If the link above doesn't work.. here's the Blog post
In July 2016 I found myself itching to dive into another investment. I had found myself very intrigued with a 10 unit in my local market that had been for sale for over a year. In fact when it first hit the market I remember running the numbers, only to confirm what I already knew; the property was priced WAY over market.
The property is located in our downtown area on one of our main roads heading into town.
I literally drove by this property twice a day, every day.
Through random MLS searching one day, I noticed the price on the 10 unit had been reduced (by 20%). So... I decided to run the numbers again.. and again, and again, until I backed into a potential purchase price that I felt comfortable with. At this point in my REI career, I had only purchased SFR. I owned 5 rentals and had executed on two flips. It was after doing some more reading (books, blogs, and bigger pockets) that I knew multi-family was the next step for me.
After coming up with what I thought was a fair purchase price, I made an appointment to tour the property. Although I am a licensed Broker myself, I knew the listing Broker (network) was very familiar with the property and I had a relationship with her. I asked her to escort me through the showing. This proved to be very beneficial, as I found out during the tour that the reason the owner was selling is because they were retiring and moving down to Florida. On top of that, they had sold 16 of their 17 properties and THIS was the last one.
After the tour I immediately called a local commercial banker (network) whom I had known for several years and asked for a meeting.
Financially, I had the money to put down on the property, but I also had equity in other properties as well, and did not want to liquidate my cash reserves into this property. I knew the property would Cash Flow without a down payment, depending on purchase price, and wanted to leverage my equity if possible. After several visits, and proforma's I finally received approval to not only leverage my equity in my other properties, but also use the value of the property in the LTV (loan to value) calculation as well, regardless of purchase price. As many of you experienced purchasers know, typically lenders allow you a certain LTV lets say 75-80% based on the lesser of cost or purchase price. My lender was allowing me 80% Loan to Value (not loan to purchase price) with a 20 year amortization, and a 4.00% fixed rate for 5 years.
Let me get to the Numbers:
Original List price - $800K
List price after reduction - $550K
Purchase Price I felt comfortable with after running numbers - $415K - with fees that would be rolled in to debt - $425K
NOI - $42,600
Debt Service - $27,700
Cash on Cash (if I had to put 20% ($85K down, which I didn't) - 17.5%
Annual income after DS = $14,900 - $425K - 20 year am. 4.00% interest
With all this being laid out, I decided to make an offer. In my mind the property, assuming a 10% cap rate, which is typical in my area, I valued the property at roughly $450K. I have something that I firmly believe when making an offer on a listed property:
Your first offer should (almost) offend the seller
That being said I called up the listing Broker and told her I wanted to make an offer of $380,000. This would turn out to be a (still unknown) costly mistake. When comparing to my comfortable price of $425,000, $380,000 doesn't seem TOO low, but keep in mind, the property was listed at $550,000. I knew they wouldn't accept, but I wanted to give myself some wiggle room when they countered back.
While I thought this to be an almost offensive offer, I later found out that I did not put enough stock into how bad they wanted to move on from their life as landlords and enjoy being retired in FL.
The phone call I received from the listing broker later that day was bittersweet. She called and said "Adam, I can't believe this is happening, but the Sellers have accepted your offer".
Emotions were running - on one hand I was extremely happy I was getting this property at such a great price, on the other hand, if a seller accepts your initial offer, there's a 99% chance they would've accepted less. How much less?? We'll never know - this is why I referred to my offer earlier as a mistake. If that's the only "mistake" I make when investing though, I'm sure I'll do ok.
I received their signed acceptance the next day and took it to my lender. The first part was done. The property was under contract. The second part, was not yet finished. I still needed the property to appraise at $395,000 or more, for me to get the financing without any cash out of pocket. This extra $15,000 on top of the $80,000 in equity in my other properties would bring a total collateral value of $475,000 and provide that 80% LTV.
The property valued at $425,000. While I wasn't too worried, and actually thought the value of the property was around $450,000, I believe that $425,000 valuation was influenced by the lower purchase price of $380,000. Either way, I was able to move on to closing on the property without using any money out of pocket. I even rolled all of my closing costs into the deal.
About that $10,000+. As I mentioned earlier I'm a licensed broker in Michigan. I was able to acquire my license without ever being an agent for another Broker because of my 5 years I spent as the Special Asset Manager for a Community Bank. The buyer's agent commission was 3% of the purchase price. This was the icing. I had just purchased a 10 unit property, in great condition, in a great location, which not only cash flowed, but also had tremendous upside (i'll get to that in a second), AND I walked away with a check for $11,400.
some of you may think that was a bonehead move. That I should've leveraged my commission by lowering the purchase price to avoid taxes. Truth is I had enough expenses to wipe out a large portion of that commission and I wanted to put some $$$ into rehabbing one of the units for a tenant that had let me know he was going to be moving out in 2 months.
Fast Forward 1 year:
I have increased my net operating income to $53,000 by rehabbing two units, cleaning up the landscaping, getting less expensive insurance, decreasing mowing/plowing costs, and increasing rents. I had the property reappraised a few months ago, and it was valued at $530,000. With the equity generated in the 10 unit, I was able to get the Bank to release the lien on my other properties which had originally secured the deal.
I wish every deal worked like this!
