the road. 

Again all these figures or indicators will be shown with a good deal analysis software. It is hard to give you pieces of advice without all the information, but we all tried.

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  • Mike Wood
    Developer · New Orleans, LA · Member since 2015 · 1k+ posts · 898 votes
    10y

    @Rob Krach I think you are going to have a hard time finding a bank or an owner that will sell you a $500k property with only $10k down.  I think you can forget about a bank.

    Most lenders will want 10-20% down (thus the owner's counter at $100k down).

    Also, since this has over 4 units, you are going to have to do a commercial loan in 2-3 yrs, which will limit where you can get the money.  Last thing you want is to be 2-3yrs into this property and you cant get permanent financing.  

    I also think you will get a lot of feed back saying its not such a great deal. It sounds iffy to me, especially considering the high taxes of $1000/month (19% of your monthly rental income).

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  • Rob Krach
    OP
    Lender · Chicago, IL · Member since 2013 · 82 posts · 27 votes
    10y

    Mike,

    My goal in posting this here is so that BP members can help me look at it in a way I wouldn't, if people give me reasons not to buy then it is just that an iffy deal but if i find a deal and people on BP can't think of why I shouldn't pull the trigger, then that's the deal I am going to go full steam on.

    Thank you for your feedback,

    Rob

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  • Pat G.
    Rental Property Investor · Northville, MI · Member since 2015 · 179 posts · 92 votes
    10y

    Rob:

    Congrats on opportunity. when dealing with multi-family here is a quick formula learned.

    Put in a vacancy factor of 10%, expenses at 50% of rental income. So given your numbers it looks like this:

    5250 x 12 = $63,000

    Vacancy 10% = $6,300

    Expenses @50% = $31,500

    NOI= $27,900

    Now if the expenses that they gave you are higher use their number. What Cap rate is it advertised at? You can take this NOI figure and determine the value with this formula:

    Value = NOI/Cap Rate (Their Cap Rate) - for this you would use the new NOI as figured above. I can guarantee that they didn't show a vacancy or if they did they said 3% or lower.

    Don't shop this around to every bank, as each time will be a ding on your credit. Try to raise private money for the down payment. The seller is your bank, and then in 3 years when you do go to a bank you will have that experience and track record and the bank will fight over you. 

    Do you have some sort of deal analyzing software from the likes of a Dave Lindahl, Lance Edwards, Michael Blank, or Ron LeGrand. If not you need to get one quickly. Lance specializes in small apartment buildings so if you are going to stay with that he may work for you. What the software does is lays out all the needed information in one place. Dave has been around for a long time and was trained by Ron. I think Dave is up to 7000 units.

    Also, with those courses they would give you a due diligence checklist to start with. There is too many things to look for to list here. 

    Anyway I hope I helped more than confused. To start use these simply formulas to get a better read on the deal. Keep me posted, here to help!

    Pat Gage

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  • Account Closed
    Real Estate Agent · Las Vegas, NV · Member since 2015 · 2k+ posts · 1k+ votes
    10y

    if your goal is to wholesale it you must sharpen your numbers you don't mention the list price, the counter offer, the market value and the reason a wholesale buyer would want to buy it. As mentioned commercial loans you would need 25% down. Even if the seller only took a $10000 down payment you have not figured  out if you can sustain the property. The lack of due diligence on rehab cost further complicates your project 

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  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    10y

    Rob if the seller has a performing asset throwing off cash then they will not sell it with little to nothing down generally.

    The reason is they are giving up an income stream. They want to replace that income stream with a down payment and the note.

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  • Brandon Hicks
    Investor · Avilla, IN · Member since 2013 · 796 posts · 769 votes
    10y
    Based on Pat Gage 's numbers and I'd agree that they are a good starting point, you'd be basically break even with just servicing the sellers note. Even if you had the $100k of your own it's a bad return for you unless there is some sort of missing upside. So there isn't a way you can justify making a payment to a private lender for the down. And you'd be hard pressed to find one for a deal this thin. To me, if you really want this thing you need to make them realize the issue. Which is lack of NOI to fund all that financing and/or lack of return that doesn't warrant use of capital.
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  • Brandon Hicks
    Investor · Avilla, IN · Member since 2013 · 796 posts · 769 votes
    10y
    Had to split due to iPhone glitch, ran out of screen! If they want a price that high, which is what's leading to the lack of NOI for payments, then they need to take the risk and sell with either less of a down or a far lower payment/longer period of time before you balloon. Bottom line is its thin. It's not going anywhere at that price. You're quite likely the only guy in town that'll pay their price but you have to get the right terms. Believe me, I've been you many times and made deals work that others pass on for the same reasons.
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  • Pat G.
    Rental Property Investor · Northville, MI · Member since 2015 · 179 posts · 92 votes
    10y

    Rob:

    I agree with @BrandonHicks. You need to find out where the Sales Price came from, a listing from a broker, a pie in the sky figure, or what it was worth several years ago. 

    If you explain your offer to the seller based on numbers, they will either agree and ask for a counter offer based on the numbers, or they will think you are crazy and walk away. If they walk away, that is OK because you didn't get yourself into something that you will stress out about for a long time. Ask me how I know that??!!

    We also have not covered the Debt coverage ratio that the banks are going to be looking for of 1.25 when you finally cash the seller out in 3 years down the road. 

    Again all these figures or indicators will be shown with a good deal analysis software. It is hard to give you pieces of advice without all the information, but we all tried.

    1Reply
  • Rob Krach
    OP
    Lender · Chicago, IL · Member since 2013 · 82 posts · 27 votes
    10y

    @Pat G., @Brandon Hicks, @Joel Owens, @Account Closed I sincerely appreciate the responses, and you guys have given me a lot to think about.

    I had a feeling this is not the greatest deal as it stands but at the same point I had to take a stab at making offers and finally taking action and to be honest I am learning a lot from just going after this multi family stuff in the past 2 weeks.

    The sellers broker is the one who helped come up with the list price and i don't think they took expenses into account when determining the value.

    with a sales price of 525k if i got my total expenses down to that $31,500 annually including taxes, insurance, payments to the seller would that then be a good deal at the 100k down payment, obviously i will attempt to get that lower.

    again,

    thank you so much for your help and insight.

    Rob Krach

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  • Brandon Hicks
    Investor · Avilla, IN · Member since 2013 · 796 posts · 769 votes
    10y
    Would a $31,500 NOI cover both the debt service for both the seller note and private down payment AND give you a return? If the NOI comes up short do you have funds from somewhere else or reserves to feed the alligator? Will you have the debt paid down to a level where you can meet the LTV requirement to get it financed within the balloon timeframe? Without upside it's a pass in my opinion.
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