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Under Contract...Finally, after 5 months
Well, I don't know how many deals you guys are getting, but after 5 months, several hundred underwritten deals, and several best and finals, we finally are under contract on a 98 unit value add.
What it took:
- $100,000 EMD
- No Finance Contingency
- $50,000 Good Faith to lender
- $15,000 to attorneys for the PPM
Big shout-out to my partner, @Sam Grooms.
Now we just need to close...
Congrats Ben! Awesome news. What market is this located in?
Originally posted by @Garison Clemens:
Congrats Ben! Awesome news. What market is this located in?
Phoenix - the fastest growing county in the country :)
Very nice. @Ben Leybovich @Sam Grooms Now the real work starts! Keep us updated through the process. I know the pain of going through the Best and Final rounds, certainly is stressful. Lost a deal yesterday in B&F as a matter of fact, but onto the next!
Keep up the good work.
Congratulations @Ben Leybovich good on you for the new deal.
Would you mined sharing more details, like what's the value play etc?
@Garison Clemens in hot market like today's, we are all missing out on best and finals...
You have to be in to win, But not paying to much and willing to walk away.
Many people pay to much, the cycle may come and bite them in 2 years.
Keep it up!!
Originally posted by @Hadar Orkibi:
Congratulations @Ben Leybovich good on you for the new deal.
Would you mined sharing more details, like what's the value play etc?
@Garison Clemens in hot market like today's, we are all missing out on best and finals...
You have to be in to win, But not paying to much and willing to walk away.
Many people pay to much, the cycle may come and bite them in 2 years.
Keep it up!!
It's a complete re-positioning. About $1.4M of reno. Rents should move significantly when we are done.
@Garison Clemens, it sure does. We're trying to close this deal in 45 days, even though the PSA gives us 60+15. We just finished up due diligence, and nothing too surprising came up. There's about $50K in repairs that should be the seller's responsibility, so now we have to decide if we want to ask for that at closing, or if we'd rather not have a retraded deal attached to us, and just bump the renovation budget from $1.34M to $1.39M. In fact, I'd love to get other's thoughts on that decision.
@Hadar Orkibi, to give more insight on the $1.4M and rents that Ben mentioned: We're spending $7,300/unit on upgrading the interiors, so touching almost everything. The property has about 1,500 SF of space that's not being used, so we're adding a business center/study/group project area, as well as a fitness center. The laundry contract is up in October, so that'll be somewhat of a payday when we renegotiate, and we'll upgrade the machines to take credit cards. Then, the obvious, like painting the building, redoing the landscaping, new signage and rebranding. We underwrote the reposition taking 24 months to complete, but realistically, the property manager believes they can do it in 12-18 months. They're repositioning over 1,200 units in 2018 alone (21,000 under management), so they're not too worried about another 98. They will actually be equity partners on the deal, exchanging their fees for a piece of the gain on the exit. Has anyone had experience with a structure like that?
After the renovation, we expect rents to increase approximately $300. The current owner/operator doesn't like to increase rents and hasn't moved them in over a year, even though property values increased 30% last year in the immediate area. After the increase, we'll be right in line with average rents in Phoenix, and well below a similarly remodeled property around the corner. They're $300-$350 higher than our expected rents. They're an all furnished property, but even discounting the rents by $150 for being furnished, we're still well below them. If you're wondering why there's an all furnished property at 163 units, we're near a rather large university. We also plan to try 10 furnished units of our own. That property is all studios and 1 bedrooms, so we think there's demand for furnished two bedrooms that isn't being met.
@Sam Grooms we usually include a certain percentage for construction contingencies for these kinds of situations, but that’s certainly a case by case basis based on the severity of the repairs. I agree with you not really looking to do a retrade on the deal. I saw that you said the property manager has a lot of experience with turning units to get them reno’d so maybe the additional 6 months to a year of rental premiums could be your hedge on that $50k in repairs that needs to be completed, as long as it makes sense for you guys. Just an idea since that is just them saying it could be done. You never know.
@Garison Clemens, we do have a construction contingency, but we'd rather not use that before getting started. I like the idea of additional rental premiums offsetting the $50K, but then we no longer have that cushion. We can ask for it from the seller, but end up with a reputation for retrading. The last option we have is to add $50K to the raise, which lowers returns, obviously, but not by a lot. We'll just have to decide which is the least bad option.
Does your advice change depending on what the repairs are? The roof was replaced in 2017, but they cut some corners; didn't use enough nails and apparently haven't heard of flashing. $35K is fixing their mistakes. The other $15K is for plumbing (isolation valves and backflow valves) that isn't up to code. The property management company and the inspectors believe the seller should be responsible for these items.
@Sam Grooms does the roof have any kind of warranty? Or did the seller use a “find what’s cheapest” just to get a new roof on the property before listing?
I agree with the seller being responsible. I think the conversation should at least be had, you never know what could come out of it. I think at least raise the concern, and it will at least get the idea in their Head you know of the issues, $50k is no small amount, no matter the size of the deal. I’m not sure how you guys are structuring it, but maybe asking the seller to do a seller finance on maybe the repair amount at least so it won’t cost you as much as raising capital, and technically you’re not asking for a credit or concession at closing for the repair amount.
Are you guys closing in the early part of the month too? Or at least planning on it?
Sounds like a good deal with solid upside @Ben Leybovich and @Garison Clemens.
Re the 50k, I understand how the inspector and the PM feel about it, but if you are getting a good deal there and want to keep you name clean from been re trader then perhaps just raise the 50k. Or have a direct conversation with the seller and try and fined a Fair Middle Ground at 25k. If he say no then you can walk away from the re trade Idea.
how many investors are involved in this this partnership/ syndication?
Can i ask what founding did you get on it for closing and how much down did you have to come with?
Originally posted by @Hadar Orkibi:
Sounds like a good deal with solid upside @Ben Leybovich and @Garison Clemens.
Re the 50k, I understand how the inspector and the PM feel about it, but if you are getting a good deal there and want to keep you name clean from been re trader then perhaps just raise the 50k. Or have a direct conversation with the seller and try and fined a Fair Middle Ground at 25k. If he say no then you can walk away from the re trade Idea.
how many investors are involved in this this partnership/ syndication?
Can i ask what founding did you get on it for closing and how much down did you have to come with?
We are not going to discuss any details on the partnership in this forum, for obvious reasons. As to funding, the investor special - bridge + refi + GSE.
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#1 Multi-Family and Apartment Investing Contributor
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@Ben Leybovich and @Sam Grooms congrats on the deal!
On the roof issue--it was installed in 2017. My guess is it was done by a licensed contractor with permits. If that's incorrect that's a problem and your request wouldn't be retrading, it would be correcting the seller's negligence. But let's say it was on the up and up, there could be a couple different things here: a) your inspector's opinion is just that--an opinion--and is on the picky side. b) this is a potential warranty claim for improper installation. c) the seller asked them to do it on the cheap and it will still function and not leak but isn't the best way to have installed it. My guess is it could be "a)" or "c)" so have you had a roofing contractor conduct an inspection for a second opinion? This also begs the question that if the roof permit was signed off and its not leaking, would you fix it? Probably not...until a problem arose, which may not ever happen.
As for the plumbing valves, if they aren't up to code you could ask the seller to fix them and bring them up to code prior to closing (and delay closing if necessary). This isn't a retrade, its a request in response to discovery of latent defects. If they say no, then it's your call. My guess is if you plug the $15K into your model it won't effect the IRR by more than a couple of bps.
On another note, if you are planning on raising rents $300, I wouldn't plan on this re-positioning being complete in 18 months. Most likely this will require close to 100% turnover as the new rents are too much for the existing tenant base to absorb. Could you physically renovate 98 units in 18 months? Absolutely, that's only 5.5 units a month. But on a 98 unit property that would be 5% physical vacancy just for units being renovated at any given time plus your normal vacancy. Plus tenants might move at an accelerated pace because of the increases and this could throw your occupancy pretty low and even into negative cash flow. Repositionings are always harder than they sound. It can be done, but if you plan for 24-36 months and then manage to get it done in 18 you'll be stoked.
Good luck guys!
@Brian Burke - we are underwriting stabilized operations sometime in Y3. The physical vacancy is bumped in Y1 and Y2, not to mention the economic. C'mon man, I think I know a few things...:)
Good points on the rest. Yes, we've had a contractor on the roof. It'll all work out.
Now, on to the important stuff. You know I have this fabulous Casita in this house hack of mine. It's got a fantastic bed, tiled shower, granite tops, and the whole 9 yards. You must be growing old and hard of hearing because I can't imagine how you can't hear it calling your name.
Originally posted by @Chris Pike:
@Ben Leybovich and @Sam Grooms, just curious what your exit strategy is? Are you planning on holding for the foreseeable future once you complete the refi? Or are you planning on selling at some point in the near future after you reposition?Just trying to get a better understanding of how bigger players in my market are working their deals.
Also, would you be open to sharing who you are using for a property manager? If not, I completely understand.
Thanks for your help!
The short answer, Chris, is that as long as we hit the hurdles, I'll sell at any time. ON the other hand, since no one has a crystal ball, we are prepared to hold for a while. As to the PM, how many units are you looking to place?
Originally posted by @Chris Pike:
@Ben Leybovich Not looking to place any units immediately. We are currently redeveloping 2-4 unit multifamily in Downtown Phoenix and having my girlfriend self manage as AirBnBs. Although, I have been opening up conversations with family members involved in the industry regarding pooling capital to get into small/mid sized reposition opportunities in Phoenix. Looking at 20-60 unit buildings. Want to start scouting out solid property managers early on in the process. Also, looking to expand my network of people who are doing similar projects in the area. Appreciate your time!
Chris, so I've written a number of times on the blog about the PM situation. The thing is, in the small multi space you simply cannot afford management, and definitely not professional management.
Proper management infrastructure involves pay roll personnel on-site, with strategy/accounting/reporting/legal off-site. This is too much load for a 60-unit to carry, and certainly not 20-unit. I am sure you can arrange something, but the guys we work with and others of their caliber won't be interested in anything much under 100 doors because they know it's not possible to systematize properly.
Good Luck!
@Garison Clemens, No warranty on the roof, unfortunately.
@Brian Burke, it was done by a licensed contractor, but no permits. Arizona allows you to put on a second layer of shingles without pulling permits. It was definitely option (c) that you mentioned, and they wouldn't have been able to do work like this had they gotten a permit. Seller wasn't willing to give any concessions or reduce the purchase price. So, we just increased the raise $50K.
I agree that it's better to plan for the 24 months, and give yourself room to outperform. As @Ben Leybovich mentioned, we actually added the 5% physical vacancy you mentioned to Y1 in our underwriting, even though we didn't underwrite doing them all in Y1. Again, more room to outperform.
As for an update on the deal, we released contingencies about a week ago, and are set to close within a week.
It's been a little hectic, and I'm not sure I'd recommend closing in 45 days. Ever.
@Ben Leybovich and @Sam Grooms
Now that’s persistence! Just what everyone needs in this market.
Thanks for sharing!
Should be closing this week. A hundred things have to happen for us to be able to close, but this is what we do as real estate investors!
Wish us luck!
Originally posted by @Ben Leybovich:
@Brian Burke You know I have this fabulous Casita in this house hack of mine. It's got a fantastic bed, tiled shower, granite tops, and the whole 9 yards. You must be growing old and hard of hearing because I can't imagine how you can't hear it calling your name.
You can forget about @Brian Burke staying in any Airbnb... Those paranoid cops think that every BnB has cameras and microphones in the walls, watching every move and recording every word... And "ex-cops" are the most paranoid of the paranoid.
: )
DL
@Brian Burke , ask me how I know.
Originally posted by @DL Martin:
Originally posted by @Ben Leybovich:@Brian Burke You know I have this fabulous Casita in this house hack of mine. It's got a fantastic bed, tiled shower, granite tops, and the whole 9 yards. You must be growing old and hard of hearing because I can't imagine how you can't hear it calling your name.
You can forget about @Brian Burke staying in any Airbnb... Those paranoid cops think that every BnB has cameras and microphones in the walls, watching every move and recording every word... And "ex-cops" are the most paranoid of the paranoid.
: )
DL
@Brian Burke , ask me how I know.
HAHAHA This is too funny, DL. You're totally right about Burke. I am ok with a complete sweep, Brian. I am also game with a polygraph, if that's what it takes.
Otherwise, I'll be in HI in early October? You have any plans?