Getting a small apt complex under contract

Multi-Family and Apartment Investing
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Getting a small apt complex under contract

Avi Garg
Rental Property Investor · Concord, CA · Member since 2016 · 499 posts · 219 votes

Need some help in understanding how to get a MF under contract. Lets say the small apt complex is listed at $300k and the seller is willing to drop the price to $280k (no seller financing available). 

1. The conventional way to do this is to have 25% as down payment and find a commercial lender (LLC required) and get approval letter to get the complex under contract

2. I read someplace (can't remember where) that I can try to find a rich friend/family to give me a screenshot of their account with the money (name scratched off) and I can use that to get the complex under contract and then find the investors. The only issue with this is I thought the bank screenshot should have your name on it.

3. Find HML who will be willing to put in 80-90% so you can get the property under contract

4. Any other way I am missing out (100% cash offer is out of question for now)?

(these are made up numbers to put things in perspective)

Another question I have regarding commercial loan is that does the bank look at where the money came from? Lets say I have 30k and the rest I get from 0% credit card (I know the risks so lets not point the credit card risks).

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Gerald Demers
Note Investor · Orlando, FL · Member since 2016 · 135 posts · 79 votes
10y

Hello @Avi Garg, the biggest question a seller has is "can you close"?  Thus, they need proof you will have the cash (however you choose to raise it).  If they say yes to your contract and you can't close, you cost them money unless you can address that.  The easiest way is that you are putting down a deposit, if accepted, you have x days to do your due diligence and once that date is passed, your deposit becomes non refundable (deposit goes hard).  

This is a 280K multi-family as opposed to 750+K purchase.  Not saying that's bad; I just look at the two prices and the situations they can create as different.  

If you have a private lender (HML or private) that can lend on the project, sure, get a letter from them indicating their commitment to the project.  The letter should include contact information so the seller can call and verify.  It does not mean you have to use them.  

Regarding your 30K, most conventional lenders's paperwork ask you for the source of your down payment.   If you don't have the down payment, run your numbers on the property and see if the income supports the additional debt if you borrowed the down payment and at what interest rate you could offer.  

If it's a great deal, you can partner with someone that has the down payment for a % of equity (so it's not debt).  

We have purchased all of our properties with 100% financing from private lenders.  But we bought them at heavy discounts, completely rehabbed them so the LTV is about 60%.  Nice safe investments.  

Gerald Demers

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  • Chris Soignier
    Real Estate Broker · North Richland Hills, TX · Member since 2013 · 1k+ posts · 607 votes
    10y

    1.   Yes

    2.  Flat-out dishonest and unethical unless your rich friend/family member is allowing you to use those funds to close.    Reputations take time to build, but can be destroyed instantaneously.    Don't do it!

    3. Maybe that gets you to the closing table, but then what's your exit strategy?    If your interest rate is greater than the cap rate, you're losing money starting on day 1.    Feels like a ticking time bomb to me ex. perhaps as bridge financing when you have a firm permanent financing solution just not quite ready to go.

    4. Why not just be honest and state that you're in the process of raising money for it?    $40K (on top of your $30K) s/b easy to find if it's a good, bankable deal.

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  • Chris Soignier
    Real Estate Broker · North Richland Hills, TX · Member since 2013 · 1k+ posts · 607 votes
    10y

    Forgot to mention, you'll need to also budget closing costs, operational liquidity, and rehab/escrow if applicable, which together can total well in excess of 25% of the purchase price.

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  • Gerald Demers
    Note Investor · Orlando, FL · Member since 2016 · 135 posts · 79 votes
    10y

    Hello @Avi Garg, the biggest question a seller has is "can you close"?  Thus, they need proof you will have the cash (however you choose to raise it).  If they say yes to your contract and you can't close, you cost them money unless you can address that.  The easiest way is that you are putting down a deposit, if accepted, you have x days to do your due diligence and once that date is passed, your deposit becomes non refundable (deposit goes hard).  

    This is a 280K multi-family as opposed to 750+K purchase.  Not saying that's bad; I just look at the two prices and the situations they can create as different.  

    If you have a private lender (HML or private) that can lend on the project, sure, get a letter from them indicating their commitment to the project.  The letter should include contact information so the seller can call and verify.  It does not mean you have to use them.  

    Regarding your 30K, most conventional lenders's paperwork ask you for the source of your down payment.   If you don't have the down payment, run your numbers on the property and see if the income supports the additional debt if you borrowed the down payment and at what interest rate you could offer.  

    If it's a great deal, you can partner with someone that has the down payment for a % of equity (so it's not debt).  

    We have purchased all of our properties with 100% financing from private lenders.  But we bought them at heavy discounts, completely rehabbed them so the LTV is about 60%.  Nice safe investments.  

    Gerald Demers

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  • Avi Garg
    OP
    Rental Property Investor · Concord, CA · Member since 2016 · 499 posts · 219 votes
    10y

    Thanks @Chris Soignier .. I am aware of the other costs but didn't mention them as I wanted to focus on the getting the property under contract. Thanks again for pointing it out though.

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  • Chris D.
    Investor · East Amherst, NY · Member since 2016 · 47 posts · 20 votes
    10y

    So what your saying is your goal is to get this under contract with no financing in place, then run around like a chicken with your head cut off trying to find the money or financing, then when it does not work out you have to back out, then screwing the seller and wasting his time.  Sounds like a great plan to me.

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  • David Frasz
    Lender · Washington, DC · Member since 2016 · 27 posts · 12 votes
    10y

    @Avi Garg

    Regarding your question regarding where the money comes from - yes, banks look at where the money comes from. To a lender, income, net worth, and liquidity are important. In the example you offer of using a 0% APR credit card, though you would have no interest charges, the balance on the card would be considered a liability and would reduce your net worth by the same amount. As such, it would not make the lender think you have more money or feel any more comfortable lending to you. In fact, it would be raised as a credit risk as lenders do consider the borrower's outstanding liabilities. All that said, if you can get a lender to accept that, it could still be worth your while in order to be able to do a good deal.

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  • Avi Garg
    OP
    Rental Property Investor · Concord, CA · Member since 2016 · 499 posts · 219 votes
    10y

    @Chris D. That's not the point. There is a reason I mentioned conventional financing, HML, rich family/friend. Relax Dude. I am trying to understand the process for acquiring a small apt complex. This is just a hypothetical scenario so that I have things in place when I am ready to take the plunge. I definitely don't want to run like a chicken with its head cut off when I am about to pull the trigger on an actual property.

    @David Frasz Thanks for the info. I knew the residential lenders look at your liabilities but wasn't sure about the commercial lenders. Good to know.

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  • David Frasz
    Lender · Washington, DC · Member since 2016 · 27 posts · 12 votes
    10y

    @Avi Garg Sure thing.  Feel free to reach out down the road if you're looking for multifamily financing.  We offer non-recourse debt.

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  • Rick Pozos
    Wholesaler, Rehabber and Landlord · San Antonio, TX · Member since 2014 · 2k+ posts · 2k+ votes
    10y

    When the bank sees the name blacked out on the bank statement, BIG red flag. They want to know its YOUR money. Why would it be blacked out? YOu have to be completely honest with your dealings with a bank. 

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