Help me structure creative-finance Offer Structure for 6-plex

20 Replies

All:

I'd like your help in structuring a creative solution to buy a 6-plex that is physically in good shape, though financially it's a mess.  

Here are the details:

  • "Ask" price is $299K, though Seller's Agent has suggested to me that deal may be attainable at $250K. 
  • Will be a Short Sale.
  • Owner is in default on his loan to local bank: balance owed as of July 2014 = $254K.  Additionally, there are ~$14K additional in interest since July, and another $14K in late fees.  TOTAL DUE TO BANK would be $282K.  
  • Mortgage with local bank expired in July.  Bank refused to extend/roll over.  It had been a 7 year note at 6.25%.  
  • During Summer 2014, local bank accepted an offer where they'd net $210K after all commissions, fees, etc. That deal fell through. 
  • Total delinquent taxes to County is ~$21,000.  
  • Annual Revenue Generated is ~ $56K.  At $250K purchase, that would be close to "2% rule".
  • Building is in good physical shape.  I ave already done a walkthrough.
  • Market brochure advertises NOI of $42K, though that is high. I'm assuming net NOI of $27K, after reserves vacancies, property mgr, etc.

ISSUE:  How do you structure a deal that would satisfy the Short-Selling Bank, the County (backtaxes), and the Owner, while still being financially viable for Buyer? (Sidebar: does the owner matter - he would not get anything regardless.)

Would very much appreciate everyone's input here.  I want to be courageous, but not rash, in pursuing this one.  

Hey @Andrew Kniffin  ,

Sounds like you've found quite the challenge.  It sounds like the seller needs/wants to get out?  If that's the case why don't you do a 'subject to' deal with the seller in exchange for paying off the delinquent property taxes (functioning as a down payment) and then work directly with the bank to assume the loan and see what you can negotiate with them in terms of forgiving the late fees/interest. 

I'm there are plenty of nuances involved that I haven't considered, but that is my 2 cents.

If you could wrap this thing up for under 300k it sounds like a great deal!

Good luck,

Andrew

@Andrew Davis   Yes, that is one of my thoughts.  But the underlying note expired in July, so I don't think it's possible to do a Subject To.  (In other words, it's not possible to take Title "subject to" existing financing because there is no existing financing.)

The other question is the County "Taxes Owed".  If the county does not get paid by March 1, they plan to foreclose on the property.  They would then have to go through the whole sales process, and their fees would be very high doing so.  So, I wonder what options might exist for the County to take a "haircut" on their taxes owed.  Would they accept 50 cents on the dollar if they got cash at closing?  

To the county taxes: it is unlikely you will be able to negotiate them.  Taxes take precedent over mortgage.  That said, typically the bank will pay up the taxes so they can further pursue foreclosure (they have a better chance to negotiate a reduction, but even that is unlikely).

Why did the 2014 offer fall through? Did they uncovered something in their due diligence that you should identify?  Did they just realized they were vastly overpaying?  Did it appraise abnormally low?

As to the numbers; just make sure you are factoring accurately.  Is this a conversion 6-plex or a true-build.  Do you have other multifamily units in this area?  If not.. you'll want to find someone who does to compare costs and understand tenant demand / expectations.  If you cannot fill the building with tenants "what-if" cash-flow is unusable.

Keep in mind... the seller could not make his payments for one reason or another.  Is it just gross mismanagement?  This is the easy answer, often people jump to this out of ignorance to the real factors...  Perhaps there something fundamentally wrong with the property?

Not trying to discourage you, just trying to make sure you consider beyond face value.

I'm very thankful to @Mitch Coluzzi  for his thoughts and insights:

  • One idea was to (1) buy note directly from the bank (all-cash, with some discount to face value), then (2) pursue from Title Owner a Deed in Lieu of Foreclosure, then finally (3) pay off County in full.  
  • This 3-step process would satisfy all 3 parties.  It would cost alot of cash upfront, but could financed out on the backend after a 6-month quiet title period (during this time, also, you'd prove your ability to manage the property so that the property is again 'bankable').  
  • I am now very doubtful that negotiations with the County will be fruitful.  They are senior lienholder on the property, and will get their money one-way-or-another.  
  • Current Local Bank is very unlikely to have PMI on the property. If they did, they would NOT have been willing to take the $210K short sale offer last summer (instead, they would have simply filed a PMI insurance claim and gotten paid in full). This means they should still be willing to take less than the full face value of the note.
  • Don't be lulled into thinking that the property has underperformed merely because of "bad management".  That's often what you want to believe, but perhaps there are substantive issues going on; and I would face those same issues were I to own the property.  
  • A Financial "Hall of Mirrors": even if you have someone's 2013 Schedule E, this can be misleading.  An owner may under-report real expenses (and instead allocate them to a different property) to make it seem more profitable than it truly is.  Solution here would be to look for minimum 3 years' Schedule E's.  In addition, get actual bank statements showing cashed checks/rent deposits.  

One further pointer/insight regarding the bank:

  • My thinking was that the bank would NOT want to realize the loss on the Note, but rather have it "reperform" by having new persons make payments on it (via Sub2).
  • But The Local Bank may prefer to "write off" this loan and expense the loss, rather than continue having it on its books as an underperforming loan.  
  • Underperforming loans can look very bad when the bank is audited by Federal Regulators.  Thus better to have "clean" books with the loan removed, rather than have it festering as a laggard performer. 
  • The only way to know the bank's actual preference would be to speak to the Bank's representative who's responsible for the loan.

The bank may or may not be willing to take a loss on the note, it depends on if they have reserved for the loss already.

Most banks do not want to sell one off notes to investors.  Maybe for a small local, but for a large bank it is going to be hard to get anyone to return your calls.

Thanks @Bob E. that is interesting.  I wonder how I could find out what small, local banks in my area are willing to sell nonperforming notes.  Any thoughts on that?

Call them and ask for their special assets department.  If they have only one or two branches go in and talk to the manager.

What do you mean by the note expired and that there was no existing financing.  Notes don't expire, the terms of the note are existing financing.  Was there a balloon payment due at the end of 7 years? 

The property taxes are almost certainly non-negotiable.  However, your offer should be made to accommodate the taxes.  

Don't base your offer on the asking price or the agent's idea about what the seller will accept.  Make your offer work for your purposes and don't offer a penny more. 

@Account Closed   I appreciate your input.  

The note was issued in June 2007 for 7 years fixed rate, with balloon/full payment due in June 2014.  It does not 'float' after that; it was due in full as of ~7 months ago.  Seller/Owner has not delivered any funds since the summer, though.  

Does that answer your question?  

To "make my offer work for my purposes" I must consider what the Seller, County, and Current Bank need, otherwise I won't get my Offer accepted!  So, the two seem intertwined to me.  

@Andrew Kniffin  remember your GOAL.  To help the seller?  No.  To Help the Lender?  No.  To get and offer accepted?  NO!

Your one and only goal should be to Make Money!

Kristine Marie Poe  is right,  figure out what price allows you to reach your goal and then that is the limit.  If the numbers work for the other parties involved then great, otherwise look for the next deal that allows you to achieve your goal.

Originally posted by @Andrew Kniffin :

@K. Marie Poe  I appreciate your input.  

The note was issued in June 2007 for 7 years fixed rate, with balloon/full payment due in June 2014.  It does not 'float' after that; it was due in full as of ~7 months ago.  Seller/Owner has not delivered any funds since the summer, though.  

Does that answer your question?  

To "make my offer work for my purposes" I must consider what the Seller, County, and Current Bank need, otherwise I won't get my Offer accepted!  So, the two seem intertwined to me.  

Wow.  It might be a good idea for you to step back and get clear about what your goal is.  If it's to meet the "needs" of the seller, county and lender, why not offer $350K.  That way the lender and the county get paid off and the seller gets some proceeds. I can assure  you that such an offer will be accepted.

You can never know what a seller (or lender in a short sale) will accept, so you should never make offers based on your guesses....which is what they are. Even in a short sale, there are huge variables you can't predict. For all you know the seller can/will bring cash to closing.  For all you know the lender will accept a $150K payoff.  Start by crunching your own numbers for your own goals (long term rental?). Then make an offer and see if they counter.

It's a straight up short sale, period.  Make your offer, and go through the process.  It's the only way to get a real answer, and all the other guesses about motivations are irrelevant.  Your logic about the mortgage insurance is flawed.  MI only covers the lender for the top 20% (less a down payment), so they rarely "get paid in full", plus when there's MI, the MI issuer must approve the sale since they're taking a hit. Property taxes won't be discounted.  If the previous $210k acceptable Net is true, and that likely has changed by now, you can work the numbers backward, and get to a sales price of about $256k (assuming 10% total sales costs/fees to the bank).  But, as said before, make the offer you're comfortable with and go from there.

lots of good advise is already dispensed here, particularly about keeping your eyes on your goals, not the goals of the other parties to this transaction.

I would assume that the county will get its taxes, in full, so there's no point in trying to negotiate there.  However, that also creates an interesting opportunity.  If the taxes are not paid by the deadline, the bank will probably pay them to protect their collateral.  This gives the bank an additional incentive to get rid of this situation before that expense has to be paid.

Assuming the numbers work out (per earlier advise), I would offer the bank $210k in a shortsale and pay the property taxes in escrow.  Another way to do this is to first negotiate a settlement with the bank for $210k, then have the seller deed the property to you, subject to the bank's lien, then pay the taxes and settle with the bank once you are on title.  As a bonus, you could ask the bank to finance the $210k, if your financials are strong enough.  But most likely, you will have to find other financing for this deal, maybe a hard money loan to tie you over until you can get traditional financing.

Sounds like a fun deal.  Good luck!

@Bob E.   @Account Closed I wonder if we're getting caught up in semantics here, but just to reply:

You are correct that my goal is to make money.  But I don't get the deal, and thus don't make any money, until the others see value in my offer.  Offering $350K is too much, but offering $1 won't be helpful either.  I can't craft a solution that meets everyone's needs unless I understand what they need.  I'm trying to find the best deal for me that also works for the needs of all parties.  They effectively have veto power, so if they don't like it no one will win!  

Originally posted by @Andrew Kniffin :

@Bob E.   @K. Marie Poe I wonder if we're getting caught up in semantics here, but just to reply:

You are correct that my goal is to make money.  But I don't get the deal, and thus don't make any money, until the others see value in my offer.  Offering $350K is too much, but offering $1 won't be helpful either.  I can't craft a solution that meets everyone's needs unless I understand what they need.  I'm trying to find the best deal for me that also works for the needs of all parties.  They effectively have veto power, so if they don't like it no one will win!  

I don't think it's semantics. Getting others to "see value in my offer" doesn't have anything to do with crunching the numbers to determine the offer.

I work some very multi-faceted purchases, with lots of problem solving for the seller. I don't use the seller's problems/needs to determine my offer.  I determine the offer, make it, and then manage seller response and expectations. Then I have to do what I said I would do, on time, with a good attitude.  :)

Everyone is right.  Primary goal is for YOU to make money as the buyer.  However, I understand what Andrew is saying... Given that he is dealing with a small bank on this note, working the "this is where I am coming from approach" makes sense.  All the right pieces, potentially in the wrong order (forums are so snap-shotty)

The first and most important step with any transaction (be it flip, wholesale, or note purchase) is to find the maximum number that works for you.  Period.  Not a dollar more than X.  The seller has one, so should you.  Before any negotiating starts, you NEED to know what this number is.  The conversation and time investment is done when you realize that your number and their number are so far apart (EI: you want to pay 100k, they owe $1m).  At that point, cut your time invested and look for the next opportunity.

If they are willing to deal, but need some convincing... then you can work on identifying why, what, who, and how.  Knowing the motivation of the seller is important but motivation does you no good if the numbers cannot work in any world.

Basically: figure out YOUR number.  Get to the bank and ask about the note...  do it in person if possible, can get a lot more information out of small banks in person.  Are they even willing to sell the note?  If so... where are they starting?

Last tidbit of advice:  In my experience, small banks love to use the county's assessed value as their price ceiling for a property.  Grain of salt advice. :)

@Mitch Coluzzi  Kristine Marie Poe 

Update on the deal:

I learned that the property is not being foreclosed on March 1st, but rather the first "Confession of Judgment" will be defaulted on by that point.  The property is still a long ways from foreclosure.  

So instead put in an offer at $240K.  Seller countered at $245K and I've accepted the counter.  

Since it's a short sale, deal is now going to Special Assets Department ("SAD") of bank for their approval.  

Total rent roll is $4,900/mo, so at $245k purchase you would be at 2% of purchase price in monthly rents.  

This meets my numbers and am confident it will be a good purchase (assuming bank okays the sale).  

@Andrew Kniffin  

That's fantastic!  Thanks for the update.  I really hope this deal works out for you.

Hi all:

Just wanted to give an update about what's happening with my Saint Paul, Minnesota-based multifamily purchase:

  • We signed and executed a conventional Purchase Agreement.  
  • 2 days later, Seller received a higher offer.
  • He submitted both to the Bank (recall that this is a short sale)
  • Bank 'accepted' other offer. 
  • We have threatened a lawsuit for Breach of Contract, since Seller did not continue with the signed contract.  

That's where it stands.  So it's drifted into a legal issue.  It is a bummer that this has happened, but I believe it's worth pursuing since I really like the property at that price.  

I'll keep advised as things proceed.  

Regards,

Drew

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