All Forum Posts by: Anthony Chara

Hi Chris, there are 2 ways you can evaluate the property in its current condition. First off, since you have a negative NOI, I'm assuming the property has high vacancy. Only other explanation would be that they cannot charge enough rent in that area to offset the Operating Expenses. Either spells potential disaster.

Valuation #1 is just like a SFH. The appraiser would use the Comparison Approach. What did other properties in the area in similar condition sell for on a per unit basis.

Valuation #2 would be just like doing a Fix & Flip. Start with the ARV. Use proforma GPI (assuming all units are occupied and everyone is paying rent), then, subtract out the market vacancy and add in any Other Income the property would generate from things like laundry, storage, parking, pet fees, etc. This will give you your EGI or Effective Gross Income. From that, subtract out market rate for Operating Expenses (Taxes, Insurance, Management, Maintenance, Utilities and Repairs/Reserves). You should be able to find these amounts by talking to PM's in the area that manage similar properties. This will give you your proforma NOI. Using this proforma NOI you can now divide it by your Market Cap rate (NOI/CR = Value) to come up with your After Repair Value (ARV).

Once you have your ARV, now the fun begins. The questions you have to answer is, "Why is the property the way it is and what needs to be done to it to get it to produce income based on these market numbers"? Let's say it's under performing due to it needing extensive rehab. Great, figure out your rehab costs, add in holding costs while you're making the needed repairs (taxes, insurance and mortgage costs) during that same time frame and then subtract that from the ARV. You should also subtract out a 'fudge factor' to be conservative. Next, subtract out what you think is a fair profit for the money you're putting into this deal and the risk you're taking in order to turn it into a performing property and you now have the Maximum you should pay for the property 'as is'.

If you've never done a Fix & Flip or Fix & Hold, I would suggest you partner up with someone in your area that has a great reputation for doing them. Someone who's good can estimate rehab costs within a few percentage points of the final costs as I've outlined above.

Good luck to you Chris!

Hi Eric, make sure you ask them for references of people in their current syndications. Get at least 3-5 references. Also, make sure to ask them if they've ever lost money in a deal. If they say, "No", I would probably move on. You don't want to be their first. It may sound counter-intuitive, but most experiences come from mistakes. Never losing money can make people over confident and set them up for a major disaster. 

@Jeff Greenberg is correct. You use the Gross Rents, assuming every unit is occupied and everyone is paying and then subtract out your vacancy using the highest of 5%, Market or Building. If you can get the seller to give you their P&L's for the last 2 years, that's even better. Then, you can calculate their Economic Occupancy which is Total Rent Collected divided by Gross Rents assuming no vacancy.

Required - NO.  Asked for all the time - YES.

You mean like MOST commercial brokers that don't even have the courtesy to return my phone calls on properties they have listed?  Unfortunately, this is the norm in my opinion.

That could be an issue @Jeff B., but it is something you can get around legally. That's one reason you need a contract. 

Even though they may live on-site, that in itself does not make them an employee. However, if you set the hours they work on-site, that's a problem. Also, do they have the ability to manage or repair other properties that are owned by other people? Do you limit them by telling them they cannot work for anyone else?  

There are things that set apart an employee from a contractor.

Employee - You tell an employee what hours they will work, don't allow them to work for the competition and provide them with tools. They also don't lose any money if they screw something up. They can, of course, be fired for screwing something up.

Contractor - A contractor sets their own hours, can work for the competition and provides their own tools. They can make money and they can lose money. If they screw something up, they have to replace or repair it on their own dime. They too can be fired or not have their contract renewed.

You do need to check in the state where the property is located too. Individual states may have different laws or criteria. My experience comes from having contractors in a business I owned for over 3 years. I had no issues with the state considering my contractors as just that, contractors, due to the things I mentioned above.

As long as it's not me (you) and the person has a good reputation (ask the rest of the residents), I'm okay with it. However, you still need to add the PM fee into your expense numbers just in case you ever do want to hire a true PM to oversee the complex. Otherwise, you could be over-paying for the property.

You also need to make sure you have a contract in place with the resident manager. I'm assuming that there is no management fee, but they probably also don't pay rent as this is their compensation? If that's the case, I prefer to have them pay rent with a lease in place and pay them for their services. It may be a wash, but the reality is, if you ever do want to get rid of them, its much cleaner this way because they are already paying rent.

I'd say, what time are visiting hours at the local penitentiary???  You need to be VERY CAREFUL!!!! You can pay someone a referral fee if all they do is introduce you to a potential investor. It cannot be percentage based. It needs to be a set fee no matter how much they help you raise. I pay between $500-$1000 for each referral that turns into an investor depending on the deal, not the amount raised. Beyond just an introduction, they CANNOT help you raise funds unless they have a Securities License or are a Principle in the deal. I strongly suggest you speak to a good SEC attorney about this before you end up in hot water. 

In most cases, you're lender will require you to have a new LLC for each apartment complex you purchase (5+ units). If you're only going to be buying 4 units and less, most lenders will require you take title in your own name. Then, once the deal is closed, you can move the property to an LLC via a Quit Claim deed.

Suggest you speak to a good business attorney and RE attorney that understand LLC's and RE. My understanding is that having an LLC with only you as a member, (aka Disregarded Entity), gives you NO liability protection whatsoever, but it does get the property out of your name.

I prefer to buy my complexes right into a new LLC so it is NEVER in my name. If you close it in your name and then transfer it to an LLC later like the banks prefer, then there is still a paper trail back to you as the owner. You also need to get a Registered Agent for your LLC so your name doesn't appear on any of those public records. I have my Attorney act as my Registered Agent.

Your best bet is as @Omar Ruiz suggested, ask for a repair credit. That way, YOU choose the contractor and make the repairs. Sometimes, sellers will cheap out on the process and just do the bare minimum. I would prefer to never let the seller make final major repairs right before close unless you can get them to let you pick the contractor and make sure the exact repairs are spelled out in the contractors contract. Also, if they reduce the price $104K, then you still have to come up with the $104K in cash to do the repairs. This is an extra burden on you and your Cash on Cash Return will also suffer.

I also agree with @Chris Soignier. Before you suggest a 50/50 split or walk away from the deal, you need to know what it's worth as is and what it will be worth when repairs are completed. 

Lastly, it's pretty common for a commercial agent to represent both the buyer and the seller. However, you didn't say if this was a commercial deal (5 or more units), you just said Multi-Family. Even in CA, all contracts will state whom the agent is representing. They could be a Transaction Agent or a Dual Agent or they could just be representing the Seller. You need to read the contract to find out. A good agent that is representing both the buyer and seller should not try to dissuade you from asking the seller to complete the repairs or give you a credit back. They should just pass your 'written' request onto the seller and vice versa.