All Forum Posts by: Ralph S.

Rich
I'm only responding as you and J have earned, IMO, a well earned and highly respected reputation here on BP, but you've missed on the accounting points the FinanceExaminer brings up.

It is not something called "Bank Accounting" that rules the day. It is GAAP (Generally Accepted Accounting Principals), and accrual accounting, that banks and all publicly owned and government regulated businesses must adhear to.

GAAP requires that when an asset becomes impared, such as when collection of receivables, or the value of an asset comes into doubt, a reserve must be established and the financial impact be recognized at that time. This would be before any foreclosure or collection efforts occur.

To accept your points that the financial impact occurs when the REO is sold, would be considered fraud on the part of the financial institution for having overstated the value of their assets prior to that time.

The missing part in your statement:

Is that when the $100K note is written off, and $50K is received in cash, the reserve is reduced by $50K. Since all of these are assets, and the two 50's offset the 100, there is no change in assets when it is sold. If there were a difference, such as when the reserve was estimated too high or two low, that difference would land on the income statement, not the balance sheet, and still, assets remain unchanged. Since you reduce the reserve (and eliminate the "troubled asset"), the % should remain roughly the same.

While the in depth debits and credits applied by the banks when loans go bad are out of my experience, the concepts of accrual accounting, reserves and GAAP are not, and are not hard to understand. They are all designed to make sure every company is measured on an equal basis (GAAP) by following the same rules, and that the financials at any given point in time are as accruate as they can be as to the value of assets, liabilities, equity and income.

When they don't, you get Enron and Bernie Madoff, and perhaps the bank where you sat in their board meeting.

Guess I've been through too many audits, having to defend many of these reserve balances of the companies I've worked for. It's not Banker Boardroom stuff, they have no say in the matter, just nuts and bolts accounting.

Bummer. Guess we'll just have to agree to disagree, since you're done.

Daniel
Yes, the 2% rule suggests rents should be 2% or more, so 3% is better. At 2%, you get a rent multiplier of 50. In my simple, backward mind, I just take rents and multiply by 50 and compare to the asking price, so $500 mo rent times 50 equals $25K/unit.

It is just a rule of thumb. There has been a lot written here on BP on the 2% and 50% Rules.

And, I was wrong on my first post about the expenses being OK. I did not consider the 40% vacancy, so the OE as stated is balistic.

When the mortgage is recorded against the property, it should state all the particulars, amount, term and interest rate, needed to calculate the monthly payment. From that, you can determine the amortization schedule and get a good idea of what is owed. Now, if it is in pre-foreclosure, you should just be able to get the exact informatioin from the lenders asset manager, I would think.

Good luck.

Daniel
Matt is right on the DD needed before crunching numbers.

What's behind the 60% occupancy? If rents are below market and still at 60%, chances are many of the renters are undesirable and the purchaser is looking at undergoing a 100% turnover in renters, hence a real need to be cash rich to weather that storm. What kind of bad rap in the community (drugs, crime, etc) does this complex have, that you'll have to deal with and overcome?

What do you bring to this project? Are you experienced in doing this, managing constuction and contractors, managing a large complex. You got the large cash outlay? Can you build the business plan, support it with good research and walk into a bank and convince them that you have the moxie to pull this off, or are you paying cash? Or, are you just looking to birddog or wholesale this?

All that aside, at $3.5 Million, or $15.5k per door, plus repairs at $1 Million or $4.5K per door, it's right at $20K/door. Not bad, if true.

Expenses per your post, of $800K is $3,500 per unit, or $296 per unit per month. If your version of "expenses" are the same as the OE as described in the 50% rule (you can look it up - search BP forums for '50% Rule'), it's at 47%. That's ok, and can likely be lowered with better tenants and after a rehab.

With an average $632/door gross rent and an acqisition/rehab cost of $20K, it exceeds the 2% rule (again, look up the 2% rule), coming in at 3.2%. If there is a rent upside, after repairs, all the better.

Ok. Good enough to look into. But, it'll take a lot more than crunching numbers, hanging an "under new management" sign and filling the parking lots with contractors trucks.

What to offer? If you really have the cast iron stomach and can muster all the resources to make this turnaround work, I'd go down to the courthouse, find out what mortgages he has and approximate his outstanding balance. Offer just a little more than that. Give him a little pocket money and get this monkey off his back. At worst, it's a starting point for further negotiations. I don't think there are too many individual investors who would be up to this size and scope of project, and probably fewer banks who would make a loan on this.

I think you'll find:

>A 4 unit may be considered commercial.
>What you do after purchase is irrelevant to the financing at the time of purchase as long as you comply with the lenders requirements to maintain the asset.
>Going from 4 to 6 units will require not only permits for the 2 new units, but likely upgrades to current codes for the existing units.

But, I don't know about PA.

You'd be (thoeretically) increasing demand on utilities by 50%. Are the existing water, power and sewer lines capable of handling this increased load? Is the additional garbage disposal going to force you off a municipal residential service type plan and onto a paid-for-service dumpster plan? With these units "in the attic" what challenges exist in the lower units when you have to run supply and waste plumbing and electrical wiring (from a basement?). A lot of surgery may be required on the lower units to supply these two new units, and then there is parking.....

Be sure you understand what "a zoning permit" really means. You might find this a challenge to get approved, if at all. That zoning permits exist, and that you would have to get one is one thing, doesn't mean the planning board will allow it.

All in all, don't listen to the seller try to hype what may or may not be doable. Even if it is, is there a return on the investment? You're buying a quad, don't fall in love with seller claims of untapped potential. If making this conversion is such a good deal, why didn't he do it? Is he just repeating the hype he heard when he bought it?

And, I don't understand what you mean when you say "Buying the currently MFU with 4 units will qualify it to 6." In what way does buying something qualify it for anything?

I can't wait for MikeOH to comment.

They've been predicting Spanish will be the predominate language in CA for years. Might the Spanish birthrates be traced back, in some part, to Catholisism and their anti-birth control stance, or maybe to the advantages of giving birth in the US (making the child a US citizen and hard or impossible to deport the illegal mother)?
Perhaps our terrible healthcare system isn't so bad afterall.

At any rate, I don't see birthrate trends changing anytime soon. You could also change the perspective from majority/minority and examine the same trends from an economic class (upper, middle, lower) or education level (dropout, high school, undergrad, etc.). Both of these other viewpoints, I think, would be much more alarming.

First off, David, congratulations on a good start. That a real estate attorney would be here crediting BP and the BP nation for sound investing guidelines only reinforces my belief that there is no end to learning and BP is the premier site when it comes to REI. Hope you continue to visit and contribute.
While not a big dog, myself, I think I like that nervous feeling. For me, it keeps me on my toes when too much is out of my hands (appraisals, inspections, underwriting). With so much out of my direct control, and almost every purchase and sale have had unique little glitches that had to be dealt with, I don't think that nervous feeling will ever go away.

IMO, this is one of those "you need to see a lawyer" answers.

If by "taxes were sold" you mean tax lien, that is different than a tax sale. Big difference.

You'll have to gather up all your purchase docs, title policy, deed, etc., and have them reviewed. Hopefully, this is just an error by the taxing authority and you can get the tax bill split up.

But (and not a lawyer, here), your first objective would be to fix the situation, a lawsuit would be the last resort, after all other attempts to fix it are exhausted.

Oh, no. Don't do that! Keep collecting applications. You're shooting yourself in the foot and potentially losing those good tenants that lose interest.

In my experience, you still have to kiss a lot of frogs before you find a prince, no matter how well you try to phone screen.

I think you're mistaken in thinking this is required in order to abide by the Fair Housing Laws.

Bienes, I really like your posts.

So, the guy's pulling down a thou a week, she also works, and they're living with mom, none of their rental history is checking out, the app is incomplete, even after asking her, again, to fill it out completely. She claims no paystub, even though her employer is required by law to provide one, direct deposit or not.

There's a very good reason they're living with mom.

I'd pass big time on these two. Pocket the fee for your time and let them know things didn't check out.