Buying groups of properties all at once is a great way to rapidly increase the size of your portfolio. The key, of course, is being able to find, evaluate, and finance such deals.
In the past, we’ve bought portfolios with as many as 97 and 41 houses, but this time I will discuss a more reasonably sized package of nine houses we recently bought and the lessons you can learn from it.
Finding the Deal
This deal came to us in a very simple manner; a wholesaler emailed it to me. Now, most of the properties I see from wholesalers range from OK to terrible. The portfolios are usually particularly bad, with most of the properties residing in the absolute worst parts of town.
Part of the reason for this is that wholesalers will often develop strong relationships with a couple of end-buyers, and those investors will get to pick over all the deals. So all the good ones get gobbled up, and the one’s that get to you are usually mediocre at best. On that note, it’s a good idea to find the best wholesalers and try to become one of their go-to investors. Take the best one’s out to lunch, and if you do buy a deal from one, try to leverage that into another.
But even though most of the good ones will get snatched up before they land in your inbox, some of the good ones will slip through the cracks. I’ve purchased plenty of properties from wholesalers by simply being on their email lists. While you’ll have to sift through a lot of coal to find a diamond and learn to ignore heavy-handed sales language like “Cash Cow,” or “25 percent cash on cash return,” or “this property will cure cancer,” it’s still worth the effort. After all, all you have to do is get on an email list and check to see if the property and price look reasonable. Most wholesalers will include a lot of pictures, so that can help you do a quick evaluation as well.
When you get an email from a wholesaler with an interesting property, you can bet that a bunch of other people got the same email. In the past for example, when a wholesaler sent me a house that would have been a great deal, I got there right as another investor (who happens to be on BiggerPockets as well) was leaving. As soon as I had finished walking through the house I called and let the wholesaler know I would take it. Unfortunately, the other BiggerPockets investor (who will remain unnamed) had already locked it up.
That’s how fast this game can move. Try to get in the property as soon as possible!
On this package of nine, I called the same day and set up an appointment for the following day. This was the soonest we could get in. In the past, I have made a couple of blind offers on properties I knew I wanted. But oftentimes sellers will be hesitant with those because they (rightfully) think there is a high chance you’ll back out upon seeing the property. It also makes you seem desperate. You don’t want to be a motivated buyer anymore than a motivated seller. Occasionally, blind offers may be appropriate. But I haven’t generally found them to be useful.
Talk to the Seller
I’ve found that with wholesalers, it’s usually easier to talk to the actual seller than it is when the property is listed with a real estate agent. On a run-of-the-mill deal, that might not be necessary. But on one that may require terms such as seller-financing, or on a larger deal like this one, it is always a good idea to meet with the seller. Never underestimate the importance of rapport!
On this occasion, we were able to meet with the seller at the one vacant property in the portfolio. We built rapport while getting as much information from the horse’s mouth about the properties themselves. This is always a critical step. The seller needs to trust you and want to sell the properties to you. By building this trust, you can increase your odds of stemming off any other last minute suitors.
Valuing the Deal
A lot of big investment firms that buy houses such as American Home Buyers, B2R or Colony Homes value large portfolios of houses in the same way normal investors value apartments; by looking at their cap rate and gross yield (annual rent divided by total cost). Unless you own or work for such a firm, I wouldn’t recommend this.
Yes, you need to analyze deals to see if they will cash flow. But more importantly, you should value these properties based on their ARV. We want our portfolios to meet the same ARV requirements that our individual purchases do. For these, it took a little while to put together nine comparative analyses (albeit a lot less time than when I put together 97), but it is an important step. You never want to just shoot from the hip, especially when buying multiple houses at once.
We were only able to walk through two houses beforehand. The other seven I rove by. So I listed out my assumptions on our offer. I said that I expected that all nine were habitable and that while there was some deferred maintenance, there were no major renovations to be done. This is something I have started doing on larger offers and am quite happy with so far. What it does is gives me something to point to if I find a bunch of problems that weren’t disclosed prior to going under contract. If need be, this makes it much easier to retrade with the seller.
Due Diligence and Closing
I have stressed before and will stress again; walk every unit! Sometimes, you may not be able to; for example, one of the major points during our negotiation on the 97 was that the seller didn’t want to go through all 97 properties. But we felt the price and terms justified that as long as we made a major contingency in our analysis that we were taking on some of these properties relatively blind. Whenever possible, walk each unit.
On this deal, the seller agreed to let us walk each one and luckily the properties were more or less as expected. We weren’t able to get much in the way of an operating statement. Again, we felt the price justified that as long as we made a contingency in our analysis for that unknown.
For the financing, we used the same technique we used to close the 41 properties. We set the close date to be shortly after a bank refinance on a portfolio of houses we already owned and had private lenders on. Then we simply asked those private lenders to lend on the new properties. Given these lenders wanted to keep receiving their interest payments, they all said yes. This method calls for a lot of paperwork, but it’s a great tool to add to your BRRRR strategy, particularly with regards to buying small portfolios of houses.
Remember, no one ever said you can only buy houses one at a time. You just have to think outside the box a little bit.
What strategies do you use to close large portfolio deals?
Share them below!