I am getting ready to place offers (letter of intents first) on a 24 unit building I'm looking at. This is a value add deal and is not bank financeable due to condition, mismanagement, and lack of documentation. After dropping the price from $950k it is currently listed at $659k ($27,500 per unit). Seller is open to financing at 35% down, around 7% interest, and flexible term.
After some research, I found that the 10 unit across the street was purchased at $19,000 per door last year by the same seller. This 10 unit property was in similar shape if not a bit better then the one I'm interested in. The buyer also used seller financing. His rate was 5% at a 15 year term (seller wanted to go 25 year term). He put down 50% cash.
I feel the 24 unit is worth $400k which puts it at $16,666 per door. I would like to put down as little as possible to have more reserves and comfort for the big $350k rehab needed.
When talking to the seller, he seems very tired of dealing with it and collecting cash door to door each month. When getting more info out of the listing agent, he says he is flexible but is not willing to "give it away".
I'm looking to hear about what you guys recommend. I would like to know what has worked for you in the past for negotiating and actually submitting the LOI/offer(s). How do you present them? What else do you provide along with your LOIs? What does your LOI consist of? After coming to an agreement with the LOI, what specific terms should I include in the seller financing to ensure I am protected properly?
Thank you in advance and please let me know if I'm leaving other important info out.
MLO Master Lease Option, instead, based on the NOI.
Do Not Buy an apartment building when you can RENT one
Use a Master Lease to control the property.
Use a Master Lease to control the property, with an option to purchase it at an agreed upon price for a few years. You then sublease to the existing and new tenants for cash flow.
There are four main advantages
1. Less Money Down out of Pocket
Not 25-30% down payments, which is quite a big chunk.
2. Cheaper Than Hard Money
Using a master lease instead of a loan may result in a lower payment than the equivalent loan at a high interest rate or points.
3. Less Money At Risk
Your option money may be as little as 5-10% of the option price. On a $2 million purchase, that’s $100,000 to $200,000, significantly less than if you purchased it with a loan.
If the deal goes bad, you don’t have to exercise the option, so your downside risk is limited to your option money, time, and improvement costs.
4. No Debt Financed Income Tax on IRA Investments
Income from that investment may be subject to unrelated debt financing income tax (UDFI). A Master Lease is not a loan (as long as the master lease is not long term with a declining balance, thus a disguised lease), the net income to your IRA is not subject to debt financed income tax.
Taxes: When you exercise your option to buy and simultaneously flip the building, you haven’t been in title long enough to qualify for a long-term capital gains tax treatment.
Thus, the gains from the sale may be taxed at a higher rate.
The Seller: The seller could simply renege on the deal when it comes time to exercise your option, leaving you with an expensive litigation option. Secondly, the seller may end up in bankruptcy or get a lien against the property in the interim. Third, the seller may die or disappear, leaving you with a legal mess that will take time to clean up.
See a great lawyer with experience with MLOs.
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