Have seller who wants to sell to me about 50 properties - what to do?

[Uyenchi Ho]

I have a 2-fold question:

Currently I have a seller (also an investor, I'm sure) who wants to sell to me about 50 of his properties.  I asked if any of his properties are listed and he said no. This is true, I looked it up. I looked up his profile and this guy owns like half of Northern California.  So my question is how do I approach this? Do I go through one property by one property (will be extremely time consuming to physically inspect all the properties since they spread all over the Bay Area - and that I'm still working full-time at my current job - and make each offer one by one?  This seller doesn't seem like a distressed seller (and I admit this is an extremely important factor in making wholesaling work), but I'm hoping that because he's selling in bulk, I can still get a great deal - or 50 great deals - for my cash buyers.  First question: should I even waste my time on this since he's not a distressed seller? 

 Question 2: Let's say I pursue these properties, I have a list of about 15 cash buyers who are waiting for me to bring them deals (I have one who owns 500 plus properties and said he's waiting for me to bring him more.  He said he can buy a lot of properties with all cash, so I would bring these deals to him first.)  Based on what I've read on BP, I've learned that I shouldn't bring any properties to my cash buyers unless I actually have them under contract.  My fear of getting these 50 (or even 20) properties under contract and my cash buyers don't want them.   I don't want to be stuck with 20 contracts/properties. How do you recommend I approach this situation? Any thoughts would be greatly appreciated.  

Thank you.

[Bill Gulley]

Well, here's a book coming....

Investors may turn properties as the rate of depreciation decreases, his motivation can simply be financial taking in tax implications. They may also be the runts of the litter, poorest performing, but poorest performing for one doesn't mean poor performing for another.

It's possible to pick up about 10% of the value of the portfolio for yourself. You might sell 45 for the price of the 50, keeping 5 for yourself.

The seller may also have other properties he would be willing to sell, most likely as in larger holdings there are many ways to get to the goal the seller is seeking.

First thing to do is to set up the structure of the deal, sight unseen of the properties, determine what the goal is, what you need to do is to establish 50 properties that may be sold, not necessarily the 50 he picked out. Price is irrelevant at this point.

A good excuse to move to a cherry picking structured deal is geography, any buyer will be willing to take more at a better price if the properties can be better managed, if his list has homes 30 miles away that's a management problem.

Another issue can also be local jurisdictions, code requirements, rent stabilization or governmental influences that may make management more difficult or limit potential.

So, I'd try to solve the seller's problem, open the possibilities to selecting a portfolio. If the seller won't go there, fine, but his price just dropped.

Now, selection process, select geographic areas, where do your buyers operate and where are they willing to buy. If all are in the city, then break it down to neighborhood.

The work begins, individual analysis. Understand you may have $50K + in settlement costs, title search and insurance, settlement and filing fees.  Inspections? BPOs?

His books will need to be open, you need the rents, vacancy rate, taxes, legal description and street address along with his asking price. His CAP rate is irrelevant to you and your buyers, his rate will not be yours or theirs. 

Now, what are they worth? Ask your buyers what their cap rate runs, what they look for and use those to value each one. I've picked up portfolios at just over 25% discounts from individual investors, they will usually be between none to 10%, some may hit 15% with more motivations or depending on property conditions. Above that you'll need to justify a discount, these guys are not Larry Landlord. Add up the portfolio and apply the discounts, add in settlement costs, and you'll have a basis. 

From that work the cash flow, maintenance, taxes and insurance, assume a cash transaction. Your pro forma will then determine the estimated cap rate and ROI of the entire portfolio. 

Time for some due diligence, it's going to take awhile to drive by and stare at 50 locations, you don't need to go in at this point and do not disturb the tenants. 

Take notes on each so you can identify the address, the legal and the subject property description. Note the condition, appearance, you can usually tell the layout and look for outbuildings, shared driveways or other obvious encroachments that could be an issue later on, if so, note those. Rate the neighborhood as well and record driving instructions from a commonly known point or major intersection. Google map them.

If you are cherry picking, you may have 70+ properties to consider!

Now, you're ready for an offer.

(SORRY FOR THE ITTALICS HAVE NO IDEA WHAT HAPPENED AND CAN'T CHANGE IT!)

I suggest you use an OPTION, not a sale contract, especially not a cash offer sale contract.

Your seller needs to know that you have buyers and that while you may buy some properties yourself your intention is to split the portfolio, the seller WILL NOT CARE! The seller probably all ready knows you're not buying from discussions at this point, seasoned investors can spot newbies in less than a minute.

I suggest an option that includes all selected properties at a price broken down per property, the option can become a sale contract after due diligence, inspection and at that point your buyer can approve each.

Another way to "lock up" the deal is to form an LLC as the buyer, you put yourself in as a managing member and admit other members prior to settlement. This is a sizable portfolio, this is what, at least 2.5M? Could be much higher. The Operating Agreement between you and your buyers will allow for your exit after settlement.

There isn't going to be any hiding of the purchase price, this is not going to fly with sophisticated parties as the gurus layout! Justify your work and putting the deal together. This needs to be accomplished with your buyers before you go any further too. As soon as you determine how this may be structured as mentioned above, get with the buyers and come to an understanding, if that can't be done, then you may seek a "finder's fee" of some kind and just walk with that. There is too much work to do without knowing you have serious buyers. I doubt the seller will be giving you months or years to peel off single sales, that is not his objective. Full Disclosure is required!

Settlement costs got to the seller and your buyer(s).

Of course it's subject to title, it's also a good idea to have backup properties of similar value so that in the event you get all the way to settlement you can substitute for any property with issues after due diligence or title concerns. These can be identified in the option contract with stated values.

If this is all over your head......call me, LOL!  Good luck :)

PS. Maybe a moderator can clean this up, sorry again for the script error. :)