Golden opportunity? Or taking on too much risk/debt?

[Mariah Jeffery]

I have 23 rental units now. I bought a duplex in '07. The next opportunity came in late '09 when I met a motivated seller, an elderly couple that gave the a great deal on my next 11 units/4 properties. This couple still has 52 units left. I had hoped to buy more from them, but they suddenly because less motivated and wanted higher prices. I continued to buy more from other sellers, most recently in December '10. I'm pretty happy with the 23 I have now, and although I'd like more, my rental business grew very quickly.

Last night I received an email from the daughter of the sellers of my units 2-11. Dad is about to turn 89, and wants out. He wants someone to buy ALL 52 of his remaining units and will give a good price to whoever does. Tax assessed value is $3M. I wrote back to the daughter and said thanks, but I don't have anywhere near $600K in down payment money to go through a bank for financing (I had brought up owner financing before and they said no way).

This morning I got an email back "We are willing to consider creative financing proposals. Please put together your best offer and get back to me."

So ... they've indicated they could give me a good price and good terms. Do I really want to more than triple the number of units I have? I'll be going through a property management company so it won't be as bad as if I was going the management myself, but it's still scary.

Also, I assume they're going to want at least 10% down. In order to get this much $ together, I'd have to liquidate stock accounts, possibly 1031 exchange a few existing properties, possibly borrow from my IRA and/or my parents. Basically all my eggs would be in one basket, which also scares me. On the other hand, I could potentially get a return of over 20% even with a management company doing all the work. What should I do?

[Brian Levredge]

For starters, you know what they say about tax assessed values. I'm also not one to worry too much about putting eggs into one basket provided I've assessed the risk accurately. Plus I'm not a huge fan of diversification anyway (but that's another story).

Based on the little you've mentioned, I think you're in the driver's seat on this deal. I highly doubt you would be able to find that many lenders willing to finance all of those (how many properties is this?) units at once. On top of that, it looks like there may be some succession issues as well. If they really want to move all of them to one buyer, then they are going to have to carry back paper to someone regardless of what they want.

You have the luxury of seeming comfortable with what you have already. What's it going to take to make you a motivated buyer? You could set up favorable terms as well as an installment sale which you could pay by selling off a few of the properties here and there provided you aren't paying full freight for them.