Multiplexes in San Diego

Investor Newsletter for May 20, 2013

Multiplexes in San Diego

We have been lamenting the fact that we have been unable to acquire single family homes (SFH) in San Diego to fix and flip. Homes are selling for prices which make the margins too slim for the corresponding level of risk, and we value your investment (as well as ours!) too much to enter into deals which don’t meet our criteria. As such, we are changing our strategy to multiplexes, where we will add value to the property and resell to long-term investors. We are looking specifically for properties where there is sufficient land and appropriate zoning to enable us to add more rentable units. We are finding that it is not necessary to buy the properties at as large a discount because the added units are worth more to the end buyer than the cost to build those units. Moreover, the competition for these types of properties is much less intense right now. We have been pursuing this strategy for only one week and we have found several very promising properties and interesting partnerships with property owners.

For this newsletter, let me present to you one multiplex property that we have actually been pursuing through short sale for several weeks. This is the property that alerted us to the potential of multiplexes and eventually led us to develop this strategy.

4044 Cherokee Avenue is a property in City Heights brought to us by Josie Gaxiola-Bacino of Prudential California Realty. It currently has two units on the property but has a split lot. There is a craftsman house and rental unit on the larger 7,000 sq. ft. lot. The smaller 3,500 sq. ft. lot is vacant. We have found out through our research that it is permitted to have up to 8 units. It is in short sale and Josie as the listing agent obtained permission from the owners for $280K purchase price. This initial offer was based on our analysis of rehabbing the craftsman house and adding one to three additional rental units. The bank performed their Broker Price Opinion (BPO) and felt that it was worth $350K and asked us to up our offer. This morning we submitted an offer at the BPO price of $350K, and based on our new analysis of building the property out to the full 8 units, this should still be a profitable project for us.

We have not yet been approved for this short sale, but since we are first in line feel very good about getting this property. We have the following exit strategies.

1. There were 41 offers on this property, some of them over $400K. Once we have the property under contract, we could go back to these buyers and wholesale the property to them if the price is high enough. If we can make a quick $50K+ without doing any work, we will more than likely take this route.
2. Purchase and build on the property ourselves. It will take $350K to purchase the property and probably $700K+ or more to build eight units. We will be into it probably $900K+. Once finished and rented out, a brand new 8 unit complex in San Diego should be worth in the $1.4MM to $1.6MM, based on a 4.5% to 5% CAP rate. As to the raising of the funds, we have the following potential routes.
1. We believe that amongst the small group of investors, we have the power to raise all of this money and do this project amongst ourselves.
2. Qualify for a construction loan from First Business Bank, which is the local San Diego bank that holds our reals estate accounts. They have very favorable terms and will loan up to 65% loan-to-cost. We have been in talks with Rick Martinez Vice President of the Bank for many months about such a loan. We will, however, still be responsible for 35% of the down payment for this project.
3. Joint Venture with local hard money lender. We have been in talks with George Flint one of the Principals of BNF Real Estate Group. I have done several deals with George and we have shared with him our new multiplex strategy and informed him about Cherokee. He has investors who have strong interest in multiplexes who would fund these kinds of projects and even purchase them from us when completed. He also can help us qualify for Fannie Mae construction loans for this project.
3. At the end of the project, we can do the following.
1. Sell to another party such as an investor brought on by George or to the general market for the lowest CAP rate and therefore highest price.
2. Refinance and pull out most if not all of our cash and hold it amongst ourselves to build our own portfolio of multiplexes.

As for the construction of the multiple units, our sister company SD Quality Renovations (SDQR) headed by our General Contractor, Jason Guthrie is ready and capable of building these units. He has many years of experience in ground up construction and has a good crew in place now that can do this work.

At this time, we are pursuing several other multiplex projects off of the M LS. Furthermore, there are two General Contractors that have their own properties that are asking for us to partner up with them to convert their properties to greater number of units. They need help from EAC to raise the funds. We will be meeting with them this week and next week to further develop this partnership.

We are excited about pursuing this new strategy, as there seems to be a number of very promising prospects currently on the market.

Yours truly,

Kevin Yoo, M.D. President