I'm expecting a package deal of 4 SFH rentals. How to value?

Question

Hi there,

A co-worker with some single-family rentals has asked whether I would like to purchase a package of 4 of them, 3 currently with tenants and one nearly ready to rent. These are 90 minutes away from where we live, in a city where I have one other rental house.

I have never purchased houses as a package and I'm wondering how I should value them? Should I just evaluate each on its own merits and then add up the total? Should I expect a volume discount off of that? I have not been offerred a price yet.

Regards,

Dan

Bill Gulley · Answer

Hello Dan, did you hook up with your new mentor in Round Rock? ;)

Value the separately. My approach is going with the income approach less repairs and knock off 15%. With landlords, they understand 10% management expenses and while that is in a ownership position I relate it to value. I justify 5% as settlement costs taking bulk properties which doesn't sound so bad as a discount for taking them all.

Usually, there is a dog in the bunch too, I may discount that one heavily hitting on repairs and making it appear that I'm paying a better price on the others, as a compensating factor.

Since they are landlords I always explain the tax hit they will take throwing back in depreciation just in case they forgot and then explaining the advantages of seller financing, as this is exempt from Dodd-Frank.

Try to work in seller financing, on one or more properties, often you can get the whole package, but if they really need cash you can get your purchase money on one or more properties. If you're getting financing on a property then contract on that property by itself as that is the deal to take to the lender. Seller financed deals can be done together. You can answer every question on the 1003 loan application truthfully without having to disclose other pending transactions that you may buy after you close on a loan. Your other contracts should be set up to close after any financed properties.

You can search here for "blanket mortgage".

All financed properties will carry about the same closing costs as if you bought them one at a time but you can get a break on settlement charges having more than one property on a contract, simply identify the properties as "Property A" then the legal, Property B, then the legal and total the individual prices placed with each property as your total purchase price in the contract. Be sure too, to set a land value and a value for improvements when buying investment properties to set the value for depreciation later on.

:)

Val Csontos · Answer

@Bill Gulley  I like your idea of substitute of collateral.

We had used it successfully with our local bank before so here how the last deal went:

Purchased an SFR from estate sale for $159k

It had and after fix-up value of $290k .

It needed about $30k to make it modern and nice.

so our local Bank gave us a loan for  $189K on 30yr fixed at 5.7% to pay for purchase and for the repairs.

In lieu of the normal cash down payment of 25% they normally require,

we gave them a substitute of collateral, in the form of equity in another rental we own with about 60% LTV.

All you need it track record a great subject property and some equity available elsewhere.

Bill Gulley · Answer

Never use your money unless you have to and then only when it makes more than where it's sitting. IMO

No Dan, seller financing is negotiable in every deal. I've done lower prices with higher rates without prepayment penalties and paid them off and I've higher prices with low longer term rates.

Don't get confused with HML money or cash loans, these are equity based loans from a seller and have different aspects, generally non-recourse but that didn't matter to me as they never got my properties back anyway.

You can use the amortization, rate, amount financed to manipulate about any payment needed to make them happy, so long as it's affordable!

Going two points over the bank isn't bad, consider the closing costs of conventional financing and you're not that far off in the first few years. The rate is always more than the seller can get if he took cash after taxes, beats any CD anywhere. He can't have better collateral, he knows the property better than any lender ever would!    :)

Account Closed · Answer

I have bought a package of 4 before.  I offered a total package price and let the seller allocate the total amongst the homes as he wished. But each one had to appraise independently at the contracted selling price. Two of them I got fairly under market and two were at market. One came with a  terrible tenant and was the worst experience I have had so far but the other 3 have performed really well so all in all it was not a bad purchase.

Robert Piller · Answer

I agree with Bill Gulley .

I analyze individually--then ask for a 15%-20% discount on the package - as I'm taking the good with the bad and can close quickly.

I've paid cash in the past for these--but like the idea of asking for seller financing. Great idea!

Dan N. · Answer

Anish Tolia , was that a mortgage per property or was it a blanket loan of some sort? If the latter, does that complicate accounting and/or taxes?

Thanks in advance,

Dan

Bill Gulley · Answer

Absolutely, SFDs will always be done to the market with comps and is the most heavily weighted approach. I look at the income as well to "value" the  deal and should have said; the financial or financing side of the deal.  This is more to negotiation than actually valuing the property, not explained well.

I  mentioned the owner understands management, 10% and 5%, call it fudge for maintenance.  I have used this valuation for seller financing, arriving at the payments to the seller. I mentioned this later and should have tied it in to the above paragraph a little better. Said another way, if rents (after taxes and insurance) are at 9,600, -15% = 8,160 for the payments expected to be paid to the seller. He wants 10% interest. Say my market value is 78K. What I want to do is to give the seller a monthly payment that is close to what he had as rents, this is a psychological aspect to say he's getting close to what he had without management or fixing the hot water heater.

My market value is at 78K, my offer on that may be at 70K. Not a lowball number,  if there was 3K in repairs that can be shown or agreed to that goes to 68K. We may negotiate more or less as this is the offer. If he goes up I may say I'm taking them all off your hands and hit on marketing times, holding for sale, etc. Say there are 4 properties involved.

While I have done these at 100%, most may not be able to go there, but 68K at 10% with 680.00 monthly payments (9,600/12) is a loan term of 215.91 months, say 216 or 18 years.

So, at this point I have nothing down and $120 a door, my offer at market is reasonable and the seller gets an annuity income of what he has been getting less management/maintenance.

I have sold this for LLs many times, but in reality not everyone will have the horsepower (money and knowledge) to pull it off. So, if the is cash down I would adjust the present value down, keep the interest rate and payment constant (to a point) and reduce term which would be shorter. I said, to a point, I'd have to really want it to put 10% down, but at that point I'd consider my cash on cash return and want my 10% out of the rents. I always look at my down payment as a loan back to me, a simple way to consider it as if I'm financing it from myself at 100%. The worse the property might be the higher my rate to me.

I'm really negotiating with the terms of the loan, not so much the price or present value (PV). 68K-10%=61,200, that is the new PV, his payment dropped to $611.90. I could also split that between lowering the payment and shorten the term.

I need to keep in mind my rents, taxes, insurance and maintenance, a targeted monthly income in playing with the payments required or adjusting the present value or amortized term. BTW, I could go for a lower interest rate with the money down, that too can effect my return and it's an easy point to make, $X down and I can go to Y%.

So, yes, I use the market value as the primary price point, I discount the that price on repairs and/or use a discount to arrive at the financing terms.

This works well in my market, especially with landlords moving to retirement. I usually don't do a pre-payment penalty (easy to get out of saying that a pre-payment penalty (PPP) is a violation under the new seller financing laws if applicable). I have agreed to a PPP equal to the difference in the tax liability arising from an early payoff for a set period, like 3 years. If I'm selling the tax benefits of seller financing then it's reasonable to me to offer that guarantee of receiving that benefit as much as any other loan covenant.

A PPP is another tool to apply in negotiations. I could beat down the PV loan amount and sell it or refinance it out from under the seller.

I will usually do a single loan on each property simply to stay away from release arrangements. When I do seller financing it won't be like the bank with principal reductions weighted to the total loan but to an amortized reduction to each property as if they were single loans made, it's easier to devise and communicate to a seller, it also allows getting rid of any dog in the deal.

Lastly, if there are properties to spin off, I always tell the seller. You can start thinking now of doing a Sub-2 deal.

Want some creative stuff? The seller keeps his loan in place, I replace the collateral, then he releases the subject property sold, I keep the money from the sale and use it. See your attorney and make dang sure that the collateral substituted is worth more than what your seller had before!!!  :)

Account Closed · Answer

@Bill Gulley

For some reason I can't quote you but you stated "Value the separately. My approach is going with the income approach less repairs and knock off 15%."  I don't believe you can accurately value a SFH using the income approach.  At best you could do a GRM but then why not just comp it since you'd have to have a sales comp anyway?  Is this what you're doing?

Dan N. · Answer

Isn't seller financing usually at an above-market rate?

Ron Steele · Answer

I've done these before.

They are presented like a multi family investment {NOI, Cap Rate, etc}.

If you are getting financing {usually from community bank}  they will still have to do an appraisal on each property so thats the value they will lend at:

75%ltv,

10-20 year amort depending on price point

5%-6% interest rate

For me it was a blanket loan in which I just had one payment, but could sell off the properties individually and would reduce the balance on the total loan.

They did not factor in cap rate or anything, although I'm sure if the property was not cash flowing they wouldn't have done the deal. Also some may require professional management, but depending on your experience level and track record.

I hope that helps

I'm expecting a package deal of 4 SFH rentals. How to value?

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