I'm a huge fan of the collective wisdom of BiggerPockets, and wanted to seek out a few ideas. There is an apartment building listed on the MLS that I've been fantasizing over for several weeks, and after much considersation gave the listing agent a phone call. The seller is open to creative financing, but wants to find out if I can qualify to assume his loan. I can almost guarantee I will not be able to (in the neighborhood of $1.5m), so I'm looking for legal ideas to structure plan B and keep plan B a win-win scenario to make this deal happen with a Land Contract. Partnering with mom and dad, mom and dad in law, and outside investors are plans C, D, and E - which I really don't want to do.
I read a post a while back from Brandon Hicks that mentioned using pro-rated rent, property taxes, and security deposits as down payment credits. What else have you written into your contracts to produce low or no money down deals?
My goal is to reach a hand shake agreement before settling in with my attorney to draw up a PSA.
Any input is good input, but I'd especially like to hear from Brandon Turner (sorry Brandon, I haven't read your book), J Scott, Brian Gibbons, Brian Burke, K. Marie Poe, Jon Klaus, Ned Carey, Aaron Mazzrillo, Dawn Anastasi, Jay Hinrichs, Bill G., Curt Bidwell, and Michael Siekerka.
How much do you have to put down?
This is not at all my area of expertise. Good luck - Ned
Hi Josh. How many units is the apartment complex and is it listed for a decent price? I would say the biggest consideration in assuming the note would be your experience. If you have no rental properties currently, I would say it is pretty much no. If you have 5-10 years of experience under your belt and have consistency positive results along with similar properties then you might have along shot.
Another issue so paying the agent. You could do a land contract with the seller utilizing the existing financing subject to and refinance out in a couple years.
I can afford to come out of pocket a little over $10k. I realize it's not much in the big picture, but I'm essentially looking for a 100% seller financed deal if I can get one.
@Ned Carey I appreciate the acknowledgement Ned, thank you.
@Kyle Hipp I thought about the agent commission too. Do you have any ideas on how to take care of that?
Personally I would probably contact the seller directly. Get your numbers together and analyse he deal in complete detail getting all the information you need. Explain to the seller your position and a rough structure to the terms of a deal expressing that you would like to make it work for them as well considering their goals. The agent might have up to a year contract and say that you are easy to move forward on deal around the rough terms proposed or something similar to eek their needs. If they can sell the property without you so be it but if the property has been on the market for 6 months already seller just might cancel the sales agreement. You could I offer a token commission of sorts and proceed to execute the land contract
@Josh Jacobsen I know this isn't what you want to hear, but if you've only got $10K you are under capitalized to complete this deal on your own. For a deal worth $2 million (+/-) $10K will get swallowed up for breakfast. Just the loan assumption fee would likely be around $15K. Sure, you can acquire it with creative financing like land contracts, seller carry backs, sandwich lease options, credit cards, signature lines, HELOC on primary residence, etc but you'll be so overleveraged with so little reserves that the slightest hiccup could put you in a very bad and painful place. On a $2 million deal I'd keep around $30 to $40K (at a minimum) in the operating account at all times. You'll most likely have nothing left with which to fund this operating account if you play that close to the fence.
Forget about using proration credits and security deposits to offset the down payment. Those credits have a purpose. You'll use the prorated rents to pay the first mortgage payment. The security deposits are for you to hold in trust, to return to your tenants when they leave (less damages and outstanding balances). In practice this stuff is credited in escrow but you still need to put the funds that you would have deposited to escrow into your bank accounts so that you have the security deposits and reserves on deposit.
Plans C, D and E are viable. Raising money from friends and family gives you the down payment, reserves, closing costs, etc. The lender is much more likely to approve the loan assumption if you are bringing real money to the table and have skin in the game (even if it's someone else's skin). Splitting the deal with others is painful, but nowhere near as painful as the feeling of despair when the market moves against you and you realize that you are undercapitalized can't service your debt or expenses.
On the bright side, leveraging other people's money allows you to scale much faster and higher than you could do on your own. Done correctly, under capitalization will be a thing of the past. It will also transform you from a dreamer desperate to find a way to do a deal into a real buyer that'll be taken seriously by the seller and lender. You'll get a better deal when you have the upper hand!
@Brian Burke Hey! Thanks for being real with me. Let's talk more about the operating account. Is there any reason I couldn't partner with the seller to fund it? What about writing something into the contract that the seller would include a $30k grant into the purchase price, with contingencies that it's for business use relating to that property? Tough policy to enforce, but in a perfect world, is that an achievable term?
Yes, you're fantasizing!
As Brian mentioned, 10K won't cover closing costs.
BP is full of illegal, unethical and really bad ideas, mostly from newish types trying to figure angles to promote themselves, that needs to be understood and ignored.
Using deposits in a settlement for a down payment, rent deposits are escrowed funds, there is no way to legally get your hands on such funds and give them to the seller. A seller may retain the funds, it is an amount that is credited to reduce the amounts owing, reduces the cash needed to close but it does not reduce the sale price. And, if funds are taken out of those escrows the money in cash must be put back into that account, it's a wash, if you don't, most likely you'll be in violation of state law. So, you still need the money. Using taxes is much the same, but you don't have an escrow requirement, you just get caught at the end of the year to pay the tax man.
Falling for such a suggestion, where the author clearly doesn't understand settlements shows your lack of knowledge, not being cruel, just using the fewest words typed to point out the obvious.
Any seller, who owns a 1.5M+ property probably isn't an idiot, they know what they had to do to buy the place. What wildest dream would motivate a seller to kick in money to you to sell his property? I have done deals where a seller kicked in cash, they had some other motive, agenda, purpose, tax avoidance, charitable purpose and all were complicated transactions, can you really go there?
Next, that seller knows the risks of an installment sale of any kind most likely, at the very least they will look at you just as a bank looked at them. Money, skin in the deal, operational capital and reserves, ability to pay, credit and experience, the knowledge and management abilities to not just close, but to carry on the project. They only aspect you might have is the credit, but not really some credit score, but credit is the history of paying other debts, other similar debts. Your credit history in making a car or house payment has little relevance to your payment history of a 1.5 M loan. So, you have nothing to bring to the table.
Which leads to the partner idea, why would a partner get with you on such a deal, we just touched on the fact that you bring nothing to the table, your partner is basically buying it, they carry the loan aspects. Think someone with money that knows noting about RE will jump in with you based on your RE knowledge? Fantasy, if they do know RE, they then know you don't have the experience, so why would they partner, they'll just buy it, if it was a good deal.
As to circumventing the agent, another misdirected suggestion, listing broker have protected periods, you already contacted the agent, even if the listing expires you and the seller must wait, not do any installment transaction until you pass the protected period, I can tell you an agent isn't walking away from some $M+ listing and they will be watching what goes on.
As to this listing, it's been listed how long? It's overpriced, might be underwater. How can I make that statement? Because it hasn't sold, a good deal usually isn't listed, if it is, agents call every investor in the book about the property, if that goes nowhere then that means every investor in the book passed on the offer, every investor in the book won't pass on a good or even decent deal! So, it's overpriced.
Still on the market? That suggests to me that the seller is not motivated, if they were, it wouldn't remain listed at that overpriced amount.
When investors with no, or little money try to acquire with installment deals or by unconventional methods, the very first thing to find out is the owner's motivation, will they go there? That really comes first, before you waste time doing numbers, before inspecting the property and before trying to comp out the property......otherwise, you're wasting your time and the seller's time.
You still need to learn RE, not how to market RE but the meat of RE, that is where all creative and conventional transactions will be anchored in.
You're wasting time, effort and losing money by elephant hunting with a BB gun. When and, or if, Brandon or Brian or Ben post about creative deals, they are all with a motivated seller, it takes skill and knowledge to motivate a seller, convince them that the offer is their best deal. I'm sure there was a bit of luck involved in finding their first deal, there was in my first multi-complex creatively acquired. You might find some elephant deal needing rescue where the owner is highly motivated, then you can beat the deal to death with your BB gun.
Back to the forum chatter......learn first, good luck! :)
Bill G. That's exactly why I wanted to hear from you. You are experienced and speak the truth. But now I want to hear your ideas about how I, "the inexperienced investor with nothing to bring to the table" can come to a mutually beneficial agreement.
One time I rode my bike from Seattle to Boston, only taking a change of clothes and whatever fit in my backpack, sleeping outside without a sleeping bag for most of the trip. I was cold, especially one night in Havre Montana when the wind was blowing and the temps dropped to 42 degrees without wind chill. I had a tent's rain fly, a light blanket and my cycling clothes to try to keep warm. Worst night of my life. I also had four flat tires my first day. And something like 10 my first week. I was definitely unprepared when I started, But you know what? I got what I needed and made it happen.
Surely you know something I don't, what would you do in my position? You've ridden your bike to Boston and back several times.
And, at 17 1/2, I got an invitation to tryout for the US Olympic team in cycling as a road racer, so I understand your determination! Point that determination into learning real estate from a professional view point, not a wheeler-dealer angle trying to compensate for what you may lack. If you expect to ride with the best, you'll need the equipment and knowledge to keep up, shear willpower is not enough.
You can't be fixated on just one approach to attack a hill or curve, you need to instantly recognize options and select the best that meets the conditions.
I don't know the conditions that exist with that property, I mentioned staring with the motivations and needs of the seller, not your burning desire to own a property, can that hill even be approached at the speed you desire? Probably not.
Can you instill confidence in that seller, the only way really is with your money and knowledge, most important is knowledge. Technique, your riding skills weren't developed in a week, there is no step by step, 1,2,3 and 4 approach to RE that can be replicated in every situation, or even most situations.
If you're going to insist on thinking you can just approach a deal with willpower to overcome knowledge, I can't really help you. You didn't begin that trip without some planning, training and preparation. You didn't just pack up one day out of the blue and take off I'm sure. This trip can't be accomplished without the same care and due diligence, planning, training and preparations. RE is not a sprint, it's an endurance race, you need to train for it.
BTW, at that age I couldn't go to the trials, I should have as another I had beaten before made it. One of my biggest regrets, if not the biggest. Things that are impossible to accomplish at the time, just aren't meant to be, determination alone is not enough. :)
Originally posted by @Josh Jacobsen:
Let's talk more about the operating account. Is there any reason I couldn't partner with the seller to fund it? What about writing something into the contract that the seller would include a $30k grant into the purchase price, with contingencies that it's for business use relating to that property?
Well, let me break that down another way. "Mr. Seller...I'd like to buy your property, I'd like to assume your loan and have you carry the difference. By the way, I don't have any money, so would you grant me $30K so I have some reserves?"
If you can get the guy to say yes to that deal, I either want to hire you right away as an acquisitions guy, or I feel really bad for you because that deal is such a bad deal that the guy is willing to pay you to take it. It just isn't realistic if you are being honest with yourself.
Bill is right and has given sound advice. If you want this deal, this is what you have to do: Start smaller, buy SFRs or duplexes. Rent them out, gain experience. By doing this you will sharpen your acquisition pencil and hone your financing skills. And you'll learn what it takes to run a property and how much it costs.
Work your way up to duplexes, quads, then once proven, go to commercial multifamily (5+). I went from SFR to duplex to 16 unit building to 60 unit complex to 140 unit complex...it took 8 years. Had I gone straight into 140 units on the first deal (which I probably wouldn't even have had the chance because no one would have financed it) I would surely have blown it big time. Don't get me wrong, even when I was starting out I thought I could handle a big property, but I didn't even know what I didn't know.
@Brian Burke "Well, let me break that down another way. "Mr. Seller...I'd like to buy your property, I'd like to assume your loan and have you carry the difference. By the way, I don't have any money, so would you grant me $30K so I have some reserves?""
Hey Brian, you just wound him up for this. He's probably there now and the Owner and Listing Broker are looking at him in disbelief;-) Who knows, stranger things have happened...
@Josh Jacobsen "One time I rode my bike from Seattle to Boston..." When you heading back?
I'd start by flipping a condo, which you could probably get into easier with an equitable partner, then get some BIG game!
@Mike Hurney I love Boston, but I flew back after I was finished.
@Josh Jacobsen NOW we're talking! If you've got what it takes to succeed in this business I would expect you to ignore everything we've said and go out there and try to do this deal. If you just say "Brian and Bill say this can't be done, so I'm going to listen to them and go find something else to do" you won't go very far in this business. I anticipated that you would want to try it yourself anyway, so hopefully I've given you some useful approaches from which to start. It's also why I've delivered two messages previously in this thread that seem to conflict with one another to some degree. So here is my advice:
Go try to get this deal on your own. If the seller and/or the lender become an obstacle, re-read my first post. Then, if finding investors becomes an obstacle, go re-read my second post. The recipe is all there.
You can read what some dude on an internet forum has to say all you want, but it all means nothing until you've experienced it for yourself. If you manage to pull this off and you get this deal and it all blows up, it's not the end of the world, its another (expensive) lesson but will ultimately make you stronger and better. You know this already from your own experiences in other things, and I know this from my own experiences in the biz.
As an aside, it took me over 10 years from first SFR to duplex (but only because I wasn't focused), a couple of years from there to a 16 unit property, and 8 years from that first 16 unit to really big properties. The extraordinary difference that you spoke of was leveraging the funds of others. I grew organically using my own resources to get to that 16 unit deal, and then another 11 unit (and lots of houses/duplexes/quads)...that gave me the credibility to get investors to fund my larger deals. That's where the real growth happened. Step 1: Build a track record. Step 2: Get funding to scale it. Simple concept, but long journey.
I think you have gotten good advice... I think any seller would find it difficult to do the deal with you as it stands... JV partners are what you need.. you need cash ... At the end of the day that's what a lot of us do.. We sit back and wait for those that need some help to bring deals.. then we either buy them or cut them in.. either way your compensated for your efforts.
Just out of curiosity what state is this property located in?
Well if its anything like the PDX market or area the chance of any one not just putting it on the market and selling for cash would be remote.. Unless there is some real hair on the deal.. would be my guess
Well, get in the saddle and start pedaling, if and when you crash, you'll learn something. Not sure that what you learn will really help you that much, but you'll learn something.
I took on a 12 unit (2 buildings) in my second year going full time, probably because I knew RE better than that dumb azz agent that owned the place.
You said you had 10K, now you have 80K available to use.
Others pumping this as if they have some solution are pretty much full of it, you MUST find the motivation of the seller FIRST! The BS here as to do this or that, well, pure hype. I don't have time for this badgering while you don't give the full details, horsefeathers, no one can tell you what is going to work unless you post the details.
All you have here is; I want this, I'm broke but determined, tell me how to do it, with some crap hype posts encouraging you.......good luck!
Get the details, post them, then I'll look at it. :)
@Bill Gulley "You said you had 10K, now you have 80K available to use."
Forgive me, I'm not sure what you mean by this, will you spell it out for me?
"Get the details, post them, then I'll look at it. :)
Gladly. My meeting with the selling agents is on Monday. I'll keep you up to date.
Hey @Josh Jacobsen You have been given some incredible advice from folks already so I can't add a lot, but I can say this.
There are two types of people in this world: those who say "I can't buy it" and those who ask "how can I buy it?" I'm proud that you are the 2nd. Never listen to the first.
THAT SAID - I'm not saying you can buy this. I'm just saying never believe anyone who say "you can't." Sure, it might be tough or a bad idea. But "can't" doesn't exist in my vocabulary :)
If this were me, I would see if any of these approaches would work:
1.) Partner with someone who is super experienced and give them the bulk of the deal. Even if you made no money it would be amazing experience.
2.) Consider a triple-net lease option if the deal is good. This means you would sign a master lease on the place and then sublet all the units out. I did this to acquire my 24 unit for nothing down.
but in the end, creative finance must be built upon an INCREDIBLE deal. If it's an incredible deal - then you can pull it off. If it's not - then go find a good one.
Maybe @Ben Leybovich will want to add to this conversation?
I looked at your profile, Josh, and I noticed that you own 2 houses and have flipped a car once :) I think that while Brian is correct asserting that you are under-capitalized in terms of available capital, the bigger issue is that you are most definitely under-capitalized in the intellectual worth department.
Josh - there is certain knowledge that only comes from doing, and you haven't done enough - plain and simple. Take Brandon's comment with a grain of salt - his enthusiasm can supersede his sense of the obvious :)
Perhaps, you could look at a tri-plex :)
@Brandon Turner Thank you for the kind words. I had never heard of a triple net option before and the the concept went right over my head. I'd like to hear more about it.
@Ben Leybovich Ouch.
@Bill Gulley One of the two listing agents backed out of the meeting today, leaving the original contact to call me and let me know that we would need to postpone. I requested the information he had to be emailed to me, which he did.
The existing loan on the property has $675k left in principle at 6% interest over a 30 year term, with a balloon due in 2017. His P and I payment is roughly $3375 per month. His ask is at $1.4m, so if he were to cover the difference after an assumption he'd need to carry a note around $725k. The rent roll is $14142 per month, and the property is 100% occupied right now.
Scheduled Rent: $169,704
2014 Tax: $21,061
2014 Insurance: $3,101
Property Management: $11,880
Cap Ex: $16,971
The people in my corner say that this property is too expensive, and I agree. P and I would eat that profit margin and leave nothing. For this property to make sense the seller would need to come down almost half a million. I would look to buy this one in the neighborhood of $930k-$1050k, yes?
I agree with @Brandon Turner and @Ben Leybovich . Hey wait, they disagree (no shock there) and said opposite things...but I say that Brandon pretty much nailed it. Ben was right about one thing, there is certain knowledge that only comes from doing. (Besides, Ben disagreed with me so he must pay the price--hearing that I agree with Brandon and not him! That'll teach him.). That's why I encouraged you earlier to go for it--the point isn't that you'll do the impossible deal, the point is that the knowledge you gain by doing the steps will embed deeper than anything any of us say on this forum.
Now, on to your deal:
You didn't say how many units so I'm going to guess somewhere between 14 and 30?
I see no good reason to want to assume a 6% loan at low leverage when rates are lower now. You could get a larger loan at a lower rate and then you'd need a smaller seller carry. Not that it matters, because the the existing lender isn't likely to approve an assumption if the seller is carrying the balance of the price, nor is a new lender likely to make a new loan in such a case. If you had investor dollars, different story.
Will the taxes go up after you buy? I don't know the rules in your area, but you need to know them inside and out.
I see 5% for physical vacancy, but what about economic vacancy? Loss to lease, credit losses, concessions, etc.
CapEx seems high, but I don't see anything for repairs and maintenance, turnover cost, landscape maintenance, pest control, advertising/marketing, and general administrative costs.
Finally, cap rate is market dependant. NOI divided by cap rate = market value, so you need to research prevailing cap rates in the neighborhood for that property type and quality. Using the prevailing cap rate and YOUR NOI (not the seller's NOI) you can calculate whether it's overpriced or not. Don't forget to subtract any immediate needed repairs from the calculated value.
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