Breaking into the Houston MF Market

[Jeff Greenberg]

My business partner and I recently syndicated, and closed on a 62 unit multi-family property in Houston, Texas. I am writing this for the benefit of those interested in venturing into the commercial arena.

It started when a broker that I worked with in the past called about the property. He had decided to branch into Houston and made a cold call on a 155 unit property. The owner happened to be there and said that he would not sell, but did have another property that he would consider.

The other property was a 62 unit C class property in a C neighborhood. The owner had bought it two years earlier as an REO at 60% occupancy. Shortly after take over and tenant repositioning it was down to 40% occupancy.

The seller stated his price but my broker negotiated him down by 250k and brought the deal to me. By this time the property had 3 make ready units and 7 down units, at an occupancy rate of 84%.

Houston was a new market for us and we were in the middle of a San Antonio deal with two other investors. We had to consider our resources before taking on a second property at the same time. I started to communicate with some Houston investors I had met on BP, and they checked out the area and walked through the property for me. With my broker’s opinion and the opinion of a local, I made the offer my broker had suggested. Once we had the property under contract, I also had three property management companies give me their opinion of the property and location.

The first phase of our due diligence is the financial phase. From our offices we reviewed the seller’s financial statements, rent rolls and verification of expenses. . After a thorough underwriting, review and confirmation we were satisfied with the performance of the property and made travel plans for our on-site due diligence.

Once on site we conducted a thorough investigation of the sub market. We drove the surrounding area to assess the condition, competition and employment opportunities. We made it a point to stay at a hotel near the property and drove by the property at various times of day and particularly at night, especially Friday and Saturday night. We took every opportunity to meet with the seller, talk to local store clerks and restaurant staff, and nearby neighbors to get a full spectrum opinion about the area.

Prior to our scheduled inspection with a local property inspector we conducted our physical due diligence. We walked every unit, documented inventory, conducted a lease audit and reviewed other documentation. . During our numerous visits and meals with the sellers we obtained many details about the property.

As part of our research we visited the city’s building and safety, flood control, code enforcement, planning, and the fire marshal to learn about their requirements and confirm compliance. We had the fortunate timing to attend a community outreach meeting with the police department and spoke with the beat officer for our property. We also had a visit with economic development.

While in Houston, we interviewed property managers, looked at properties they manage, met with BPers and potential investors we knew, and looked at other properties in the market.

Satisfied with the property, market, submarket and management, we returned to continue the due diligence and acquisition process, including securing the loan, finishing the Private Placement Memorandum (PPM), securing insurance quotes, and forming the entity that would hold the property. Once the entity was formed and the PPM complete, we were able to accept investor funds and close the deal.

We closed on the property on February 21st and are now working with the PM to reposition the delinquent tenants, bring the down units on-line and conduct capex repairs.

[Jeff Greenberg]

@Sharon Tzib When we went under contract there were 10 vacant units putting it at 84% occupied killing off fannie mae. The property is within 25 miles of salt water( the bay), in a 100 year flood plain with the elevation 1 foot under flood elevation. Add 1963 construction and the lenders drop off. We fought for two months threatening a sit in, in the previous insurance office to get them to give us a loss run, just so we could get an insurance quote.

The issue with the lender's insurance requirement was they wanted us to insure for replacement value. Now you might think, what is wrong with that. Well we bought the property for 1.3 mil (here is your number) and replacement value at $60 a sq foot would have put it 3.2 mil. Our plan was to insure for 2 mil. If the property was destroyed and we received the 2 mil plus sell the land for 600k(assessed value), we could walk away with the investors very happy and the lender satisfied.

The lender would have accepted the 2 mil, but without co-insurance. Of course we could not get it for 2 mil without co-insurance. I hope that there is someone on BP can explain the logic of co-insurance, but here is what it ends up meaning to us. An insurance company may require a co-insurance of 80-90%. So let say the replacement value of the property is 3.3 mil and I decide to insure it to a cap of 2 mil. Now 2 mil is less than 80% of 3.3 mil or 61%. Therefore the maximum they would pay out on my 2 mil policy would be 61% of the 2 mil policy or 1.2 mil. So if we really wanted a 2 mil policy we would have to carry an additional 800k to cover the shortfall on the 2 mil policy. This ended up costing more than the 3.3 mil full replacement value.

So if you wondered what took so long, contacting a half a dozen insurance brokers and waiting for a response, does take time.

Lesson learned: find out early if you are in a flood plain and get firm quotes early.

A recent update, the good news is the property assessed for 2.1 mil, the bad news is the property assessed for 2.1 mil. We are in the process of contesting the assessment.