Dealing with Larger purchases
As many of you know, I've just recently completed the purchase of 154 units in Dallas area. It has been over 30 years since the last time I bought something that large and times have changed. I'm going to enter some info on the steps to accomplish this, because I don't want you to think it is easy or same as buying smaller properties.
The first thing that is different is the shear number of people you deal with to reach satisfaction that the deal is what you want. Starting with the seller or sellers'agent. They like to show a "pro-forma" operating statement rather than the actuals on income and expenses. Then, they like to list the expenses that are recurring monthly expenses. Utilities , mgmt, repairs etc. Many times, you have to look elsewhere to find the larger annual items like taxes and insurance.
The other item that will wreck your day if you miss it, is what they call the "cap ex". These are once in awhile expenses like new roofs, ac/s , asphalt etc. If you forget these in your analysis, you're in trouble. It can make the difference in a viable property and a real loser.
Shear # of people-It is pretty easy to own and operate a sfr business of your own. We have several posters on BP that actually are a "one man band" when it comes to property ownership and management. When you move up into larger properties, that is not an option. Here are some of those.
1. On site mgr
2. Asst on site mgr(on site mgr will not work 24/7
3. Full time maintenance person.
4.Asst maint person
5.Professional mgmt company to handle all the paperwork, payroll. wotholding etc.
6.Tax preparer that will also handle your workmens comp, insurance policies and other contracts- advertising,pest control, laundry facilities, a/c maint, etc.
If any one of these areas is not operating smoothly, you're in big trouble. The other thing that you need to determine up front is whether the proposed acquisition accomplishes your goal. What are you wanting out of this building? When you have that answer, then you begin with your analysis.
Next time, we'll go into the analysis and the characteristics that are the same, and those that are very different from sfrs and small commercial properties. Until then, Rich in Killeen
Comments (7)
Your experience is showing. Great job! Looking forward to more.
Dan Farrell, over 14 years ago
Louis, Thanks for adding your expertise to this topic. You might also wish to contribute to the post where Rich did a part 2 to this topic at the link below: [url]http://www.biggerpockets.com/blogs/575/blog_posts/2615[/url]
Steve Babiak, over 14 years ago
Nice post, Rich. Definitely "keep em coming" as Will said!
Joshua Dorkin, over 14 years ago
Great blog Rich, keep em coming! Will B Nationwide
Will Barnard, over 14 years ago
Louis, great info and suggestions. You should copy and paste it as a reply to the post I made linking to this blog. Your info should be shared with the entire site. I'll discuss your items in my next chapter. Rich. p.s. Why are you guys still awake???
Rich Weese, over 14 years ago
Great blog idea Rich! Just adding a few things to the phase you're describing. With existing properties you'll find that the existing lender required the seller to make reserves for roofs, windows, doors, kitchens, etc. Those amounts are usually deposited in a separate bank account (escrow) every month. The balance reflects the remaining economic life of the item. Make sure you negotiate that you (the Buyer) gets to retain the balance of that account. Some sellers consider that as a "savings account" that they receive when they sell. I say negotiate hard on that, and make sure you don't start from zero when you become the new owner. I also suggest you have your own inspection done. That gives you an objective listing of the condition of the units, as well as other items that might need replacement or maintenance over time. Personally I prefer to have my my (new) management company do this, as they will be responsible for the budget for the next years. Their expertise is greater than mine, and they usually are brutally honest and supply great info that enable me to go back and renegotiate hard in the critical weeks before the closing. As Rich says, don't ever accept a pro forma as gospel. Do your own due diligence. As a buyer your starting point must always be that the pro forma is intended to picture a perfect world. You as a buyer will never see those numbers happen, so dig in and find out what is really there. Visit the property several times with different members of your team to see it through their eyes. Never hesitate to go back to renegotiate based on your findings. This blog is a great initiative Rich; I truly believe that it will be extremely helpfull for anyone considering moving to the 100 plus units multifamily investment. Looking forward to the next chapter. Louis Bergman
Louis Bergman, over 14 years ago
Rich, Thanks for breaking this down for us to learn a bit more. Steve Babiak
Steve Babiak, over 14 years ago