All Forum Posts by: Marc C.

Personally, I like to look at who the Listing Agents on Loopnet are for properties in my category. I also search Realtor.com for apartment listings and see whose names come up over and over again. Finally, I'd joing the local REIA and ask there.

In each market there are 4-5 agents who do a large percentage of deals. You want to meet with all 5 of them in person, with a one-page write-up of your business plan (on your company letterhead) and what you are looking for, then follow up with them by phone or email weekly, in the hopes they call you with their next pocket listing. When they send you deal, send them feedback about EVERY deal with what you liked and disliked about it, so they get a better feel for your needs. Send them an article or two when new data comes out on the market, by mail if necessary. Find out when their birthdays are and send them physical cards. Also, after you meet with them the first time, send a personal thank you card by mail. 

Just remember: They are hearing from TONS of buyers from all over the country these days. They will quickly assess whether you are worth their time or not. One way they will do that is if you visit them in person, not just by phone. Just don't expect too many deals to flow your way, as there is tons of competition...a Greater Fool from California who thinks a 6% cap rate is a smokin' deal is going to beat you out much of the time, but who cares? Move on to the next one. 

Finally, as I have posted in other discussions, I am getting good results finding off-market deals from direct mail directly to building owners (20-50-units). In this range, you find the Mom and Pops looking to retire. Takes time to prepare all of them mailings and make them look good (hand-written envelopes, real signatures on a one-page letter). Just got started, but response has been good; 6 out of about 120 letters, so 5%. And they are all serious sellers so far. For two of them, I had an LOI to them within 72 hours. Haven't done any deals yet, but working those two. If they don't sell to me, I will send them the same offer in a couple of months.

Don't forget: One of the reasons you meet with these brokers is that you want recommendations on managers, architects, lenders, contractors, appraisers, etc. You'll get the same names from some of the brokers...a good sign. 

By the way, I'd be an investor in a KC apartment building if it's over 20 units and you have experience. I know the market pretty well and visit there a couple times a year; I can take the train from here today today at 1:30pm and arrive in KC ready to work at 7:30am, with a rental car waiting for me. I like walkable neighborhoods and buildings that have some upside. 

Curious how many are doing direct mail. We are getting some success that way, as I described in another thread. The people who respond are over 70 and looking to retire. I make sure they get some kind of LOI/offer within 72 hours. Paying no commission and seller financing options seem to resonate with these folks.

I just wish I'd been doing direct mail all along instead of just looking at broker's listings. 

By the way, if you make an offer, use a Letter of Intent and not the Realtor's purchase agreement. Saves them time in writing up an offer that will almost certainly be rejected (due to that appraisal). Appraisals are pretty worthless to buyers...they are something that only banks need to rely on. But the seller gets the appraised value stuck in his head. Just looked at a 4-plex recently that had an appraisal from last year for $167,000, but that is about $30,000 above what I would pay for it. I risk insulting him with a low offer, but if he doesn't take it, I'll have only wasted a half-hour to write the LOI and a stamp to mail it. My LOIs have 3 options: 1.) All cash, closing 90 days after the Seller gets us all the property records, price subject to appraisal and time subject to lender's performance; 2.) 20% down, Seller finances balance over 10 years, closing 21 days after the Seller gets us all the property records, 3.) 0 or 5% down, closing 21 days. In all of them, I include the TOTAL amount the seller receive, including the interest (5%). I also describe the percentage of taxes they will likely incur next year as a result of the sale.

I will say that, in my market, we are getting a pretty good response on direct mail to apt. bldg. owners. Everyone gets a business card on a magnet that touts "We buy apartments and mobile home parks." "We are local investors." "We are not Realtors; no commissions" and gives our Facebook page as a place to go for the latest multifamily news. Probably should add, "We will make you an offer within 72 hours." Who calls? The guys who want to retire; they aren't in a hurry to sell/not desperate, but like not having to pay a Realtor, AND they are interested in seller financing to supplement their income. We will send everyone another letter in 3 months, perhaps with an article in it about the local market. Postcard 3 mos. later. Someone is ALWAYS looking to retire. 

Can't believe I wasn't doing the letters for the last 3 years instead of looking at overpriced broker deals. And I can't believe this strategy wouldn't work in other markets besides ours (Santa Fe / Albuquerque, New Mexico.) 

Low cap rate, low CoC return, expenses seem artificially low (5% management?) total expenses need to be near 45%, vacancy rate listed as 2% units but it has 25% now? Put that in a deal analzyer of your own and you won't like that answer.

If it's near you, I'd make a low-ball offer at a realistic 8% cap with 5% seller financing for 10 years: "If you're not embarrassed by your offer, you're offering too much." Maybe with 5% down and a wrap around his current mortgage (perhaps after he puts it all in a trust and sells you the beneficial interest in the trust...save the confusing details for later.) Include in your offer your own APOD with realistic numbers which justify your lower price. 

But the question is, even then, is it worth an 8% cap? How much upside is there? Is this an amazing neighborhood with high walkability and the units just "rent themselves" as a result? Hard to believe with 4 vacancies. Can you raise rents on Day 1? How do they compare to the neighborhood rents and home values? What would $50K in fix-up due to it and the rents? You can't cut expenses much if at all, it appears. 

No recommendations on a particular site or service anyone else has used? What, no one here partners with strangers, or no one does background checks if they do? Maybe I'm posting in the wrong forum; maybe hard money forum would be more appropriate? 

I don't know your market, but, on the face of it, I think the numbers look acceptable for a small property. 

1.2%/mo. in gross rents. NOI=$1178 x 12. Price is $200K. 7% cap rate. No screaming deal, but a "decent" first project to learn from. What's your total ROI over a 5-year hold, assuming rent rises 3%/year and expenses 2%. Would like to see that at 20% or more (it's all hypothetical though). If the ROI is lower, can you put less down on the loan to increase it? (Make sure you are including your closing costs on purchase and sale to compute.)

 5% vacancy is probably unrealistically low unless there are long-term tenants (which often means the rents are below-market). How does it look at 10%? You can compute the actual economic vacancy once you see the seller's actual numbers.  

Just my two cents; others' experiences may differ. 

Marc

@Anthony Chara - Not so much background checks for investors, but as an investor looking to place money with a sponsor. You certainly want to know about who you are handing $50K to, right? If you don't know the person otherwise? Is what they've told you about themselves the truth? 

Sounds like a great topic, Ted. Funny, we are trying to get a property manager to talk to the Apartment Investors Breakfast two days later. - Marc

A local investor I have met is doing a J-V deal for a 9-plex with a stranger who has only done one previous property, and it was recent. Does anyone have a service they recommend for doing background checks on one's investors or deal sponsors? At a minimum, it seems one should run a credit check, employment verification check (to verify their past is what they say it is), criminal background check, bankruptcy check, perhaps research previous LLCs or corporations the person has formed. Checking references from previous investors would certainly be appropriate, but who ever gives a bad reference? 

One would need a release from from the person being checked before proceeding. 

Anyone know of a service that could do this? I guess a tenant screening service might suffice for some of it, if you're set up with one and get the investor/sponsor to agree to play tenant. But there are also companies that do background checks specifically for business issues. Any recommendations?

Bill Gulley is right: This is not an easy subject, nor one that can be trivialized. The repercussions of getting it wrong are huge (not just trouble with the SEC, but your state securities regulator and also your investors, who have been known to sue when all of the risk factors of a deal were not disclosed to them and the deal turned bad). 

Start with your state securities office. Ask to see some of the filings others have made for real estate. Many states have an intrastate exemption that is far easier to deal with than the restrictions on SEC private placements under Reg D, and let you advertise your offering to in-state investors. Intrastate exemptions are often available to non-accredited investors, while offerings under SEC Rule 506c are available only to millionaires (but you can advertise them...it's what all the crowdfunding sites are using). 

Under rules 505 and 506c, however, you may include up to 35 non-accredited but "sophisticated" investors, but these two exemptions require audited financials and you can't advertise your offerings...you can only promote them to those with whom you have an established relationship. And sophisticated investors need to be people who understand real estate investment fundamentals and have business experience...people who "get it" when you talk to them about a real estate deal. 

After you have developed a PRIVATE network of potential investors with whom you have established relationships, you can show them your "sample deal" one-on-one and ask if they would like to be notified when you have a deal that looks like it. But these folks should be accredited investors/millionaires, or, in the case of the intrastate exemption, state residents (and I would suggest, sophisticated investors you've met through REIAs, etc.). Make sure you are dealing with people who can afford to lose ALL of their investments; don't be thinking you're going to take a substantial portion of Grandma's life savings. Personally, I think it's dangerous for anyone to stick more than 5% of their assets into in any one deal. 

Once you have a real deal signed, then you need a securities attorney or service to draw up your Private Placement Memorandum, Form D, operating agreement, and subscription agreement before you talk to potential investors about it. Personally, I'm going to use Reg D Resources, www.regdresources.com. They prepare everything for a 506c offering for $5500 (except the LLC operating agreement), about $4000 less than a local attorney wanted, and for a far better looking PPM. They've been doing this since 1999, and their documents meet the tougher Form 1A requirements for small public offerings (so they work great for state private placements). The only thing I am using a local attorney for is my LLC operating agreement, which shouldn't be one of those "stock" agreements you see online for free or $29. (Case could be made that one could "borrow" an LLC operating agreement from someone else's known deal on a crowdfunding site, then submit it and all the docs done by Reg D Resources to a securities attorney for approval as the last step, rather than the first.)

Be ever so careful! Don't discuss specifics of any real deal (such as rates of return) with anyone until you have filed Form D with your state securities office and the SEC and have your prospectus/PPM to show. Let your lawyer-approved documents do the talking, and don't deviate from those documents one iota when explaining the deal to investors (ideally, in person and in private after many previous meetings).