No financials but it might be an opportunity!?

Question

I was just presented chicken scratches and half completed spreadsheets on a 50 unit building.

Could be an opportunity as it's a out of town landlord and the building has had its share of problem tenants.

Most of the units the tenant pays their own heat, in a few, the owner does.

My question:  can one do their own "financial forensics" on such a building?  Call the utility companies, get the numbers, go into the building and knock on doors - see the vacancy rate, ask the caretaker?

Can an investor even get a loan without good numbers?

Can I use the lack of good numbers to my advantage?

Don Konipol · Answer

@Bruce D. Bolton

Sounds like a turnaround deal.  One that should be purchased on a per door price rather than cap rate.  What you’re asking is if you can do an accurate pro forma financial statement.  You can, but unless you’re very experienced in both investing in this particular type of property and real estate accounting, you should engage the services of a qualified accountant.  Many investors think developing a pro forma income statement is a matter of purchasing a program, plugging in best guesses for numbers, letting the program use industry averages for categories they have no specific information on, pressing print, and viola, the pro forma looks neat and pretty.  But this is actually only a very rough starting point.  Each and every major expense or income should be thoroughly researched and evaluated.  A definitive plan drawn up as to specific tactics for each projected income increase or expense reduction.  A timeline used to arrive at a figure for cash reserves and burn rate.

If this is beyond your pay grade, your time constraints, or your level of interest, you’ll probably want to consider a more passive option.  For example, I myself might have tackled this up to about fifteen years ago,; I no longer want to do the heavy lifting.  But if somebody else is experienced, competent, has a proven tract record, and the risk return ratio is right, I’d probably invest in it as a passive investor.

Most deals like this presented to me have not been researched thoroughly enough, don’t have accurate numbers, don’t have specific tactics to accomplish the turnaround, and the promoter doesn’t have a verifiable tract record of success.  The one in five or ten that do usually don’t provide a sufficient return for the risk.  The few that meet all these criteria I invest in.

Scott Mac · Answer

Hi Bruce,

Risk / Reward (or punishment) is what comes to my mind about this.

If you miss the numbers and if you can't carry it to the numbers you (paid for) you may risk foreclosure.

Other than that, a super deep discount on a per door price (providing you can carry the place at a possible loss until you can fix it) might seem attractive.

But still it seems like it might come down to the availability of your personal liquidity to carry it if you make a mistake.

Kinda seems like a "There's more fish in the ocean" kind of situation. Easier Fruit to pick so to speak.

Good Luck!

Luke Miller · Answer

@Bruce D. Bolton it's going to be difficult. Banks don't like proformas without some sort of T12. You are probably going to have to go bridge lending until you can stabilize the property.

You say most of the tenants pay their own heat, are you trying to implement RUBS? if so, does your management company have comps in the area that support RUBS?

You can call and get pricing from utilities, but it might not be accurate. A better way would be to ask for utility bills from previous months.

You can use it to your advantage if its a property that you truly want, but it's bound to give you surprises.

Gwyeth Smith · Answer

@Bruce D. Bolton, I think you are right in that this might be an opportunity.  Poor management is definitely a value-add play and a chicken scratch spreadsheet of financials is evidence of that.  With that said, a lot of the feedback already given on this thread is true.  You just have to be sure of your numbers, projections, and business plan if you plan to proceed.  As others said; figure out your risk tolerance, what you want for returns, and then evaluate without emotion.  If it meets criteria; take the next step.

Grant Rothenburger · Answer

@Bruce D. Bolton Have you thought about partnering with someone more experienced with larger deals possibly in the same area? You may be able to find someone really familiar with these types of deals who can figure out if it's a deal or not, and then partner with you to see the project through. Maybe even another property management company in the area.

Andrew Syrios · Answer

You can certainly try to piece together an approximation of the financials, but of course, it won't be nearly as precise as actual financials. It could be an opportunity, especially if the seller understands that not having financials hurts their ability to sell. But it also comes with a lot of risk and banks will be hesitant to loan a property that has no financial history.

Michael Dang · Answer

A seller generally won't give you full access to the property unless it's under contract.  Then as a part of the due diligence process conduct a lease audit.

If there is a story to tell with some solid proforma numbers then a private investor or hard money lender may fund it.  Once stabilized then you can re-finance it.

John Fortes · Answer

Ask the seller for the P&L and if you can't get it from them or their property management company, then call around to a reputable PM in the area to find out what some ideal expenses could be. Generally, you want to purchase this on actuals as you can and the more you can get from the seller the better you can do that.

Another alternative is to get the tax returns but you can't get that unless you have it under agreement. And in most cases the seller won't provide those either. What can you ask for next? Ask for bank statements to see what the seller is bringing in and what is going out (utility wise). Usually if the taxes is a no-go bank statements is easier to get as a compromise. See if you can get some sort of P&L in the beginning.

Unfortunately, some mom and pop type owners have poor book keeping and this is the result of it. Good luck to you!

Matthew Baltzell · Answer

@Scott Mac there will always be other opportunities. My mentor taught me "sometimes no deal is a good deal."

However, that doesn't mean this is a bad deal.

But, I would ask you first, what kind of returns are you looking for?

I think that's important to understand first.

Could you get your desired return in a different property? Maybe or maybe not. I don't know.

Best of luck.

Let me know if you get more specific numbers and I would be happy to help you analyze it.

Cheers:)

Charles Soper · Answer

Have to agree with @Scott Mac on this, it's all about your risk tolerance.  You can probably find a HML or even a private money guy who would do the loan as long as you bring a plan with some educated guesses on NOI, cap rate, and value but stabilizing 50 units without at least some history of the property or area seems like a big hairy audacious goal to achieve.  Good luck and post updates, would love to see how this works out for you!

No financials but it might be an opportunity!?

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