30 unit off market: WHAT SHOULD I DO?

Question

A neighbor of mine is a RE agent and he approached me with an off market apartment complex in Port Huron, Michigan that the owner wants to sell. Here are the details:

30 units

1.2 acres

20 townhouses 2/1 plus 10 apartments 2/2

Fully occupied

$21K/month NI

$10.3K/month Expenses

$10.7K/month NOI

The seller wants $1M for the property. A little digging in public records shows that the seller is behind in paying property taxes and lives outside the local area so it looks like they are having problems managing things. According to the agent, the seller wants proof of funds before showing. Unfortunately all of my capital is tied up in my 5 investment properties currently...The cash on cash ROI is 15.5% and the cap rate is 12.8% which is quite good for this area (cap rates tend to be around 10%).

WHAT SHOULD I DO WITH THIS LEAD?

Any ideas would be so helpful!! I'd hate to let this opportunity go to waste if it is really as good as I think it is. Thanks!!

Joel Florek · Answer

@Dante Pirouz I would definitely have the conversation for seller financing. To be successful with presenting that I would have a packet or creditability book that helps to show your a serious investor that has the capacity and plan to manage a property like that. Initially with those numbers for NOI and the asking price it sounds like you have a great opportunity in front of you. I don't know the area well (other then I will visit when I do my first Port Huron to Mac sailing race) but how does the per unit price compare to other properties that are being sold of similar amenities and rental price? One thing on commercial loans is you may be able to find a bank that is able to lend based on the appraised value. Typically they would want to see 75% or 70% LTV but will lend a higher percentage(80% to 85%) against the purchase price if you buy it under its appraised value. Combine seller financing, a little of your cash, and maybe some private loans to pull together the needed down payment and you could get the thing off of their hands. If you wanted to talk through the deal I would be more then happy to. Just PM me and we can set up a call. I just closed on a 16 unit a few months ago for $685k using this structure so I do have some relevant experience that may help.

Scott Thompson · Answer

Can you trade one of your properties for it?

Joel Florek · Answer

@Dante Pirouz I am guessing that last comment was in reference to mine so Ill take a stab at it. You only have 4 ways to buy a property like this. There are unique ways to frame the following 4 with different titles but at the core this is what you have available. 1. Commercial loan with your cash as a down payment. 2. Private financing with your cash as a down payment. 3. Seller financing with your cash as a down payment. 4. A combination of any of the above. Option 4 sounds like your only option since you don't have a lot of capital handy at the moment so the combinations are limitless as to what percentage you utilize of each and the legal structure they take on. A commercial investment property is a commercial investment property. If there is income coming in and you can confidently show what the expenses going out will be you are eligible for a commercial loan. Which bank will take it and under what terms are dependent on many factors. But you absolutely should be able to get a commercial loan if you can prove its a great deal. The seller financed portion would likely be structured as a second mortgage. This allows them to defer capital gains as well so there are tax benefits for the seller here. Don't be discouraged by the "proof of funds" language. They just want to know your not a tire kicker. Use business plans, professional letterhead for your business, and other marketing techniques to show your organizational skills and investor acumen.

Dante Pirouz · Answer

I don't think commercial financing will be an option on this deal because I don't believe this seller has kept good records. Obviously if they haven't been paying property taxes on time for years management is a big issue. So what I imagine is that the seller wants an all cash offer so he can get out of the property that's why he is asking for proof of funds is my guess. Whether seller financing is a possibility, I'm not sure but in my experience most sellers I've talked to want a significant down payment 30-40% in order to entertain seller financing...am I wrong there?

Richard Ball · Answer

Is it actually in Port Huron? If so is it on the North or South? On the surface it sounds like a decent deal but I can't say for sure with the limited knowledge. I do think there is room to negotiate the price down, especially if it is on the South side of town. If this is in Marysville or Fort Gratiot I want in :D

Andrew Fielder · Answer

You should check what the market Net Income and Expenses are or market NOI per unit. Also see what the market rate per sqft is ($/sqft). If they are not at market, find out why.

Aaron Miley · Answer

See if you can team up with a local partner or wholesale it or find some private funds to jump on it as long as it's a good deal. Unfortunately I don't know your market but if it's a good buy then try to work something out.