URGENT Advice Needed - 19 Unit Property

121 Replies

@Daniel Daskaloski are you sure zoning would allow for that? I can’t imaging that being ok. Usually in commercial zones apartments are only allowed on 2nd and third floors?

Originally posted by @Rich S. :

I don't have the experience of everyone else chiming in here, BUT just looking at it from a common sense approach.  You know your market better than most of us do... and if she already has those other offers, you will need to present her with an offer that is more appealing and that doesn't always mean HOW MUCH, but rather TERMS.  It seems to me that if she wants to get rid of it, she wants to get rid of the headache, so she is probably not 1031-ing it.... meaning, I would assume she will have quite the tax burden if she sells out right.... so owner/seller financing might be the key here.  If you see the value and if it works for you(the future potential seems to be something most folks are over looking with future development and in your market you understand that way more than we do) find some terms that she would prefer... agree on a price, see if she will entertain seller financing and find another way to sweeten the deal.  I'm not sure I know what that is, but the TERMS may be the key... 

 Learning there are other offers makes this even more true.  I think this is new information as of today, right?  So with 3 competing offers....Not only do you need to present an offer that is more appealing, but you also need to articulate it in a way she can understand, and actually see for herself that it is a better option.  The term 'seller financing' doesn't exactly sound that great to a someone trying to get rid of a headache and just move on.  But if you can thoroughly explain, and competently explain how it will save her huge tax burdens, and will give her consistent long term income she can count on, then the deal can be yours.  You would need to know just about all of her options very well to be able to show why this is best, not to mention overcome any objections she might have.  I don't care how close of a friend she is, she is going to go with the offer that can best solve all of her problems fastest, with the least amount of hassle.  

Daniel,

I'm from that area.   I'm currently in CA.  I took the numbers you gave and estimate 2m is too high.  Also don't forget snow removal in that area as an expense, and insurance.   You said she wants to sell it ASAP?  If it was me I would offer 1.5m, get 60-90 days to get the financing done.  Also, I would find out about your on site manager during your due diligence.  I would prefer to have a professional property management handling leases, vacancies, renovations as needed, for the usual 8-10%.   I have a 14 unit I'm negotiating on now.  It's gonna close around 1.0-1.1m.  I have offered two financial partners who will put down the $250k down payment, a guaranteed 5% on their money annually, plus 10% of net annual rental income.  If the property is sold they are paid first, as 25% owners.  Overtime with appreciation, and the mortgage dropping, and rents rising their 25% will grow from 250k.  I've had positive response from this offer.  

Send me your email if you want to discuss further.  

@Daniel Daskaloski you need to run your own pro-formas on how you expect this property to perform. 

Your maintenance budget is ridiculously low. $166 a mo to maintain 19 units (broken up over multiple buildings) over an extended period of time? What about cap-ex? Vacancy losses? You need to make a list of all possible expenses (google would be helpful) and make a diligent effort to accurately project those.

For a deal like this my commercial lender's pro-forma is going to assume the following, regardless of seller's claims:

10% vacancy

3% cash reserves

3% insurance (or actuals, whichever is higher)

3% management reserves (or actual price, whichever is higher)

Actual taxes

20%-25% operating reserve (all other operating expenses)

All of these numbers are a percentage of annual gross rents. They're a bit conservative, but if you can't meet a 1.25 debt coverage with a conservative pro-forma I would walk away from the deal unless there was a major rent upside that you know is primarily going to be a management effort.

Based on my last message... and 20k/monthly rents + the seller's asking price. I would say (without any knowledge of the equity position/market value possible for this property) walk away from this deal altogether if you can't negotiate a considerably lower offer. 

Originally posted by @Elliott Elkhoury :

@Daniel Daskaloski you need to run your own pro-formas on how you expect this property to perform. 

Your maintenance budget is ridiculously low. $166 a mo to maintain 19 units (broken up over multiple buildings) over an extended period of time? What about cap-ex? Vacancy losses? You need to make a list of all possible expenses (google would be helpful) and make a diligent effort to accurately project those.

For a deal like this my commercial lender's pro-forma is going to assume the following, regardless of seller's claims:

10% vacancy

3% cash reserves

3% insurance (or actuals, whichever is higher)

3% management reserves (or actual price, whichever is higher)

Actual taxes

20%-25% operating reserve (all other operating expenses)

All of these numbers are a percentage of annual gross rents. They're a bit conservative, but if you can't meet a 1.25 debt coverage with a conservative pro-forma I would walk away from the deal unless there was a major rent upside that you know is primarily going to be a management effort.

Elliott,


After speaking to a few of my lenders a few minutes ago, this is EXACTLY what they said. So basically the only way to do this get this deal with that debt coverage is to put more money down. In that case i definitely cannot do this deal. 

So I would need to get the price down to about 1.7M for this to make sense.. it seems like. 

@Daniel Daskaloski

Find a way, do it!

Seller financing is easy - you ask her to carry the note - with a small percent down and you pay her every month instead of the bank.

You can ask her to finance you with (market) interest or lower if she’s willing.

Just like you would a bank but you go through her, it’s so much easier. And if you default she still have the property instead of the bank!

This is a great deal!!

Wow all of the love and free advice on this post is incredible!

Ask to see their Schedule E. I'd also casually talk to some of the residence and ask if they're aware of any issues with the property, what capex has been performed

So the ideal scenario here would be to see if i can knock them down to 1.8M. 

Give them 20% down payment.  and finance 1.5 million through the seller for example a 3 year term with 20 year amortization. Then i can refinance after the 3rd year with a lot more income on the property. 

What do you guys think? Does this make sense? 

@Daniel Daskaloski

Don’t get stuck on the price! You need to figure out how to ensure you can get the seller the most amount of money which fits their needs. Not based upon price only, but their net after tax money.

Originally posted by @David Miller :

@Daniel Daskaloski

Don’t get stuck on the price! You need to figure out how to ensure you can get the seller the most amount of money which fits their needs. Not based upon price only, but their net after tax money.

You are absolutely right. I will sit down and have a talk to figure this out and see what our best option is. I mean if we cant come to terms it is what it is, but i will sure try my best to do so. 

Thanks

Dan

Originally posted by @Jackie Capiro :

@Daniel Daskaloski

Who manages the property now ? And what do they charge?

There is one apartment that is given to the super of the building.  He manages the whole property and in return he gets the apartment. 

I think i will be pushing the seller financing route. I cannot get a loan @ the price they are selling it @ because of the debt coverage. 

I have been reading on this seller financing, can someone also tell me what advantages the SELLER has? I would like to make a nice pitch when i meet with her later this week. 

Thanks again for all the help guys, you are amazing!

Dan

@Daniel Daskaloski

My 2 cents:

Never worth rushing a deal or feeling rushed. There is always another deal. Especially with little experience. You’re talking millions. I would recommend setting up your ground game. Get everything lined up. Be ready for a deal down the road. You’re too attached to this deal. It’s evidenced by statements like it ORs this even matter if the deal cash flows right now or makes zero. It’s all about future potential. That’s dangerous and speculative. Most people tell you to buy a good deal. Not potential. Sounds to me like you’re trying to force this. Now there are competitors bidding against you. Let it go. Move on. When you feel competition you become even more unreasonable. Less logical and more emotional. It’s like you’re missing out on something. Don’t do it. Been there done it myself. Not with Real estate but other investments. Last chance to get in st this price....others are willing....you’ll miss out. Always backfires or turns out worse than you think. This is a long game, not a sprint. Your future success won’t hang on one deal. Sure, you can get lucky. And get the big break. Or you don’t and you’re out of the game for a long time licking your wounds. You’re justifying your way into the deal.

Originally posted by @Daniel Daskaloski :
Originally posted by @Jackie Capiro:

@Daniel Daskaloski

Who manages the property now ? And what do they charge?

There is one apartment that is given to the super of the building.  He manages the whole property and in return he gets the apartment. 

 In my humble opinion i would run the numbers hiring and factoring in a property manager. Just my 2 cents 

@Daniel Daskaloski seller fi is worth paying a little more if a bank loan isn't feasible OR the seller is willing to take a 2nd position to the bank. just please please please get an accurate maintenance estimate on this. The numbers for repairs were extremely low here!

Originally posted by @Elliott Elkhoury :

@Daniel Daskaloski seller fi is worth paying a little more if a bank loan isn't feasible OR the seller is willing to take a 2nd position to the bank. just please please please get an accurate maintenance estimate on this. The numbers for repairs were extremely low here!

 I appreciate your help. 

I will definitely look into those #'s. 

Thanks

I have one more question. 

Would seller financing work if she still has a mortgage on the property? As far as I know everything is paid off, but if in case there is still a mortgage i'm assuming seller financing wont work? 

Thanks

Hey Everyone, 

First off i would like to thank everyone for their help. This thread taught me plenty of things and ideas on how to make deals work. 


Unfortunately, this deal did not go through. I spoke to her about seller financing, she was very interested and we probably could have worked something out, but the next day after we talked she got an all cash offer for 2.55M. 

I barely had the #'s working with 2M, i am really not sure how they are doing it with 2.55m, but im sure they see the future potential. She accepted it. 


Everything is a learning curve, i learned a lot during this time. 

Thanks to everyone again! 

You are still excellent

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