I have a burn out landlord that want to sell a 7 units in my area. lRight before the market crash he put up some serious money into the building for a complete rehab. He wants to sell the property for a reasonable price which will still cash flow positively and cap rate at 9% for the area is not an awesome deal by no mean.
I offer to take the property with existing financing but I am wandering what is the best way to transfer to an llc or trust and at the end i can refi instead than purchase?
Please help out.
In order to take over the existing financing you can assume his loan. This will require current lender approval and is dependent upon that provision being present in his security instrument (mtg/dot). Once the lender approves you, you should be able to vest title to the property in your choice entity and the lender will prepare paperwork to follow the same.
Another idea may include purchasing the LLC as a company which still may create some underwriting from the lender since the ownership is changing of the LLC. In this case, it is already in an LLC. If this is possible you have to ensure you do not inherit liability on the LLC from the previous ownership.
In regards to refinance in the future, once you own it, you can refinance it when you want in accordance with the loan parameters on the property.
If you are trying to tap into some equity at closing, let's say. This gets a little more involved but it can be done. You could ask for a temporary or conditional equitable ownership of the property with the current owner. This will put you into his LLC as an owner. (that is where it is sticky but it has been done depending on how you negotiate). Then you can pursue a new lender altogether to refinance and pull cash out under the pretense of a buyout of a partner. The current lender may do this too. The lender may have guidelines which you will have to understand on how soon the seller can vacate the company with cash or how long you would have to be a member for them to lend, etc. As I said more involved, but it works if you do it right.
My thoughts were, the current owner transfer the property into a llc and give me an equitable title. Which would make me part owner. Pay him his equity upfront then wait six months to refi the note on the property. In my state MA, I ask few local investors, no one can get me a clear yes or no answer with out refereing to DOS. if you have experience on doing this type of transaction maybe I can PM you and you can walk me thru the process.
I am happy to discuss with you as needed but you may also get some other ideas and input from other members on the public post.
I am not sure what clear answer you are looking for. Can you refinance the loan after 6 months? Yes, provided you have LTV and Loan parameters that meeting a loan. Can you be added to a company that owns the asset? Yes, provided the seller wants to do that.
I am not positive what you mean by them referring to DOS.
If you pay him his equity upfront with cash, then essentially you purchased the deal. I assume the rest of the money for the deal pays for the current debt on the property, thus not to the current owner.
Transferring the property from one entity (person or company) to another (person or company) may trigger a Due On Sale clause inside your loan. This would mean the lender wants payment in full. The key is to work within the scope of the current or future lender's guidelines to carve out a refinance otherwise it is a simple purchase transaction.
How is the property currently vested? (natural person or company)
If company, is it the only asset/property in the company?
What general loan terms do you seek when you refinance (LTV, Cash and what is the cash for?)
What type of property is it?
Dion, the property is a 8 units building. The note is under the husband and wife name. He currently owes 175,000 plus equity is 55k. we are discusing either to pay 55k upfront or 25k now and either a cash out refinance for 205k or last he carry a second mortgage for 30k @ 6% with ballon due in 5 yrs. The current note been there since 2002. ltv is about 78-85%( purchase price 230,000). A refi for 175 to 205k should be relatively ok but nowadays, who knows.
is there any difference on transferring a title back by a commercial loan vs residential?
Are you comfortable with the deal?
175,000 @ 85% LTV would mean the property is valued at 205,000
@75% LTV would mean it is worth 233,000
So, if it is the later you are getting in at retail value, it is the prior, you are over paying for the asset. What is the NOI on the complex?
Assuming my way through the value, the units would need to have $800 per month or more rent and all be occupied. That would squeak out the value of $230k.
Since it [appears] you have maxed out the value, not sure you will get any cash out of this upon a refinance. An 8 unit complex is commercial financing. If you found a lender to let you borrow 90% you are only pulling out 207 and remember that will have to include all your closing costs and fees.
Is there upside in the property in the future? Better rents or more occupancy?
Title is not backed by a loan. Title is title, there is no difference between property type.
The upside is the property complete redone and green efficient. maintenance free for years.
here is a snapshot of the pro forma
INCOME Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
Rental Income 2% $53,700 $53,700 $54,774 $55,869 $56,987 $58,127
Vacancy Loss 10% ($5,370) ($5,370) ($5,477) ($5,587) ($5,699) ($5,813)
TOTAL INCOME $48,330 $48,330 $49,297 $50,283 $51,288 $52,314
Operating Expenses 2% $18,750 $19,125 $19,508 $19,898 $20,296 $20,702
Real Estate Taxes 2% $3,730 $3,805 $3,881 $3,958 $4,037 $4,118
Make-ready/Leasing Reserve $1,000 $1,000 $1,000 $1,000 $1,000 $1,000
Structural Reserve $0.15 psf $500 $500 $500 $500 $500 $500
TOTAL EXPENSES $23,980 $24,430 $24,888 $25,356 $25,833 $26,320
NET OPERATING INCOME $24,350 $23,900 $24,408 $24,927 $25,455 $25,994
TOTAL PROJECT RETURN ON INVESTMENT 10.17% 10.36% 10.39% 10.61% 10.83% 11.06%
($17,010) ($17,010) ($17,010) ($17,010) ($17,010) ($17,010)
Amortization 25 Years
CASH FLO W AFTER DEBT $7,340 $6,891 $7,399 $7,917 $8,446 $8,985
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