I would like to start a discussion about deal making to help clarify some confusions that I have that generally revolve around logistics with execution. Background; I talked my family into starting a rental business 4 years ago, we own about 10 doors right now. So I have a decent amount of experience and now have questions about some more complicated things that I am trying to grow into doing. One thing I would like to do more of eventually is bring on limited partners to deals. I hear on the podcasts all the time (episode #272 being a great example) that you should focus on finding a great deal and approach a potential investor with that opportunity. My confusion is how to lock down the deal. How do I present an offer to a seller that lays out in the contract that I will be seeking outside investment and protects me if I am unable to find the money? We can use a current example I am looking at for the discussion. My agent presented me with a listing in a neighboring city for 27 houses asking 1.8 million which represents a 10% cap rate. Homes are 90% occupied with management in place. I would like to negotiate down to something like 1.5 million. I have investor contacts that I think would be interested in this deal if I were to be able to negotiate that kind of price. Do I negotiate the deal, sign the contract, and then approach my potential investors? If that is the normal course what protects me if I can't find the money? Is that recourse for me to get the good faith deposit back or is the risk I am taking loosing the deposit? Also much is discussed in the podcasts about presenting different types of deals that the sellers may be interested in. How do you go about this when you are going through an agent? How do you initiate a discussion and back and fourth with the seller without having to send a written offer each time? My agent seems only willing to send written offers. Thanks.
If it was me (and others would do it differently), I would put together a pitch deck /offering summary for this investment showing the amount of money you seeking and the returns to your partner. I would base it on a sales price that gets your investment partner a very solid return. If you can negotiate a lower sales price great.
You can also use this as a negotiation tool with the seller to show him the returns as the cap rate is a great tool but you need to forecast your levered IRR to see where the investment really turns out as the current cap rate does not show deferred maintenance /capex in most instances
Thanks Chris. I am less confused about measuring the return and whether it is a good deal or not than I am the process of negotiating a deal with a seller in which I plan to approach investors about. Let's say it is a fantastic deal by anyone's measurement. It won't stay around long enough for me to complete a pitch deck, approach investors, work on those details, and then return to the seller to make an offer, especially in the current market. Also in my limited experience, investors get annoyed if I bring pitches to them and the cannot complete the deal for whatever reason. So how do I go about having the confidence to negotiate a deal first and approach investors later? Are there mechanisms of some sort that I should have in place in order to execute in this fashion? Or are we talking about off market vs. on market deals?
Tailor an offer with multiple “outs” that give you the time and opportunity to go out and raise the equity for the deal. You’ll need to take the financials and put together an Offering Memordandum to present to investors (usually takes me a few days). The OM should show an investors projected rate of return over the intended hold period. This allows them to make an informed decision on the investment. You’ll want to factor in your promotes for putting the deal together as well.
Now, the seller may opt not to accept your offer if you have to raise the equity (depends on the seller and market), but it’s worth a shot. I failed to raise the equity needed for a deal of mine and the seller refunded my deposit since I was up front that I needed to raise the equity or couldn’t do the deal.
Excuse my typos as I can’t go back and edit my posts on my iPad.
Being able to raise outside equity requires detailed knowledge as to how to put the deal together financially and how the “splits” work. There are many ways to structure a deal.
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