Building an Investment Fund to Buy in Cash & Sell the Business

[Roy Assaf]

Hey all,

One of our company’s niches is acquiring vacant 2- to 20-unit properties for a significant discount, fully rehabilitating them, leasing them out, and selling them. It works well for us because we have built reliable teams (consisting of a professional general contractor, a property manager, an appraiser, and an inspector) in our markets.

We have several ways of finding these discounted deals, primarily off-market. This one is located in the Myrtle Beach MSA, and one of our boots on the ground, who was born and raised in the area, specializes in sourcing residential and commercial deals directly from sellers or banks.

He called us in October 2019 to inform us of a vacant quad in the suburbs of Myrtle Beach, an area we are very familiar with. Within 24 hours, we put it under contract for $161,500.

The property was in probate court, so we added a clause to the PSA stating that our 21-day DD period begins only once our attorney receives a clear title. Since the seller was eager to sell and had multiple interested buyers, even though she knew it may take a while due to the probate court's backed-up cases, we offered a short DD period, $2,500 EMD once the PSA was ratified, and as soon as the title was clear, another nonrefundable $12,500. We didn't have an issue offering the nonrefundable $12,500 because we knew that by the time the title would be clear, we would have completed our initial underwriting and would know if this deal was for us or not.

Fast forward nine months. Early in June 2020, the title was finally clean, and we officially started our DD. By that time, we had:

1. - completed inspection,

1. - completed a walkthrough with our general contractor and had a detailed SOW,

1. - conducted appraisal,

1. - completed our five-year financial analysis and prepared the OM, and

1. - started our new fund with a $1.5M budget to buy residential and multifamily.

We quickly closed on the property in mid-June, and our contractor started rehabbing the property on the day of closing. (We signed a rehab agreement prior to closing.) The rehab’s estimated completion date was November 1; but our contractor, with whom we have worked for over five years, completed it in mid-September—which is always good news.

The intention was to lease out the property and start collecting rental income, but in August, one of our colleagues approached us to purchase it from the fund, as he wanted to own it. Instead of selling him the property, we decided to sell the entity that owns the property and included the insurance policy and rehab agreement. We ended up selling him the entity in mid-August, and we introduced him to one of our property managers in the area to manage the quad once the rehab is completed.

In the end, the numbers worked well for us:

• Purchase price – $161,500
• Closing costs – $2,000
• Finders fee – $1,500 (our colleague received most of his fee from the seller)
• Rehab – $48,000
• Total cost – $213,000
• Sales price – $280,000
• Closing costs – $2,000
• Profit – $65,000

The buyer reimbursed us the holding costs.

Our takeaways from this deal are as follows:

1. - Having a fund with access to cash makes it easier and quicker for us to close deals.

1. - Having a reliable contractor with an agreement that protects us makes a big difference.

1. - It is crucial to always be open to changing exit strategies if it makes sense financially.

1. - Knowing our market trends, as well as the area cap rate, rental rates, absorption rate, and operating expenses, makes underwriting more efficient.

1. - With the right system and the right team on the ground, we have added this strategy of buying 2–20 units (mostly vacant), fully rehabbing, renting, and selling as one of our primary niches for 2021.

1. - Relatively smaller deals can be done in a shorter period and can produce great profits for both investors and us.

I will be sharing more of my company’s stories in 2021 to keep encouraging investors out there to jump in and enjoy the fun world of real estate.

Roy