Meeting with large apartment owner looking to sell, what should I do?

63 Replies

I happened to run across a message from someone looking to sell a near 50 unit apartment complex in my town off mls. We spoke briefly on the phone and he said that he would prefer to meet in person, so we scheduled to meet up at a local restaurant tomorrow. I don't know much more than that, but I figured it can't hurt to meet with the guy. If nothing else I'll learn a few things.

So, I'm looking for advice in preparation for meeting tomorrow. What should I be sure to ask? What are some basic aspects of how a deal like this would be put together that I should know? What should I or shouldn't I do to establish credibility on my end? 

This would be a big jump upwards, but I do feel that I have enough knowledge/skills/network to do a deal like this if the seller is willing to work with me.

Any and all advice would be much appreciated. 

Thanks!

Orion-

Here's a quick list.  I generally think of acquisitions in 3 main categories:

  • BUILDING QUESTIONS
    • What is the condition of the units? Do they need renovation/rehap/facelifts?
    • What is the condition of the building?  Exterior, roof, HVAC systems?
    • What is current vacancies, historical vacancies?
    • Who are the Property Managers? 
  • MONEY QUESTIONS
    • What is last-twelve-months of actual revenues received?
    • What are actual expenses in LTM?
    • What is offering price? (Determine for yourself what the offer price / LTM rev # is...this is the Gross Rent Multiplier) (Also get a sense of Cap Rate offered)
  • MOTIVATION QUESTIONS
    • Why is he selling? Is it urgent?
    • Why isn't he using a broker?  Why try to get person-to-person?
    • Is he willing to carryback a subordinated note?
Originally posted by @Orion Walker :

Thanks for the great list @Andrew Kniffin . Very much appreciated. 

Orion - be sure to obtain the last 3-5 years of P/L on the property.  The past 12 months on a building may look appealing, but the gross revenue dollars could be in a downward spiral.  You wouldn't know this if you didn't have a few years of P/L.  This could allow you to avoid a potential serious loss on such a large complex.

The most important thing might, at this point, be what is going on with his situation that is creating his desire to sell. He may be exchanging into a larger property, or he may be retiring, or he may just be a tired landlord and wanting to bail out. Each of these scenarios would present a different type of opportunity for you to help him out. Here's some ideas how:

If #1: He's doing a 1031 exchange. This means he has a very strict timeline between closing on the property he's selling and identifying (and closing) on the new property. If he finds a buyer (you?) who can be very flexible with a closing date, that's a BIG plus for him. You can agree on terms but leave the closing date open (within reason of course) so that he can get a new property found without stress.

#2: He's retiring. You may be able to arrange a seller financed scenario that allows him to spread his capital gains tax out over several years. This helps him, and it might also help you quite a bit, especially if he is willing tho carry the entire note for a few years. Once you've successfully run the place for a few years you'll probably find it easier to sell yourself to a commercial lender.

#3: He's worn out. If the property is underperforming you might be able to arrange a master lease option ( lots of good threads and articles on this on BP. Do a search if you are unfamiliar). He gets a steady income without the hassle of managing the property, you get a juicy value add opportunity.

I suggest starting with some of these more notional 'how can we work together" ideas before you jump into numbers. Obviously "how much were you thinking of asking?" and "what's the rent and what are you paying in expenses?" is appropriate because you need to know if it's a realistic price... but you get the idea.

If you have not yet read “Insider Secrets to Financing Your Real Estate Investments”  by Frank Gallinelli download it from Amazon and read it tonight ;)

Good luck! let us know how it goes

@Orion Walker  

 

 Was goin g to jump on here but @Jean Bolger pretty much said everything I was going to say . Some excellent tuips there. If you know his motivation to sell, it would affect what type of deal you can work out with him. Save the more detailed numbers analysis for later unless his asking or stated NOI is out of wack for the area.

Hey Orion- I suggest you use a real estate broker.  There's a whole lot to this, and a lot of it is legal.  I'm a broker in Silicon Valley.  Please let me know if I can make a recommendation for you.  best- Leslie

Thanks @Jean Bolger , that is super helpful advice. Yeah, I'm certainly hoping there's a motivation on his side that leads to a way that I can help/be a good fit (if the numbers look good). Thanks for breaking down these different scenarios and including the key benefits of each. Very much appreciated.

@Jean Bolger  

is right on the money.  If he has a taxable gain, then any buyer who is willing to be cooperative with him in structuring a 1031 Exchange or any other tax planning strategy will be a huge plus in getting his attention.  The trick is to be cooperative but not too cooperative.  You want to keep him on target to find replacement property if he is going to structure a 1031 Exchange so that the transaction does not drag out too long/far.

Originally posted by @Jean Bolger :

The most important thing might, at this point, be what is going on with his situation that is creating his desire to sell. He may be exchanging into a larger property, or he may be retiring, or he may just be a tired landlord and wanting to bail out. Each of these scenarios would present a different type of opportunity for you to help him out.

I think this is real key point. You want to create a repore with him. This sounds like an informal meeting if you are just meeting at a restaurant and since this is the first meeting, I wouldn't bombard him with too many questions about property stuff. That can come in subsequent meetings.

I've seen that TV show "Bar Resque" and the host John always has problems with the bar owner where they won't cooperate with him. Then he sits down with them and has a "heart-to-heart" with them and gets to know them and such. He creates an instant level of trust and a nice bond that then makes them want to go along with Johns ideas about how to save the bar. Moral is, that getting to know someone and letting them do a lot of the talking and being personalble with them instead of just "business, business, business" can do more for you then you ever thought possible.

Of course you are going to want to ask questions and about the property and all that stuff, but maybe sit down and have lunch and just get to know the guy for 10 or 15 mins first.

As far as being prepared, do some homework. Look up how much property taxes are, take a drive by the place and see how it looks from the outside. If they are still open, ask if they have any units available and see what they offer you for options. Check out the surrounding area at night and see if it's a decent neighborhood or you see a lot of "sketchy" activity. Etc...

Hi @Bill Exeter , ironic that I don't think I met you in person at the SF meet up last weekend, and I remember thinking "oh well, 1031 probably isn't something I need to know a lot about right now". And then here we are crossing paths on BP. Funny how things go. Anyhow, thanks for the post. This is great to know more about some of the ways that I might be able to be helpful. 

@Kenneth Hynes   and @Alexander Merritt , I'm in total agreement that building report and not being too quick to jump to business is a good move, and I figure even if the deal isn't a fit I'll learn a few things and meet someone who is probably a great person to get to know.

Lots of great advice above already, Orion. One thing that hasn't been mentioned is to ask about the current financing on the property. Sometimes properties like this are encumbered by debt that has a very large prepayment penalty called yield maintenance. This means that if he has a loan that is amortized over 30 years but due in 10 and it is now in year two, you have to assume this loan and live with it for 8 more years, and then you have to refinance or sell. This might be OK, or it might be a problem if the loan is 50% LTV and now you are stuck with very low leverage if the seller won't bridge part of the gap. An additional risk factor is the interest rate, it's possible that the loan you inherit has a rate higher than today's prevailing rate, in which case you have to make up the hit with a lower price (or maybe it's below market!).

On the other hand, he might have a loan like that and be at year 9.75, in which case he's super motivated to sell because he's running out of time to do something about the impending due date. 

Or, perhaps he owns it free and clear, which presents a potential seller-finance opportunity.

@Orion Walker   I think @Jean Bolger and @Andrew Kniffin pretty much summed it up for you. 

My thoughts: I would just have a normal convo "get to know you" kinda meeting. Based on your informal meeting, you can always set up an actual meeting for later and make offers or help the gentleman. If he's tired of being a landlord and don't want 1031 Exchange, (which is a lot of pressure) but still prefers to have a passive income, you can mention about the exchange through Delaware Statutory Trusts or DST's. The value add for these programs is that they are ideal for the passive investor who doesn’t want to mange property anymore. I know people who specializes in this, who can help clients fill the entire deferral with any boot money left over from the relinquished property. You can also advice him to direct all his capital gains to his IRA. Definitely will save huge in taxes.
I am not a CPA or Tax expert so he will have to seek his own legal advice.

You can only get the best for yourself when you do the best for others. If you help him with his problems (IF THERE IS ANY) then he will hand you the property.

I wish you all best! Good luck!

@Brian Burke   Thanks for jumping in on this. I was hoping you'd see this thread. Great points on financing questions that I wouldn't know to ask. Much appreciated. 

I had hoped to chat with you more at the meetup, but seemed like you were always swarmed by a bunch of folks. Not surprising given the great presentation and panel sessions you did. I used to work for a speakers bureau. You should consider a side gig as a paid speaker at conferences and corporate training events. Seriously. All those flying analogies and surfing analogies. Great stuff. BTW, I noticed some very high end vacation/inn properties in Mendocino on the market. Not sure if that's what you're thinking at all in terms of A properties, but thought I'd mention it. 

As always, thanks for your help/advice.

Hi again, Orion- the gentleman mentioned DSTs as an option for the fellow you're meeting with.  That's my main business, in addition to listing investment property.  I suggest that you just get to know the fellow and see what envelops next.  No doubt, at the very least, you'll learn something new.

Best of luck!

@Orion Walker  

Congrats on the opportunity and the great advice received.

On a prop this size a quick ROT is expenses should be 35% of gross income. When evaluating we target a DCR 1.6%+, Cash on cash 12%+ and a CAP of 8%+

You can go to IREM.org and call several ARM certified property managers and ask about the city what parts they like and dislike and why. Ask what they see expenses running per category per unit, what they see them selling for per unit. What is market occupancy and what they rent for.

Good luck

Paul

Glad to help, @Orion Walker  .  Thanks for your feedback on the meetup, I thought it was a great event.  It was great to meet you in person, even if we didn't get to spend a lot of time together.  Let me know how your conversation goes with the seller tomorrow.

Okay, I'm back with a report. I'll try continuing on this thread and if that works, great. If not maybe I'll switch over to a deal analysis thread.

So, to briefly recap: I saw a posting on CL for a 47 unit apartment in my town. I replied, and the poster suggested we meet. Here's how things went:

I was hoping the guy that I was meeting would be the owner but no, just an agent with an off market pocket deal. We had a very nice lunch. I think we built good rapport. Here's what I've learned about the property (keep in mind that I don't have a lot of experience laying out a deal, so I may skip various pieces of information, feedback on that would be great):

Asking Price: $3.7 Million

I have been given a copy of appraisal done last year that puts value at $3.8 Million. At the time of appraisal property was in escrow at 3.5 million. Not sure why deal didn't happen at that time. Property was acquired in 2011 as an REO for $2.25 Million. Property was 40% vacant and in serious disrepair. Property has been renovated and is has been running at 90-100% occupancy in the last year. Property appears to be in above average condition. It is located in a lesser desirable area of town, but nothing in this small town is very bad.

47 units - 2&3 bedrooms, 1-2 baths. 950-1060sqft. 79 parking places. 1.86 acres. 

Built in 1991

Unit rents range from $795-950

Total monthly Income: about $39,000 (based on one year history provided)

Total monthly expenses about $10,000 (based on one year history)

NOI over the last year: $309,678

Cap Rate: 8.4%

There is an assumable loan. Fixed rate Fannie Mae loan at 4.15%. $2.6 million remaining on loan. Loan payment includes taxes and insurance. Monthly payment is $18,655.

Monthly income after expenses and loan payment averages $7,240 mnth.

They are looking for a downpayment of about 1 million. A 4 way partnership owns the property. They are looking to dissolve, siting distance as an issue. 1031 exchange likely a factor for sellers. Not interested in a lease option, but willing to discuss creative financing ideas.

That's about what I know about it so far. I'd be very interested to hear anyone's thoughts on the deal, additional questions to ask, advice, suggestions etc. In particular I'd love advice on if I should pursue it further, and what might be the most realistic avenue.

Thanks for all of your great comments/pointers.

 @Brian Burke , @Paul Timmins , @Leslie Pappas , @Parish Pradhan , @Andrew Kniffin , @Kyle H. , @Jean Bolger , @Kenneth Hynes , @Bill Exeter , @Alexander Merritt , @Brandon Turner  

@Orion Walker  

Expenses are too low comparing to gross income. Did you get a detailed breakdown of the expenses? Normally, you should expect to see 50-55% expense/gross income ratio.

Nick

@Orion Walker  

Expenses appear 40K low. Should be 164K for the yr

When is the due date for the financing?

Paul

Just to clarify, if you were to assume the $2.6 million loan and the purchase price is $3.7M, then in reality you'd need to come up with $1.1M buy out all their equity (ownership) in the place. 

If it was purchased for $2.6M and current debt is $2.5M, then I assume at some point the owners refi'd the property and pulled out all their initial cash.  Do you know if that's correct?

I agree with @Nick B.  those expenses are too low and they skew the cap rate.  I'd encourage you to look at the property as a multiple of Last Twelve Months actual Rents, since this metric avoids all the "funny business" with expenses. 

Based on the month by month breakdown he showed me when we met they have the total expenses at $123,244 for the last year. I have a request in for 3 years records. Sounds like I should take a closer look at the expenses and ask a few questions there. Thanks!

I believe he said 25 years on the loan, but I'll double check that.

@Andrew Kniffin , looking back over the appraisal it notes that the property was acquired at $2.175M yet the current loan is at 2.6. I have a question in to get some details on that. 

Thanks for the pointers so far.

Originally posted by @Orion Walker :

@Andrew Kniffin , looking back over the appraisal it notes that the property was acquired at $2.175M yet the current loan is at 2.6. I have a question in to get some details on that. 

Thanks for the pointers so far.

 The investment group probably purchased the distressed property and then stabilized it with higher occupancy.  The group either purchased it all cash or financed it and when stablized, did a refi cash out with the FannieMae loan hence the higher loan amount. I'm excited for this deal if you proceed Orion!

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