All Forum Posts by: Account Closed

Lots of issues so I am not sure the following applies but here goes our experience with these type deals.

1. very difficult to finance unless you get all the units.

2. if you have all the units, then there is no real HOA so i do not understand you comment regarding the seller keeping the HOA ownership.

3. if you are only purchasing a portion of the total units, you are really only buying a bunch of SFR at one time. Most states control/protect the other owners under the HOA so that you really do not have a control on most cost.

4. Many investor owned projects no longer qualify for fannie and fha loans if more than a certain percentage is investors owned.

5. THIS NOT A MULTIFAMILY deal if you are not buying all the units. IT IS A PORTFOLIO purchase. As such you may gain some economies of scale but you really are buying individual properties and your strategy should be similar to any SFR purchase.

6. I would be very hesitant if my strategy was to ultimately acquire all the units because there will always be holdouts that may spoil the plan.

7. Lastly, if the seller is the developer, you need to get a copy of the HOA board minutes because there may be many undisclosed issues.

97% loans is too far up the capital stack to be called a loan. Most lenders on commercial properties stop well short of 85% so that the 97% most likely involves some form of equity. 

As for the fees, the dollar amount can be all over the board depending on the lender but on most larger commercial projects it is not uncommon to incur  significant underwriting cost for appraisal, environmental, PCNA reports etc.. These can be well over $50K.

FIREA rules require that the lender order these reports  so that a mortgage broker can not order these. I would run from any mortgage broker that is asking that you deposit money for an unknown specific lender. 

Mortgage brokers are not dishonest people and most are very legit. Unfortunately, many borrowers seem to think that because most  work on a performance basis that they work for free. Over the past 10 years, the number of unqualified borrowers has dramatically increased and many mortgage brokers have taken aggressive  positions on screening clients.  Our firm only works on an exclusive basis and undertake clients only after an extensive mortgage credit review.

As a Fannie Mae and FHA Multifamily underwriter, your replacement reserve should be based on the overall economic remaining life of the building. In other words, if the property has a remaining life of say 40 years, in theory you would replace most of the replaceable building components over that time frame. Using this formula and your 200 unit project, it would be safe to assume that at least 40% or more of the building components would be replaced. So---40%/40 years equal 1.0% annually of the new replacement cost. New replacement building cost is probably well north of $300/sqft. or $3.0/sqft. At a minimum your replacement cost would be around $3600 per unit.

Obviously, this would be cost prohibitive for most investments and so generally you see budgets that show capital accounts with large infusions staged over extended times. Additionally, most investment are not intended to be held that long and each subsequent owner recapitalize the asset/property extending the economic life of the building.

Quick word on replacement reserve -  replacement reserve is for major systems, not normal wear and tear maintenance. Replacement reserve typically breakdown into three groups, mechanical (electrical, plumbing, hvac), structural (stairs, elevators, roofs, windows), foundation ( parking, grounds, sewers).

Unit replacements such as carpets, counters, appliances, paint etc..while capital expenditures, are separate from the calculations above. 

All said - Most lenders prefer replacement reserve greater than $500 and usually rely on an physical needs assessment to determine cost over a 5,10, or 15 year period. FHA and loans over 20 years usually require substantially more.

almost true, if the tenant leaves with out notifying the utilities, the landlord can get stuck with the bill. You should notify the utilities to transfer to you and also to the new tenant to avoid hassle

Reality Check;

Forget your cap rate and focus on the actual money.

Your expenses will probably be in the $3500 per unit range - that's about $56,000 annually.

 yes you might operate for less but that is why it has deferred maintenance.

Laundry income should not be included when comparing cap rates to other projects unless they also have similar arrangement. Either way, who owns the equipment and what's the cost off upkeep?

Texas is a "mobile" community - turnover statewide is close to 50% so budget accordingly.

From the sound of it, your deferred maintenance will cost you over $2500 per unit o cure. you need to see if that can get covered in your financing, if not you leverage might not be as good.

Lastly, if after you recalculate, the cash on cash makes sense given the work that this deal will require, then best of luck.  Make sure you develop an exit strategy as part of your analysis so that the work you do going in is targeted to that - no - buy and hold is not a strategy, every investment has a lifecycle (some longer than others).

Old joke;

Guy writes in to Ann Landers and ask for advice, He tells her that he is meeting the inlaws for the first time and proceeds to tell Ann Landers all his faults such as being divorced several times, has several estranged children, that his father is a murder etc.  He ends by saying that his question is should he tell them that he is a real estate developer?

Act shy and coy and tell them that you are simply in the real restate business but that your looking to make a change.

Wife's credit is not applicable since you are in a community property state. You need to sell the property to an entity that your wife controls. Issue will be your wife's income ratios. This might be a good time to sell out right. The market is hot and most are starting to think that we might be at the peak. 

Karla, We just formed a new relationship with a new but very experienced team. Please pm me and I will get them your info.

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Anton- I appreciate your insight and its clear that you know your markets. As a former Director of Multifamly for Fannie Mae and MAP underwriter, I am very well aware of all the requirements and conditions. Jerry's situation is subject to many conditions and assumptions that clearly are subjective to  any specific deal which is beyond the scope of this forum.