Rental Property Investor · Member since 2017 · 41 posts · 13 votes
Hello BP Investors.
I came across someone selling their 92 unit apartment here just outside of Houston. The seller and I are at a standstill on negotiating (she wants non-refundable earnest money), so I could use experienced apartment investors to help me analyze this deal to see if its worth putting up the earnest money to get this under contract. #help!
@Chris Murdien My guess is that the seller thinks you are a tire kicker and she is asking you to throw down some hard money to prove that you are serious. Your delay in response to her request is showing that you are not a serious buyer by the hour. (or at the very least, that you don't know how to negotiate.)
There are a lot more questions that @Nick Rutkowski should have asked. In fact, I am not sure why the price even matters. My first question to you would have been: "Have you done as much due diligence as you can to find out if it's a good deal?". Do you have a T-12 P&L and RR? Did you ask for copies of leases? (even though you probably won't get them before an offer.) Did you verify taxes and insurance? Is it in a flood zone? Is it properly zoned? Any liens or back taxes? How's the vacancy rate? Is there any deferred maintenance? Did you drive by?
My next question would have been: "Do you have everything lined up (down payment & lenders) so that you can actually purchase the property?"
If the answer to both questions is yes, then negotiate with her! Tell her you will put down $x as soft money, and in x days it will go hard. Write it into your contract. Make sure that you walk ALL 92 units. Make sure that if she needs to get you documents, like bank statements, or receipts, that the contract specifies that she must do that in x days (or your hard money down payment requirement will be extended) Just CYA (cover your ***)
I do not see my comments as advising, rather I was providing information.
With that said, I disagree with you that putting day 1 hard EM down is foolish. Yes it would be unwise for an unseasoned investor without the proper team in place, however in the competitive market we are currently in hard EM is absolutely a lever that can be pulled to separate your offer from the rest of the pack.
Do what he may with the information, what I stated is absolutely correct.
Have you evaluated the deal? ... using the T12 and Current rent roll?
Probably be best to plug these numbers provided into a software or cash flow calculator.
Without a T12 or RR you don't stand a chance to know if the perceived value she's asking for the property is worthy of moving forward.
You need to know if this deal can cash flow day one of takeover. From there figure out what your break even occupancy is. Worse case scenario you need to know at what occupancy you can break even.
@Chris Murdien don't do it. She is not flexible and is just looking for the most money possible. It's overpriced she wants 20k nonrefundable earnest money. These are red flags plus never pay asking price. There's no built in equity at the moment of ownership.
I do not see my comments as advising, rather I was providing information.
With that said, I disagree with you that putting day 1 hard EM down is foolish. Yes it would be unwise for an unseasoned investor without the proper team in place, however in the competitive market we are currently in hard EM is absolutely a lever that can be pulled to separate your offer from the rest of the pack.
Do what he may with the information, what I stated is absolutely correct.
I would disagree. There is a discounted price that I would put up non-refundable EM for just about any asset
I do not see my comments as advising, rather I was providing information.
With that said, I disagree with you that putting day 1 hard EM down is foolish. Yes it would be unwise for an unseasoned investor without the proper team in place, however in the competitive market we are currently in hard EM is absolutely a lever that can be pulled to separate your offer from the rest of the pack.
Do what he may with the information, what I stated is absolutely correct.
I would disagree. There is a discounted price that I would put up non-refundable EM for just about any asset
I do not see my comments as advising, rather I was providing information.
With that said, I disagree with you that putting day 1 hard EM down is foolish. Yes it would be unwise for an unseasoned investor without the proper team in place, however in the competitive market we are currently in hard EM is absolutely a lever that can be pulled to separate your offer from the rest of the pack.
Do what he may with the information, what I stated is absolutely correct.
The desired purchase price is $5.3MM - this isn't some $40k MLS listing where someone is going to bring cash in a week. If the OP has the building's financials, he can put together an offer contingent upon all of that being verified as well as the stated condition.
I would inquire as to why the seller wants $20k - that's peanuts (1/3rd of 1%) compared to the transaction amount. What are they concerned about that they want $20k to continue negotiations? My guess is that they don't think you will have the ability to close so they want to get some $$ for their time/effort spent on you before the deal inevitably collapses. Prove your ability to buy to them and provide POF for $1,325,000 and net-worth statements, or a plan to obtain that through established relationships. This isn't a transaction you are going to pull the wool over anyone's eyes, so go all-in and sell yourself as a capable buyer. If the numbers work based on the financials they provided, counter their 20k hard EMD with a soft 10% min EMD that goes hard after x days, which will give you time to verify everything.
Is anybody else able to help me determine if this is a good deal or not? I have the sellers financial information, rent roll, expenses etc.
With this being a new season of investing into apartments for me, I want to make sure $20k non-refundable earnest money from day 1 of the effective date is a wise move.
I know as the due diligence process moves forward, the asking price is always negotiable, at the same time, with the seller already showing she's a firm negotiator, I would hate to lose $20k because she don't want to budge on price when the lender and/or bullcrap turns up during due diligence.
My spidey sense is telling me that you probably actually intend to try to wholesale this thing and want to tie it up with no money. The seller doesn't want their time wasted by someone who doesn't even have the wherewithal to take down the deal, which is smart on their part. If they're wrong, show them proof that YOU are able to close on this thing. 99.9% of wholesalers have no ability to close on a deal like this, nor do they have any clients on tap who will. Sellers with multimillion dollar assets usually value their time too highly to spend much of it entertaining dreamers.
@Chris Murdien we’ve done non refundable earnest deposit before. It worked out ok but definitely put some leverage in their court. It got us the deal and got us a discount on the deal in the end.
@Jeff Cagle you have sharp spidey senses. I do have partners who could help me but they're bottom feeders; this isn't a bottom feeder deal. If the price per door isn't at a certain "discount," they tell me they'll just wait a couple of years when "the bubble pops."
The POF I sent the seller wasn't enough for the 20% required from the lender and the seller addressed that; you're spot on.
A couple of experienced BP apartment investors have reached out to me via inbox (vs this public thread) and they're graciously looking at the details of this (and other apartment(s)) where I'm direct to the seller.
If seller has given you financials and you are fine with it and 100% Non refundable EM could be one way to go. This was seller knows you are serious.
If she hasnt then SCREW it .... gone those days where you put hard EM day one unless you know for sure 1) its a value add and 2) you own something next door and you WANT IT.
Having said that, you should be ok with putting EM down with exit consideration during due diligence. Its a very normal practice
Back to valuation ..below is something we are using for our valuations (5 yrs and 10 yrs life cycle) ..PM you if you needed anything else and happy to go over with you.
Good luck and keep us posted...
** We ask for T24/T36**
Income:
1) Rent growth - flat for next 3 yrs and inflation for next 3 yrs
2) Any other misc income increase by 2% aka inflation
Operating expense (Big ticket items - Lets assumes its a C property)
1) Tax - 85% of purchase price and then 3% - Texas is a non disclosure state
2) Insurance (General Liability and/or flood) (example: Flood insurance in Alvin area is ~20K for 40 Unit complex on top of general liability)
3) Make ready (assume 10 units per year based on 90 unit )~10% vacancy
4) Run and Maintain - based on how much capex you will be spending
5) Management fee (6% for your size) may be a bit lower but for now keep it a bit higher
6) Utilities
7) Professional service (attorney/CPA/Lawn/etc etc)
8) Marketing fee
Capex:
1) Whatever you think is needed (Check roof, water/sewer line/heating aka boiler/HVAC system/Foundation)
I came across someone selling their 92 unit apartment here just outside of Houston. The seller and I are at a standstill on negotiating (she wants non-refundable earnest money), so I could use experienced apartment investors to help me analyze this deal to see if its worth putting up the earnest money to get this under contract. #help!
If it's on Shraver, I was offered that deal for $3.6m FYI. If you want to email me directly about the deal I'd be happy to give you some info.
@Steve Hall I was thinking @Nick Rutkowski asked to calculate price per door. If you know your market, PPD could be a great way to see if the asking price is too high.
I don't believe the seller(s) view me as a tire kicker; she rejected all offers if they didn't agree to non-refundable earnest $. What the seller is doing is just negotiating based on how she purchased the apartments. No due diligence with non-refundable earnest money.
With her being from California, I told her "we don't do that in Texas."
The seller and I talked about soft vs hard; she's either hiding something or she needs the $.
I buy with a lot of hard money day 1, as is, no inspections, minimal financials needed. And when I sell, there is zero chance I go under contract with a buyer unless there is hard money day 1.
Basically the perfect buyer in terms of all the non price items. BUT, at the same time I require a better price than most. When I say I'll pay $x and they want $y, I tell them all the advantages of selling to me (as just stated).
I could go into a rant about why you don't need to see their bank statements, leases, insurance or taxes but if you've bought and ran a few class C properties in Houston (or most other places I'd suspect) you'll know the reason.
@Nick Rutkowski my fault. 20k non refundable day 1, an additional 30k after due diligence.
Oh, re "We don't do that in Texas". Actually we do. I've been involved in a ton of deals and participate as a friend/coach/adviser in a ton more. Almost all have non refundable EM. On a $5m+ deal, $20k isn't uncommon. My last deal I bought was $2.1m and I had $200k of EM, $50k hard day 1.
@Derek Carroll and @Jared Carpenter You both gave bad advice to this new investor. Just because you see everyone speeding on the highway, would your advice to a new teen-age driver be to speed to? Putting hard money down on Day 1 is foolish, and no better than gambling.
Think that all you want. But if you actually want to BUY a deal, that's what it takes. I'd rather put down $0 hard money. Too bad it's a sellers market and if you want to buy, you have to be the one to convince them you'll close.
Your advise should be "Don't go under contract (with hard $) unless you're SURE you can close". Even though I've closed on 100% of the deals I've put under contract, on the bigger deals that require a loan, I still am nervous with my EM as my banks, who always say they want to do a deal, could always decide to past and leave me holding my you-know-what.
The "we don't do that in Texas" was in reference to going under contract with hard EM AND closing in 1 week without due diligence; that's how the seller (from Cali) purchased this Texas apartment.
The "we don't do that in Texas" was in reference to going under contract with hard EM AND closing in 1 week without due diligence; that's how the seller (from Cali) purchased this Texas apartment.
Fair enough. But for the right deal, I'll pay cash and close in a week :) I did that about 6 months ago with my downtown property. Then quickly refinanced it to get my $ back out.
@Cody L., what kind of a discount from the asking price do you usually ask in exchange for no inspection/no contingencies/hard EMD from day 1? Does it work with brokers or only with sellers that you contacted directly?