How to structure "wrap" loan on three 4-plexes

Question

Hello! I'm looking at an interesting investment, but I need your advice on how to seal the deal.

I'm talking to an elderly gentleman in his 70s, who still manages 100+ units(!!). He wants to make me a "sweet-heart of a deal" on three 4-plexes he owns. They are in great shape and rented out. He simply wants his time back and is ready to get out of the game, as he puts it. I would take over the day-to-day management and basically everything to do with them. As he put it, he wants this to work for me, because he "doesn't want them back!" It would be owner-finance in the sense he offered I simply take over his payments with US Bank - sort of a "wrap" loan agreement...

He is offering to sell these to me for what he owes. He bought all three of them in 2008 for $235,000 each. He now owes $174,000 on each 4-plex. I had one appraised (they all sit right next to each other), and the appraisal just came in yesterday for $233,000 per 4-plex. He has a sweet 30 yr note on these, so the mortgage is $800 per 4-plex per month (three 4-plexes x $800 = $2,400 mortgage payment). The 12 apartments rent for $500 each, and are all rented out (monthly gross $6,000).

I have a day job and would like to just bank back the proceeds for maintenance, to pay down the note, etc.

So the rub on all of this is: he still owes $174,000 on each unit. Although he is offering to let me "just take over his payments" the note is of course not assumable (per US Bank loan doc). Additionally, for me to refi these onto commercial notes would mean higher monthly payments, and my commercial lender would also want 20% down and for me to have a minimum of $36,000 in the bank in reserves to cover a year's worth of mortgage payments (which I don't quite have right now).

So even if I wrote up a contract to purchase them and refi them, my bank would look at purchase price for the loan, not appraisal, so I'd have to come up with 20% of $174,000 for each one just to get them bought.

I talked to my lawyer about setting up an LLC of some sort, and the lawyer was scratching his head on how to structure this. I've been reading up on a master lease with option to purchase idea, and perhaps that's the way I need to go.

Any suggestions on how to structure this partnership would be greatly appreciated!

Brett

Wayne Brooks · Answer

An LLC won't help you, neither will a master lease or option. You'd have to do a sub2, where title transfers into your name, then after a year of ownership/seasoning you could refi based on appraisal instead of purchase price. The key will be title in your name for at least a year before you try to refi.

Bill Gulley · Answer

I suggest you not do a sub-to with US Bank in MO. This is clearly a Trust assignment for this retiring investor, have the attorney draft his Trust for estate planning purposes. You can assume management under the Trust, openly without the usual Trust assignment junk. You can be a successor trustee after the attorney and he can withdraw. Seller finance after the Trust is filed, the bank may want a copy of the Trust, there will be no due on sale issue. Look up "partitioned note" under one deed of trust in MO, you can have as many principal parts divided up as you like covering multiple properties with release terms for each just as a blanket note. You can have your attorney call me if you like. BTW, my grandfather lived in your neck of the woods, Good luck :)

Account Closed · Answer

The deal maker in me can't ignore a possible equity situation. I don't want 12 $500/mo tenants. But if I could get in to 3 fully rented average condition bldgs for no money down and take over loan amount with $150K equity? I'd do that today. However, I'm curious why your seller doesn't see the $150K equity. It would give me pause about the condition, the tenant pool or the actual expenses. Or the appraisal value. What it an actual paid appraisal or a BPO?

Brett Dufur · Answer

Hi Bill! Small world! Thanks for the suggestions. I'll be sure to follow up with you. Thank you!

Account Closed · Answer

Make sure the seller understands that you are looking at a subject-to purchase. Not a land contract or other installment agreement. His request for a $50K down against loan amount suggests that he's not planning on deeding away the properties. I say don't do this deal if you cannot get deeds.

Brett Dufur · Answer

Thank you Kristine, I will keep that in mind and make sure I seek the appropriate council. Thank you for being so generous with your expertise.

Account Closed · Answer

As I've mentioned before, if your attorney doesn't know or understand basic subject-to purchases, you've got the wrong attorney. I'm guessing he is not an real estate attorney, but a general practitioner with maybe a partial RE focus? If so, NOT who you want to be paying to help you on this deal. Purchasing subject to existing financing and debt are not exotic RE transactions. Don't have him learn (or make a mistake) on your dime.

Brett Dufur · Answer

To possibly further muddy the waters, the owner did ask that I put some skin in the game by putting $50k down, paid directly down on the note. I countered by suggesting I offer to put $10k down on each of the three notes and hold my remaining $20k back for repairs, deferred maintenance, etc., and he was OK with that. Again, no money will change hands unless we get a contract hammered out...

Brett Dufur · Answer

Kristine, thanks for weighing in, I appreciate it very much! I did have an independent appraisal done for that very reason. I'm also having that appraisal reviewed by a local real estate agent to get her 2 cents. I've toured the property and found that it has benefited from his constant attention and is in above average condition (new roofs, carpet, etc). This was not listed for sale, but came my way after I called a local property management company to introduce myself and tell them I was looking to invest in 4 plexes (thanks BP for that suggestion!). That gal was the daughter in law of the owner. Before the day was out I was talking to this owner.As I mentioned, he's juggling too many properties and these three represent a partial pruning of his tree, so to speak. He's got a 7o-acre neighborhood full of SFRs he owns and manages as well, and I think he's just ready to start powering down in retirement and doesn't want to mess w realtors, showings, inconveniencing tenants during showings, etc. I'll be researching the sub2 suggestion and forwarded your ideas to my lawyer. Thank you again for the great suggestions! I'll keep you posted.Brett

Account Closed · Answer

That's the way I see it as well. Get the deeds, take over the payments, and refi out after a year. I say give yourself 3 years to cash out the seller entirely in your purchase agreement. Just in case some of the bldgs end up with issues that you need time to remediate before refi.