Buy an Apartment Building — How to Structure Your Offer

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As I stress time and time again to new apartment building investors, before making an offer on any apartment building real estate property be sure that the investment will be a profitable one. Banks and commercial mortgage lenders will only lend money on an apartment building that has a Debt Service Coverage Ratio of at 1.2. Once the investor has done his or her work and found a profitable apartment building to purchase then the next step is to structure a offer.

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The Offer Letter

The offer that the investor makes on an apartment building should be in the form of a typed letter detailing the terms and conditions under which the investor is offering to purchase the property. After the buyer has figured out the value of the property then he or should deduct around five percent off of that figure and make that the offer price. The investor should also make the offer contingent upon receiving financing, under specified terms, within 30 to 45 days for an amount of at least 75% of the purchase price. The buyer should also include an expiration date of one week on the offer during which time the seller can review the offer.

How to Make the Offer Stronger

  1. Get a letter of interest from a commercial mortgage broker that simply states they are willing to lend 75% of the properties value. This letter of interest should not be confused with a commitment letter. The bank is under no obligation to lend the money if they decide to turn down the deal.
  2. Put together a professional sales agreement in simple language that is fair to the buyer and seller. This will ensure that your letter is taken seriously.
  3. Include any information that will make your offer appear stronger. If you have a lot of real estate investment experience, include your curriculum vitae. If you are going to pay your down payment with cash on hand then send a copy of your bank statement showing the cash.

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10 Comments

  1. Ted,

    Good advice on doing your homework for Commercial Real Estate, especially apartment buildings and the financing requirements that are involved. Also, because of the Subprime lending problems there are other alternative Commerical Real Estate financing options, for instance, Real Estate Investment Trust(REITs); Bond Offerings; Real Estate Hedge Funds; and Private Hard Money Investors that can finance deals that banks and tradional lenders won’t in this present market.

    PS,
    Commfunding

  2. Ted,

    Good advice on doing your homework for Commercial Real Estate, especially apartment buildings and the financing requirements that are involved. Also, because of the Subprime lending problems there are other alternative Commerical Real Estate financing options, for instance, Real Estate Investment Trust(REITs); Bond Offerings; Real Estate Hedge Funds; and Private Hard Money Investors that can finance deals that banks and tradional lenders won’t in this present market.

  3. Excellent advice about commercial real estate. Commercial real estate can be quite complex and its good to know what alternatives are available.

    On a more specific note, I strongly agree with your advice to create the sales agreement in simple language. Too often we’re caught with annoyingly complicated agreements that do nothing but frustrate.

    Thanks again for the great insight.

  4. If anyone is selling an apartment building/complex consisting of 150 units or more located in the United States, we may be interested in buying.

    We like buildings built after 1979, but will take a look at almost any complex if the cashflow is good.

    We will need to know the current Net Operating Income.

    • The offering document what package is designed to show a prospective investor:; What ownership entity will be used, how it will be set up and operated, what are there rights and liabilities are and what are the objectives of a partnership are the risk associated.

  5. Earlier this year I was interested in purchasing an apartment building, and the agent first made out a Letter of Intent vs a P&S agreement. Can you tell what is the intended advantage of doing it this way?
    .-= Eric´s last blog ..3 Secrets to Reading Housing data for the Real Estate Investor, Part 1: Understanding Seasonally-Adjusted Data =-.

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