Process for making an offer on a multi?

Question

Helloi am in the process of evaluating my first multi family deal. I have been speaking to potential lenders all of last week. Today i just finished looking at the property and id like to make an offer. The sellers supplied a summary of the financial info (revenue and expenses), However i havent received the actual accounting financials , leases, and rent roll from the sellers yet. Most of the potential lenders want to see this info before they can give me terms and an interest rate. So what is the next step? Do i make a preliminary offer?(which i may need to change later when i get the info and get terms from the lender) or do i wait until i get the financial info first before making the offer? There are also other interested parties so i want to make sure im moving quickly.thanks!Martha

Michael Noto · Answer

Based on the info you provided I would probably recommend hiring an agent or a consultant to guide you through this purchase. They can fill in a lot of the gaps for the questions you have.

Israel Garavito · Answer

@Martha DaisleyHi Martha. Dealing directly with sellers is a little different than with brokers. It can be better or worse, as part of a broker’s job is to counsel an unsophisticated seller as to which offer is probably the best. Sometimes it’s about price, sometimes about timing, and others it’s about what the new owners will do with the property once it’s theirs; but ability to transact is always first on a broker’s checklist, so it’s important to communicate that you have the ability to close. Also, brokers will have almost all of the financial information already in hand and can deliver it before you make an offer.When working with sellers you don’t have the valuable tools that a broker can provide. However, you have direct access to the seller and can find out for yourself, no filters, what their priority is on choosing a buyer. So spend some time speaking with the sellers and zero in on this. Then put an offer together and tailor it to them.If you don’t have all of the financials you can make a reasonable offer with the rent roll, some expenses and a few assumptions. But I would speak with the seller and advise them that the more info you receive the more polished your offer will be—you want to avoid a bait and switch (make an offer and then ask for X off before closing) at all costs unless there are major underlying undisclosed issues that pop up during due diligence (major water or fire damage, fire hazards,Structural integrity issues, etc). One of these major undisclosed issues would be rent rolls, T12s, schedule Es and/or bank account deposits significantly lower than disclosed and which would impact the property’s value in a major way and force you to reduce or re negotiate your initial offer (and this fall back to the bait and switch). A sophisticated seller will understand this. So you underwrite with this and with approximate loan terms. Once you have a goof lender relationship this will be easier. But make some reasonable extrapolations here. Get some sales and rent comps in the area to see if your offer is reasonable, etc etc. Then put together your LOI.Within your LOI you will primarily communicate your ability to transact. You also specify all of the docs you will need to sign a PA and begin your due diligence. Once your LOI is accepted you put together a PA. Once that is executed you make your deposit and go into due diligence.You may also skip the LOI and go straight to a PA. This happens sometimes with FSBO properties but it is rare. Hope this helps

Martha Daisley · Answer

Thanks for everyone's info!@steven E. yeah the banks i spoke to for commercial loans all said they dont do preapproval letters for commercial. Besides that the sellers dont require one anyway. I got the financials from the seller yesterday. The rent roll and property income/expenses were all detailed in a spreadsheet. Is that how the financials are usually presented? In other words, is that sufficient or should there also be actual bank statements, deposit slips, airbnb report etc. I think they gave me the spreadsheet so I could get a better idea of the financials in order to be able to make the offer. Would the supporting documentation come after an offer is accepted?Thanks again for everyones input!Martha

Steve Morris · Answer

Make an offer based on the books they gave you and have the lender give a prelim on that. In your offer, include a books/document contingency. You'll get the actual books for review to give to a lender. Then once you waive the books (and physical inspection) contingencies, make an "official" application for financing as another contingency.If you're unfamiliar with any of this, get a commercial broker or a RE atty to write this up for you.

Stephen E. · Answer

@Martha Daisley it's great that you don't have an agent actually. Agents often take the profit out of a deal. If the seller is just asking for something pretty unofficial it sounds like you're OK. As @Israel Garavito pointed out, the bank isn't going to actually approve the loan until you are further along. You can tell them a price that is subject to the information checking out and the loan being approved. The loan won't be approved unless the appraisal checks out, which is good for you.At best at this stage all a lender is going to give you is a pre-approval. You won't be actually approved until you've had appraisal, later in the process. I've bought property multiple times without bothering to get a pre-approval letter. It doesn't actually mean anything. On my second property, actually, I got a pre-approval letter, and then was turned down for the loan, and just went to someone else and got the loan.

Roxanne Whitaker · Answer

@Martha Daisley unfortunately you can’t make an offer without a preapproval letter or proof of funds. If there are no agents involved then tell the seller you’re very interested and you need all those things so that you can make an offer.￼

Israel Garavito · Answer

@Martha DaisleyYour lender will probably not settle on the final terms until the appraisal comes in and title work is done, close to the end of the due diligence. They should be able to tell you if it’s an interesting investment with basic financials and info, enough to at least put together your LOI. And yea be conservative, but not so much that you break it. Good luck!

Martha Daisley · Answer

Hi @Israel thanks for all the great info. The sellers are very informal, they said to just let them know verbally what the offer will be. My only setback with not having all the actual financials and rent roll is that I cant get a more accurate picture of what my potential lenders can offer me in terms and rate until i have that. So my offer is going to have to be based on assuming worst-case scenario finance-wise. Martha

Martha Daisley · Answer

Hi Stephen. Yes, i know the asking price and the sellers also supplied a write up of revenue and expenses. So i have a pretty good picture of where the offer needs to be in order for this to work for me personally. Im just not sure if i submit it now or after they get me the official paperwork of financials, rent rolls etc. ?The sellers are still working on getting me the docs. The lenders ive been corresponding with all want to see this documentation before they give me terms and rate.Im not working with a realtor and neither are they.Martha

Chace Corbett · Answer

@Martha DaisleyHave you run the numbers through the BiggerPockets calculator to see what your cash flow is going to look like? Also, are you working with an agent yet that can make an offer when you’re ready?