Constructive Criticism/Advice For MFR Startup

[Kyle Nellesen]

Hey everyone. I have been reading through this site for the past few months, mostly lurking and trying to let the info soak in. I'm in the early stages of forming a RE Investment company (partnered with my dad).

A little about me: I am currently going into my last semester in law school and planning to take the California bar exam in February 2014. I have focused primarily in RE/municipal/corporate law and I think I have a fairly strong background in the contract side of things (purchase and sale, leases, etc.).

I come from a family of plumbers and contractors - my dad owns and operates a remodel company and I have a couple of years experience working in that field prior to law school. He also purchased and renovated a duplex a few years back and currently rents it out.

With that out of the way, now on to the plan...

Over the last 9 months or so, I have been looking at properties within the Orange County CA area. I have been running these through some spreadsheets to figure out the basic financials and the conclusion seems to be: most stuff out there (on the MLS) has too little cashflow to justify the price.

After talking to some brokers in the area, I am thinking about looking specifically for MFR's that are in need of TLC, where the owner is willing to do seller financing. The ideal property would be 3-4 units, under 500k, and not a complete wreck. I would be appealing to owners who are sick of being a landlord (tenants, toilets, and taxes) and who are not looking to spend the $ needed to repair their property. This could also include older property owners who can no longer manage the property and are sick of the headaches. Also out of state property owners.

Because I am not going to be able to qualify for a conventional 25-30% down payment loan (and I don't have that much cash), I was hoping to work something out in the neighborhood of 5% down and a slightly elevated interest rate over the life of the loan. Is this realistic?

In order to find these deals I am planning on getting into contact with real estate brokers and property management companies in the area and letting them know what I am looking for and offering a commission for bringing a successful deal to the table. Are there any other avenues I should look at? Also, what type of things should I be aware/worried about when offering a commission/payment in exchange for bringing in the seller? I would especially appreciate it if any RE professionals can chime in and let me know how you would react if you received a letter stating the above offer.

Tl;dr (too long; didn't read): Trying to find seller-financed multi-family residential properties under 4 total units. Is my plan realistic and how can I reach out to find these deals?

Thanks in advance!

Kyle

[Adam Johnson]

Personally, I start at zero down and no balloon and negotiate from there. I still get deals done (not always that perfect), but I consider all of the factors for each particular deal before making an offer.

One example - I assumed a mortgage that was not assumable as written because the current borrower was in default and the lender was motivated not to run it through the whole foreclosure process. This was a commercial property, so that simplified renegotiating the terms of the original note. I also did this with no money down (kind of). I told the lender that they had a vacant 5-unit property that had extensive freeze damaged plumbing, an owner/borrower that didn't care anymore, and back taxes owed that they would have to pay anyway once they spent the next 2 years foreclosing. I offered to assume the balance of the existing note, the seller had to catch up the taxes and pay the real estate commissions (I actually got 1/2 because I am a broker and represented one of my entities - all fully disclosed in the original offer). They didn't jump for joy with my offer, but they did accept it. In return, I paid for all repair costs needed to bring the property back to life out of pocket (that's where the "kind of" came from earlier). I am now talking with the same lender about doing a cash out refi, which should net me more than what I originally put into the property. All because I asked.

Another example - tried the no money down deal on a private foreclosure. The private lender just paid off $ 16,000 of unpaid sales taxes on the subject commercial property from the original borrower, so that didn't fly. I settled for $ 10,000 down, 6% interest for 20 years with no balloon, private mortgage to the seller. Done deal. Another vacant property brought back to life.

Couple of similar examples, though they were 2 different deals at different times - both duplexes, purchased on hard money loan with the total note amount that paid for the property, closing costs, repair costs, but had a draw schedule. HML paid 100% of the purchase price, I paid some of the closing costs (which were "tucked" into my repair budget). As I hit certain milestones on the rehabs, I was able to collect draws from the remaining borrowed money. Essentially, I put out $ 10,000 this week, and took a draw the following week for the same amount. In the end, I had none of my own money in the deal. Refinanced into permanent mortgages a year later for full amount because I was under 75% After Repair Value and showed steady rental history.

In all of the above examples, I bought the right properties at the right discount so that I always was below 75% LTV, with the exception of immediately after purchase before work started. I use OPM because I started out with none, so I HAD to do no-money down deals. Now, it is just more fun to do a no-money down deal OR structure a deal that puts my money back into my pocket as quickly as possible.

Sellers/lenders don't care a lot for no-money down and their attorneys REALLY hate it. Because I have successfully done several of these by delivering on my promises, I now have real references to use for those that are hesitant. I do put some money into every deal I make, I just want it back within as short a time as possible. Refinancing generally takes a full year on the tax return to accomplish, so I use some creativity to bring that money back in in less than the 18-24 months a traditional refi. will take.