Advice Needed on Being the Mutual Connection that Helps Create a Deal

[Scott Scharl]

Hello all. I have a question about how to connect two acquaintances to make a deal:

1. The first person

In a recent conversation, I have learned than a former landlord of mine is seriously considering selling three of his properties in the booming Arcadia neighborhood of Phoenix, Arizona. Each of the properties is a multifamily. The landlord does all property management and most maintenance himself. While multifamily properties all around are being renovated or razed and rebuilt, his buildings remain the most outdated and worn on their respective blocks. Tax records show that he owns each of the properties in his own name. Since he has owned each property for a number or years, it seems that his long-term strategy has been to cut corners and avoid capital expenditures, betting on appreciation in the end.

It seems to me that two of his parcels in particular would be excellent candidates to be torn down and replaced with high-end apartments or condos; the same thing is happening across the street with another, much nicer (but much larger) multifamily property.

2, The second person

Currently, I am building a mentor-mentee relationship with a local investor who has fix-and-flipped over 200 properties. This investor has an excellent track record raising private capital, and has already done work in the neighborhood flipping single family homes. He is also starting a brokerage and I will most likely hang my license with him when I receive it in late August.

All this is to say: How can I best leverage both my relationship with this motivated (retiring) seller AND my relationship with a successful local investor to help make a deal? How might finders’ fees work in this situation? Should I wait until I have my license, or should I act ASAP to connect these two before the seller liquidates and moves on with his life?

Thanks so much for any advice you might have.

[Christopher Telles]

You are in a good position to work your way into a deal. You really didn't say what you preference is in how to approach whether you'd prefer to broker or participate in the transaction on the equity side. I'll give you my take in either of those two scenarios. First, as an unlicensed person you are not able to received a commission on a sale. Although you perhaps receive a finders fee from the buyer ( not familiar with AZ real estate laws so you want to check what restrictions are in place and what you can and can't receive in terms of a fee). The better option is to create value to earn your way into the deal. It seems you've already done a little research on the sellers property. At this point why not ask him what he wants for the property. Ask him for the financials for the properties that you "and a partner" would have some interest in looking at the properties now. Tell him you've been in the market looking and your aggressively looking. Probe him to see if he's willing to finance the deal by carrying back a note. Avoid any conversation about your ability to buy by deflecting his questions and using your "partner" as the source if he presses you. If you have some ideas of values for similar properties in the area then you might make him an offer at a discount to what the current value is under the guise of its functional obsolescence. Put that specific term in a cover letter with the offer "we arrived at our offer after underwriting the property and taking into account it's functional obsolescence to the units tenants find desirable in the direct marketplace of the properties". Using creative financing techniques, in the offer ask him to carry a note for X % (say 80-90%) at Y % interest for a term of 10 years. Even if you don't have the initial money to put down you'll be able to get the money if the price is right whether from your mentor guy or someone else. Depending on the price you negotiate you may end up owning a piece of a great value add opportunity. Once you've started the negotiation with the seller then go to your mentor dude and tell him you're negotiating a great deal on a three property portfolio that could potentially be bought for X price that after a value add rehabilitation will rent for Y dollars per unit providing a new value of N when the refurbishment and re-tenanting is complete. Now is the time to work up a budget on what you think the refurbishment will cost per unit in each building, what exterior improvements will cost and what time frame and cost you will incur in getting the refurbished units rented to higher paying tenants. Then use the new projected rents to work up a proforma to determine a projected cash flow from the refurbished properties. If this sounds like a lot of work it is, but it's how every value add investor approaches a value add deal. You need to understand what you can pay for the property as it sits based on what the rehab and re-tenanting will cost. And once complete what the property cash flow will look like which will help you determine what the new values would be for each property when your done. This will help you also determine your exit. You and your investment partner will have to figure out whether you'll exit to earn the gain or if you'll refinance them to retain the cash flow. Now, as for negotiating your position in the deal. If you don't have the ability to make an investment of equity then ask for a percentage of the upside in the deal. That could be anywhere from 5-50% of the deal. Since it sounds like you don't have a lot of experience in these matters then get what you can in terms of percentage and use the deal as a hands on learning experience. Keep in mind that if your walking into a meeting with a potential partner with a deal in process or a negotiated deal you'll have a bit more leverage to get a bit more equity. I'd go for the equity play over earning a fee.