So I'll be the first to admit, I wasn't very optimistic about driving for dollars actually working. However, my partner and I are committed to making our REI business work, so we gave it a shot. One driving for dollars session later, and we stumbled upon a small off the market portfolio that has potential to snowball our business and really get us going!
We made a list of vacant, pre-foreclosures (had Zillow open as we drove), and for sale by owner homes. Once back in the office, we pulled any information possible prior to cold calling and went to work. A quick inquiry into the county website showed that the owner of one of the for sale by owner homes also owned 4 duplexes, and better yet, he had owned them for almost 20 years: "potential for a portfolio full of equity" jumped out at us!
We gave the phone number that had been listed on the for sale by owner sign a call. It turns out, the owner of these properties recently passed away, and his 5 children were trying to sell everything and not have to deal with it: extremely motivated sellers!
Now this is where we need to get creative; we want to flip the house (needs about $15k-$20k worth of work), wholesale 2 duplexes (these are in a part of town we had agreed we would try to stay away from as far as rentals), and hold on to the other 2 duplexes (all 4 have tenants).
I think it's safe to assume the two wholesale duplexes would be a different contract and transaction from the rest of the portfolio right?
As far as the flip and two rentals, we would like to get a bridge loan that would allow us to finance the repairs (we are preapproved for a $150k interest only loan, so we'd have to go back and talk to our banker about this transaction and see if he'll work with us), then once the house is sold, use the profit to cover any expenses that come up when refinancing the duplexes into mortgages.
What other options as far as bridge loans do we have for our particular situation? What about portfolio lenders?
Over the phone, the owner kept saying "the bottom line would be $85k a piece". We ran quick numbers and quick comparables after the phone call, and came up with $61/sq.ft for the house, which would mean selling it at around $110k (ARV). Considering the $15k-$20k needed in repairs for the house, we would have a max offer of $65k on the house. The duplexes, at $50/sq.ft., would be worth roughly $97k.
We're thinking of spreading out the $20k we need to drop across the three properties, so in their eyes we're only dropping about $7k per property (if we gave them full asking price for the duplexes of course), rather than trying to get them to drop one property by $20k. Should work right?
We feel that there's a lot to consider, and a few different ways of making this work, we just don't know what kinds of questions to ask on here in order to come up with a feasible gameplan to FINANCE THIS WHOLE THING (our main concern).
Anyone with experience and advice, please advise us! Keep in mind, we've never wholesaled before, and we've never done any sort of portfolio transaction. Thank you!
Ok.. there are several options on this. The sellers are looking to get $425K total. I would put each one under contract separately, and make the contracts assignable. In this way, you could wholesale out the ones you don't want and finance the ones you do. If you had to close on them all, then you could via your bridge or HML/portfolio lender. You could hold each one in it's own LLC, or all in one... it just gives you many more options.
You are probably looking at a commercial loan, unless your banker can get creative on the deal and close 5 individual loans at once. It's possible (but not probable), and you'd need a good banker to make it go. Commercial, although more expensive, would be a bit easier. HML would be the most expensive, but you have loads of flexibility. To save a bunch of money, you could write a separate loan deals for the fix-rehab-flip and the buy holds. Finance the fix-rehab-flip with the HML, the other with a regular bank.
I would also say to offer what they are worth individually, and then budge if you have to. So, if the SFR is only worth 65K, then that is all it's worth. Keep your money makers from financing your losers. Obviously, if your property is worth more than 85K, give them just 85K.
One of three things will happen: 1) you will get your price, 2) you will get the ones that are priced right or 3) you have to budge. If 2 of the 3 options are financially better, start with those. Make sure you show them why the SFR is only worth 65K, and be crystal clear about it.
If they need to have 85K, tell them you are willing to help them get there, but you need their help to do so. That help can in the form of owner financing on the portfolio, or lease/option, seller second for 20% to get the HML/Portfolio lender to go, or other support that helps you make the deal. Let them know that you want the properties, but you need some incentive/help to pay more than they are worth as-is on the open market.
Make sure your ARV's are SOLID, not just some PSF calculation. Really dig in and do it like an appraiser would. It will save your bacon every single time.
Hope that helps!
Jim already gave you a lot of great points to validate and run across.
I would just add that in terms of financing these projects you can look into:
- portfolio lenders (but these most likely won't finance the whole thing). that's where the bridge loan would come into place.
- private lenders (friends, family, or other new acquaintances that you meet through F&F - you will be sharing with your circle of friends the fact that you're looking for passive investors)
- if you or your partner currently own a property, then you can potentially get a HELOC on this property (assuming you have some equity in it)
I hope this helps! If I can be of any further assistance, feel free to PM me.
@James C., so when you say put each under contract separately and make them assignable, how would I do that? Is that something my real estate agent would be able to write? Or would I have to get an attorney to do so?
We have already started a breakdown to provide them that shows why we wouldn't able to offer them more than $65 on the SFH. Our real estate agent, and hopefully a contractor, are going to walk the house as well and see what else they can find. We haven't gotten into the duplexes yet, as they have tenants, but we plan on trying to do so within the next week (we only found this portfolio Friday, but we want to act fast!).
As far as solid ARV's, were going to have our real estate agent give us those. He's been selling houses in this area for 19 years, so I trust he'll give us solid numbers. What's a PSF calculation? I tried googling it, but nothing I found made sense.
Have you ever used a portfolio lender or a type of bridge loan that you would necessarily recommend looking into?
As far as a HELOC, neither of our properties (there's 3 between the two of us) have enough equity for that, but I definitely plan on using that someday!
Your agent should be able to write those contracts. All you are doing is offering separately on each property. They should have canned language or it would be in the contract directly to make it assignable.
I would have your agent explain exactly how he did his ARVs. You can learn a bunch from them. Never hurts to double check the work either, anyone can make a math error
PSF calculation are Per Square Foot calculations. Very rarely are they used for entire pricing of homes. More often they are used as a comparison between homes or to generate a "cost to cure" for differences in comparables by a few hundred square feet, garage or finished room etc.
I didn't have the need to use the portfolio lender, but I know others who have. It is a viable strategy but definitely requires a follow up. I suggest yo speak with multiple portfolio lenders as the options they will have will be different as well.
Best of luck!
@James C., we've met with our Real Estate agent and started viewing the properties. He definitely agreed with what you said about separating the contracts, as they will be individual offers for each property, and he confirmed having a clause that makes the contract assignable. He also offered the option of giving him an "Advisor's Fee", rather than a 3% commission per property, if we were to want to handle the purchase ourselves straight with the title company/closing agent, so as to keep our costs down.
We've been working hard on this deal for the last two days, meeting with bankers, our real estate agent, viewing properties, meeting with the management company we could potentially inherit, following up with the owner, and we have a few more meetings lined up in the next couple of days. It looks like everything is falling into place, as long as the numbers look good after viewing all the properties!
@Alina T. after meeting with a local banker I currently have an interest only loan through, he agreed to finance the whole deal: 1 year interest only loan @ 5.5% for the flip, and a 5 year term with balloon payment at the end for the rentals. We are going to meet with another banker about putting a mortgage on the rentals right off the bat, but at least we know that if worse comes to worse, we can finance the whole thing through the other bank.
That sounds fantastic, hopefully the numbers all work out. Good job on working with the bank to find a solution. Make sure that you can sell out the properties individually, since they will all be on the same mortgage.
I would take you agent up on the fee, but also learn as much from them as you can. A couple of well placed dinners out or gift cards as a "tip" can only help.
Good luck and keep us informed about your progress.
@Allan Rosso That's a great progress! I hope it works out with the banker of your choice!
@James C. @Alina T. ALL, we have viewed all the properties, and are ready to go into negotiations! We would like to set up a meeting with the sellers this weekend, but aren't sure where would be a good place. We want to have some suggestion ready before calling, and are open to meeting at either my partner's or my house, but would like to leave that as a last resort. Starbucks doesn't seem like a great idea either. Is there any place you may recommend?
You could use something like Liquid Space to rent a conference room by the hour.
Anywhere really. I have asked sellers where they would be most comfortable meeting and taken their recommendations.
A private dining room can be good as well, given the symbolism of eating together.
In general make sure the location is discrete, not out in the open. Make sure the other party is comfortable. It never hurts to be the inviting party (So where would you like to meet in Saturday and talk about the deal? What is your favorite restaurant?) If you can, discreetly pick up the tab. It's short money for good relations.
Hope that helps!
I think @James C. has provided you with an outstanding feedback. Completely agree on asking the seller as to where they'd be most comfortable. Also, another place suggestion would be finding a place via airbnb. These short term rentals are often available & would be happy to get paid for some hours rather than staying unoccupied.
Best of luck! And keep us posted.
@Daniel Helland I downloaded the app and messed around with it, but unfortunately there wasn't any available here in my area. I'm definitely keeping the app for the future though. Thank you!
@James C. @Alina T., we did exactly that, and the owner invited us to his home. It works out perfect for us, as I feel he'll be the most comfortable there!
Great to hear! Congrats on taking the right steps towards your success! Keep us posted of your progress.
Word of advice, when working a probate case, don't take "yeah, I'm pretty sure the estate has been probated" as an answer, and forget about it. Trust but verify. Two days after having sat down with the sellers (they have an interesting family history, I will write about it in the future), all 5 siblings were in agreement as far as a price. Keep in mind, by this time, my partner and I had walked all 9 units (4 duplexes and a SFH). We had ran numbers on all of the properties. We even made separate presentations for each property, that included list of renovations needed, pictures, and numbers. We asked our attorney to write the contract, and BAMN the estate hasn't been probated yet. So we're still waiting for that to be finalized, don't think I'll get to close before New Years, lol.
Next time, I'm going to ask my attorney to look into the property and sellers, and make sure they can actually sell the property. It'll save me from unnecessary work, and LOTS of wasted time that could have been better used.
I'll try to keep you guys updated!
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