I'm in contact with the seller of a package, a few stores, a restaurant, and 15 residential units. It's right in Phoenix and 2.65 acres, mismanaged and still operating at a 7.8% cap rate now. The price is low at 900k. It's old, a grade D property, but people live there, and it's cash flowing even with 5 units out of 24 vacant. My money partners, one says he can't afford it cause his money is tied up elsewhere, one says he only wants C & B properties, and one is talking with me more tomorrow about it. I'm thinking to buy & hold for a few years, then either tear down and build a multifamily or sell. I have no money to put in though, I'm willing to give a JV Equity partner 70%. It is a valuable piece of real estate. Could I get feedback and advice please?
Good for you, Daryl! You’re for swinging for the fences! Sometimes the question isn’t whether you can make money on a particular transaction, but if you can make more money with less aggravation somewhere else? Based on my 25 years in the business, I see one path before you fraught with stress and risk. To try to acquire all that real estate with your limited funds and experience, and being tied to a private lender and an inevitable difficult refi. or married to co-owner, is asking for trouble. And with a meager 8% cap rate, it’s just not worth it at this point in your career. But that’s not to say you can’t do the deal..
Instead of going the hard way, I recommend an easier, more profitable path. Control and roll the properties. That is, negotiate the best deal you can, then put them under contract with the right of entry, right to market, and a contingency such as contingent upon successful 3rd party assignment, then take each property to public auction and flip them for quick lump sum profits. Now, there are several things you need to know to get it done..
First, you need to negotiate each property separately. This is always the case when dealing with a package. You see, if you negotiate a package price, then you have nowhere to go when you’re done; but if you negotiate individual purchase prices, then you can always come back and ask for a discount if you take the entire package.
Second, you need to know real values by using the comparable sales method and income methods to value the real estate. An 8% cap rate according to a seller is rarely a TRUE 8% cap rate, because numbers are padded or not included 100% of the time. You need to complete your own Annual Property Operating Data (APOD) on the properties.
Furthermore, you need to really get to know the seller. Why are the really selling? J.P. Morgan one said, “A man only ever has two reasons for doing anything: A good reason and the real reason.” Find the real reason, then your deal will begin to materialize. For example, you might find that the $900,000 the seller needs is just to cover his mortgage so he can cut the properties loose and move to retirement. Perfect! You could simply take over the properties subject to the existing mortgages and you’re in for virtually no money.
Once you ascertain the value of the buildings, then you need to negotiate the best cash price you can because you can hang your hat it. Once you have the cash price, then you can begin getting creative with ways of paying it. Why get creative if you’re going to flip? Well, the easier you can make the purchase for your buyers, the easier it’ll be for you to flip. For example, I recently bought a warehouse using a method I call Seller Refi. for Takeover. I asked the seller to refi. for the purchase price subject to one-time qualified assumption with release of liability. The seller got his money from the refi., and I took over the loan – no money down! It’s a whole lot easier to flip a property that you can buy with little to no money.
Once you get in the ballpark with your pricing, be sure to put each property on a different contract. This gives you maximum flexibility in terms of the sale. For example, you might sell one property for a little more, another for a little less, and maybe end up buying or not buying another.
There’s so many more tips and hints to this kind of thing. I can’t even begin to fit them all into the “Freehabbing” course I give on commercial development. But I admire your ambition, I urge you to keep asking questions, and to keep putting yourself in the position to profit. Soon, you’ll be an even wealthier person then you already are.
Thanks! That's great stuff! Right now with this deal I'm in for a 5-10% equity share, I found the deal, am having my commercial realtor write up the offer, and am bringing the management company. I couldn't be happier, using zero money!!