Analyzing First deal in Miami

[Imran Raz]

Hello,

I am a new investor and would love to get feedback from this forum regarding this deal I came across. Below are the details.

According to the spreadsheet I am using this seems like a good deal. My taxes estimates are bit higher than current taxes. According to the broker all units are currently rented on one year lease, only one unit lease is coming up this month. No obvious issues to fix. The rent multiplier figure provided by broker is 7.18 and Cap rate is 10.35. 

Am I missing anything in this analysis?

[Thomas Franklin]

@Imran Raz Let me begin by stating Real Estate Investing is a business and should be treated as such were decisions are void of emotions. Just because someone has a name and a professional title does. It guarantee that he/ she is proficient, in their field. In essence, you are a "babysitter" and a "policeman" making sure everyone is doing their job, fulfilling their contractual duties, operating with an acceptable level of ethics and integrity, etc. Regarding your Escrow Deposit of 10% is ridiculous as is not wanting you to have a "Subject to Financing Clause." The typical amount placed in Escrow is 2-2.5% of the Contract Price. I owned 500+ units housed in multi million dollar Apartment Buildings. I never placed more than 3% of the Contract Price in Escrow. You need Contingency Clauses, in your Sales Contract. These are your outs. I typically use the following four.

1. Subject to Financing.

2. Subject to acceptance of Inspection Reports.

3. Subject to acceptable review of last two years of Federal Tax Returns.

4. Subject to Clean Title.

I will explain the Contingency Clauses above.

1. Subject to Financing. (Self explanatory)

2. Subject to acceptance of Inspection Reports. (You want to have the major systems inspected such as electrical and plumbing to ensure there are no major issues and the aforementioned systems are fully Code Compliant with the County and if applicable Municipality Building Department. In addition, you want to have the roof and foundation inspected. You also want to inspect random units, of YOUR CHOOSING)

3. Subject to acceptable review of last two years of Federal Tax Returns. (You should assume that 90%+ of the numerical data you receive will be false to have the property appear it is performing better then it actually is. You asked me if the Seller's Accountant prepare the Income and Expense Reports. The answer is NO unless the Seller's Accountant is managing the property. If the property is professionally managed, the Income and Expense Reports should be prepared by the Management Company. ACCEPT NO LEDGER REPORTS. If the property is self managed, the owner generates the Income and Expense Reports. If the owner provides you hand written reports, this would raise a Red Flag. You asked me how do you verify the numbers, on the Income and Expense Reports. This is where this clause comes in to play. A Seller can fudge numbers to initially hook you, but should not be fudging these numbers, on his/ her Federal Income Tax Return.

4. Subject to Clean Title. (Every jurisdiction is different, but in general O&E (Ownership & Encumbrance) REPORTS only cover the last recorded deed, and any encumbrances and judgments publicly recorded against the property (in rem matters). MUNICIPAL LIEN SEARCHES cover anything that is NOT recorded (not in public record) for any and all city, county, and state entities/ agencies' outstanding balances (i.e., code enforcement liens and violations, unpaid utility bills, real estate taxes, etc.). TITLE SEARCHES are searches that examine the chain of title prior to and through the current owner, but includes searches against the current owner (in personam matters) where IRS LIENS may be missed when only relying on O&E Searches. I have years of experience in the title/ settlement agent business and I see this mistake happen more often than not. HENCE, if you are to engage in any due diligence prior to making an offer, spend money on an O&E Search (but make sure your title company includes a search against the person if they don't do so), and a municipal lien search.

If an issue comes up during an executed contract (i.e., code violation, judgment, etc.), renegotiate the purchase price, assess how to clean up the issues that are clouding title, and try to turn it into a Win-Win Situation. Of course, I only negotiate liens/ judgments where the entity will play ball. See the green in liens! If the seller and/ or entity is unwilling to negotiate, I walk and move on to the next deal.)

In conclusion, many of these Sellers need to be educated. I have seen Sellers offering Owner Financing with a 50% down payment which is also ridiculous. One thing that is imperative that you do is have the following three questions honestly answered. Why is the Seller selling? What does the Seller need? What is the Seller's level of motivation to sell? This information will help you, in negotiations.