Techniques For Buying Undervalued MultiFamily Properties

In the last few years I've been investing in multifamily properties in the Seattle area to hold for the longer-term. I try to target undervalued properties where there exists some creative acquisition angle allowing for the creation of immediate equity and cashflow.   These are the three techniques I've focused on so far:

1) Foreclosure Auction
My first investment property (besides renting rooms in my own house) was a duplex purchased the King County foreclosure auction in Seattle.  Multifamily properties are more rare at the foreclosure auction than condos or single-family homes, but they do show up every few weeks.  As a buy-and-hold investor, I was able to outbid some flip investors who had to allocate for spread for their renovations, transaction fees on the sale, and short-term capital gain taxes.  My strategy was to purchase the properties at auction using a high-interest hard money loan, fix up the property and establishing tenant leases via my Property Management company, and then refinancing out of the hard money loan into a 30-year mortgage.

The beauty of this approach is that properties can be purchased at a large discount, and value can be created through both the renovations and updating leases to market rates.  In many cases, the previous owners had to lose the property because of managing tenants poorly and getting far less gross rent than would be naturally achievable in the area.  In most cases with foreclosure properties, there are many deferred maintenance items to be done, or even major damages needing to be addressed.  Nonetheless, provided the property is purchased at a big enough discount, money can be spent on renovations and the final after-fixup value will be greater than the sum of the purchase price, holding costs, and renovation costs.

2) Seller Financing on Underutilized Properties
Sometimes a multifamily sits on the market for a while because the Gross Income is too low for a buyer to purchase it and immediately cashflow.  It could be simply because the landlords are renting the units far below market rates.  In these cases, I might make an offer with short term Seller Financing between 6 and 18 months, during which I can perform incremental renovations, gradually increases rents and get updated leases on all the units, and then refinance once the value has been increased.  This works especially with 5-units and more, because the appraisal will be done as a commercial loan which puts more weight on the Income Approach to property valuation.  This short-term Seller Financing can be a nice win-win, because the Seller might not get the initial Purchase Price they want, but their Gross Proceeds (sum of Purchase Price plus Interest) will meet their needs.  I will try to write a personal letter or meet with the Seller to build their confidence that I will successfully meet the terms of the Seller Financed deal. With a Seller Financed offer, I might offer a quick-close and waive inspection so the Seller can unload the property quickly, especially if they are motivated by circumstances such as a divorce or medical issue. It can be a big relief to get a straightforward offer that provides the Seller with an appetizing exit path.

3) Long-Term Seller Financing
Sometimes a landlord wants to unload a property they are tired of managing, particularly if they don't have a Property Manager and have become worn down by dealing with tenants and repairs themselves.  They want to step back from the day-to-day management of the property, but they are still attracted to the idea of having a regular investment income.  If they sell the property with Seller Financing, they become the Lender on the property and receive regular monthly payments comprised of principal plus interest.  I would categorize Long-Term Seller Financing as anything 5-years or longer.  Usually there would be a balloon clause where the full remaining balance needs to be paid after the specified amount of time (for example 5 years, or 10 years).  If I can get long-term Seller Financing, I can give a more aggressive offer price knowing that I am saving in the following ways:
- No expensive appraisal (can be $2k on a commercial property).
- No lengthy back-and-forth with loan processor calculating debt-to-income ratios and satisfying all the detailed documentation.
- No underwriting fee, or loan origination fee.
- No title insurance policy for lender.
- Able to buy with a quick-close and avoid missing other deals that sometimes have to be passed on while in the middle of a touchy refi.

Conclusion
There are often win-win scenarios where properties need a few months of time/effort upgrading tenants, performing construction/maintenance, or simply taking over the day-to-day work of managing an property.  By building a team that can effectively perform these tasks and having access to hard money or private money, it is possible to acquire properties and build in immediate equity and cashflow, while also meeting the needs of the Seller.