Packaged Deal: 6 Properties and 4 Notes

5 Replies

I deal just fell into my lap over the weekend. A family friend that has his on REI business (175+ properties) wants to start liquidating his properties and is giving me first dibs. He wants to sell of pieces of his portfolio over a couple years and I'm hoping to establish a relationship to be able to eventually buy his entire portfolio from him. Here's the initial deal:

6 rental properties - market value $300k, purchase price $210k. All properties already rehabed and have long term tenants. Total monthly income after expenses and reserves is about $450, or $75 a door.

4 performing notes - remaining balance $$185k, purchase price $129k. Notes are at 9%, 10% and 2 at 12% with remaining payments of 45, 275, 219, 239. Total monthly income of $1400 after debt service.

Since I can't pay cash and have to finance, the 6 properties by themselves aren't that great of a deal. But the notes themselves make up for the properties performance until I can pay off the mortgage to increase the cash flow.

Essentially, he is giving me a 30% discount off of market value. I wouldn't buy the properties except that it's all or nothing, and if I want to purchase more from him in the future I need to buy them all now to establish the relationship.

Here's what I need help with. How can I get financing for a packaged deal like this? I'm waiting to hear back from my lender if they can do a commercial loan but don't know if they will or not. If I can't package them together, I'll finance them separately. How can I finance note purchases? I haven't been able to find anything here on BP and all my google searches came up with note financing with a minimum of $1M or more.

I'd like to buy and hold the notes, but one scenario I might be open to is selling the notes after a year or so since they are peforming and if I can get a good enough deal out of them, use those funds to pay down/refinance the mortgage on the properties to increase the cash flow and/or purchase more properties from him.

Any and all help is greatly appreciated! Right now I'm hitting a mental road block on how I can make this work.

As to the notes, you might not be looking at them in a way that you should. What is your note purchase price compared to the actual value of the collateral securing the notes?  In other words, note balance of $100K on a $50K asset is not worth a bother. 

@Steve Babiak

The note balance is 55% of the property values, and the purchase price is 70% of the note balance.

It looks like the return on the properties is only 2.5%.  Is that including financing?  Is that conservative analysis or closer to best case?

I would evaluate the properties and notes separately.  Although it would seem to be potential for a great opportunity - I would pass if either one doesn't work out.  It looks like you would be on the hook for 330K with this deal.  

How does the financing for the notes work?

A couple things I would be looking at with the notes is the value of the collateral. It really needs to be at 90% LTV for the owner to be able to sell and at least break even. What I would really be looking for is 80% or lower LTV and owners in a position where they can refinance. If they are in a position to re-finance I would offer them a discount on the balance - which still could generate a return of 20%+.

The value of the properties and the value of the notes should be calculated in two completely different ways. 

It sounds like the properties themselves are not great cash flow opportunities and the returns would be fairly minimal. You may be increasing their value in your assumptions because of the chance to purchase additional properties in the future from the seller.

Just because he's offering the notes at a +30% discount doesn't mean that it's a deal. Make sure you run the Time Value Of Money (TMV) calculations to verify their PRESENT VALUE. The PV isn't going to be 189k that's for sure. It may look like he is offering you 30% off but in reality he may not be giving you a discount on them at all.

I don't have all the numbers so I can't help you out with the exact values. If you would like help with them please feel free to PM me. If you want to help others here on the forum post the notes Terms and I'd be happy to break it down for others.

The return on the properties will actually be higher because I'm leveraging them with no money out of pocket. If my lender will be able to work the deal, I'll even be able to roll the closing costs into the loan.

I've analyzed both separately and together. It's a mediocre deal for the properties by themselves, but as I said, I'd only be purchasing these to go with a package with the notes, to establish the relationship with the seller for more properties. He's already offered to sell his entire company/portfolio and we are starting small to establish the relationship.

I think if I can make it work, I'd the sell the properties later and hold the notes, or vice versa, whichever would make more sense long term.

Here's the info on the notes.

Note 1: Balance $17,849, Purchase Price $12,494, Asset Value, $50,568, Rate 9%, Payment $456, Payments Left 45

Note 2: Balance $56,272, Purchase Price $39,390, Asset Value $60k, Rate 12%, Payment $600, Payments Left 275

Note 3: Balance $46,340, Purchase Price $32,438, Asset Value $50k, Rate 12%, Payment $523, Payments Left 219

Note 4: Balance $63,698, Purchase Price $44,589, Asset Value $75k, Rate 10%, Payment $613, Payments Left 239

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