Owner finance deal 1.1 million multi family help!

[Johannes Bezuidenhout]

This is my first ever deal getting into real estate I have the funds available to buy this. It is one lot that has been converted into 5 unit apartments in a very busy tourist area of Houston Texas . How do I approach this as fast as possible and how would I even determine the legitimacy of the value .. it will have no problem renting out as a short term leasing deal or long term. What would my next steps be I have given a contract with Ernest money and I have a period now to get the financials looked at he is currently renting the property and it is generating money . Any advice ? 

[Jerel Ehlert]

Just to verify, you have an earnest money contract to purchase a 5 unit apartment in Houston for $1.1M on owner financing.  This is your first deal and you are looking for advice on what to do?

Well...

You open title and get that working.  Check the terms of the sale, chain of title, and any conditions on closing.  Probably don't want to take title to a large asset like this in your own name.

Order a commercial appraisal and survey.  If there was anything like a convenience store, dry cleaner, garage, etc., you want a phase 3 environmental study.

Financials: get 3-years income and expense statements, monthly rent rolls, and select income tax returns.  Check maintenance records, make-ready, property taxes, and insurance.  Big question: did it flood in any of the recent events?

Income, minus expected vacancy loss / commissions / incentives = net income.

Expenses: look at historicals actually spent (and suspiciously missing expenses you would anticipate).  You should adjust property taxes to the new purchase price, not historicals because it adjusts. = operating expenses.

Net income - operating expenses = Net Operating Income

From NOI, deduct reserves and capital expenditures (CapEx) for replacement of obsolete replacement (parts of buildings that come to the economic end of its useful lifespan).

What's left is EBIT = earnings before interest and taxes.  Some include d = depreciation.  Financing determines this is what you can use to pay debt service.  Most use a debt service coverage ration of 1.25, meaning you can use up to 80% of this to make the loan payment.

Hope this helps.  It is just a quick and dirty brain dump on only the biggest issues.  Not even enough to navigate this transaction.  An attorney can be useful to help close these transactions, too.  Better an ounce of prevention than pound of cure.  In commercial transactions, there are few protections when compared to consumer transactions.  The law presumes everyone is a big boy or big girl and can look after his/her/its own interest.  If BP is the beginning and end of your knowledge base, might be better off bringing a more experienced person along.