All Forum Posts by: Anthony Mott

I agree with most of the points Andrew just made and I think his analysis is worth considering on your standard deal. However, I would bet that the likelihood of the actions of this owner and his decisions vary from your "normal" deal. I would be shocked it their wasn't several reasons that affect this deal and his motives for selling.

   The seller is 80 years old and the original builder, well he likely hasn't made some of the repairs because he didn't care about them and it wasn't worth the cost or time( Yes, I think an 80 yr. old owner whom is basically living of it, it not going to spend $500 dollars on a new sign). While I won't really get so heavily into assumptions, I actually think that you are in a great position for a low-risk transaction.

I would ask him to NNN/option it. There are several vehicles that would allow you to go about this but you could simply do it through a Joint Venture LLC and as part of the JV agreement, have a PPA included. If you offer to do a NNN lease option with 100k down and 1,3, 5 year options. You will very likely be able to get him to accept it based on why I would assume he is selling. If you are going to manage the property and he is in the area then he might just want to make sure that he doesn't lose so much value(because of estate taxes)if he was to pass away or based on your description, he very likely is being told to sell by his Legal/Accounting advisor. The fact that he hasn't raised rents or made significant improvement to the property would almost guarantee that he could be making certain assumptions for depreciation and it would still require him or his heirs to incur a liability solely based on the Tax Basis, then because you will be acquiring a below market lease.( Rents have been raised since he has owned the place. 9 years ago he likely stopped raising them because of the overall market conditions at the time and he likely just doesn't care.

Raise the rents right now. I would look at the existing lease  and see what % the clause allows. It would be very rare to go nine years without raising the rents because of the condition of the property( this would be a plausible explanation if the building was in shambles). I think you will find out that he just didn't care about it. I wouldn't be surprised if he also might just be increasing his tax liability, which would almost surely  affect his Social Security and the distributions he takes from it.

Either way, the PPA would protect you regardless of how you do acquire it. Because he has owned the property, there are huge advantages for him to partner with you. 1) your LLC becomes the owner of the business and you can adjust the valuation and assumptions being used for assets and

depreciation. There are ways that this can be structured so that it adds even more incentive to him that he currently can't utilize but with you, he could or could avoid certain issues. There are probably ten very good reasons why this would be a great option for both you and the seller.

One last question, are your only pts. of reference for valuation the realtors that you spoke with? I would highly recommend that you speak to an accountant as well. Good luck

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@EricBilderback

      I don't want to sound conspiratorial but we need to get rid of GSE's, repeal Dodd-Frank( I literally could write a book about how terrible this is for Consumers), eliminate all bureaus and their illogical and sham operations( hopefully they go bankrupt through Class action). MA, AG filed suit just recently. Most importantly, we need smaller banks to get back into lending

I apologize for the length of my response. I did want to make two additional comments. 1) You said:

Rents have gone up considerably in the last few years which makes my property more valuable??? ( This might be where you feel like we disagree.) I actually think you are spot on with this statement. Because of this and the facts that for Rents to drop, it would take some serious changes( changes that won't happen because of any kind of reform from the Government) to our entire economy before you were kind of close to being in a position where that happens. 

Most importantly, you are being so overly conservative on your assumptions that I believe it actually doesn't benefit you. Todd's response ( IMO) was fairly close to spot on. I wouldn't get a line of credit, in a market where you would want it, it would be accelerated or forgiven at a discount.

Equity- utilize it. You are actually increasing your risk.

1) Having it sit dormant does nothing for your, rents have beat inflation over the last fifteen years. As a mental exercise, close your eyes and pretend I am a financial advisor, seeking an investment from you. Eric, I would like you to invest 500k into one of our funds. The actual yields of 10% AROR are actually just the percentage I had our fund manager input into the Pro Forma we sent you. The reality is our Annualized Rate of Return has been 0% since the funds inception( 500 million years ago). I hope we can continue to input that % or even higher. **Full disclosure**Here is a chart courtesy of CBPP on Rents Rise Median ( included with utilities) vs. Median Income

https://www.google.com/url?sa=i&rct=j&q=&esrc=s&so...

In fact almost all data available shows that Rents haven't dropped significantly since mid 80's.  Can we count on you to invest in our fund( even though you will lose money).  We should also include that as you contribute more capital to the fund, your Revenue will be higher, but your net income will drop as a result of your tax basis. We also need to warn you of your exposure to liability in a Civil dispute.

I hope you understand my point, I am not making fun of you. I actually have closed 100's of borrowers by asking them if they would seek and investment like this( No way!, Not a Chance, etc.)

I have clients that pull equity out so that they can keep it working for them. I completely disagree with your conclusion that you cant beat the market, you already are.

   You are very welcome. Thank you kindly for the response as well as some feedback to be wary of??? I will try to give you my opinion in a much shorter response than the book I wrote earlier( Haha). I will outline some bullet points and I would love to hear alternative thoughts, opinions, and a specific flaw( understanding I cant see the future)

- Rent contractions of 20% in the near future is essentially impossible. In retail, yes, but that's only one sector that I would be worried about and rent would be the least of my worries. As far as rents from Multi-family,Commercial Business, and SFR's( not a chance).

A few statistics which leads me to believe this:

1) Multi-family construction- 30 yr. high -b)7%= drop in Vacancy( lowest in 30 years) c) 3.5% increase in rent( fastest in 30 years. Every measured level from Age, Income, to Household type have increased the Rental market share.

2)It's a Supply and Demand Issue, both in SFR rentals and multi-family- 15 year incline. It's also a Macro-economic issue. Wages are increasing but not at same levels of Rents.

3) Wages could triple and go up but we would still be in a very similar situation. Federal growth has dropped an average of 100k+ housing units which are subsidized. I have worked on Section 8 projects through HUD to utilizing almost every subsidy available. This wouldn't make much of a dent even if it was increasing. The housing market and subsequent rents continuous rise is predicated on the costs of construction because of over-regulation, etc., etc.

4) Technology and efficiency- I am an advocate of innovation and capitalism, unfortunately where Technology has made purchasing or pricing out a rental a million times easier, one of the primary reasons why this wont have a net-positive impact is because it eliminates the income that would be generated throughout the entire Industry. As someone who has sold and bought hundreds of properties, what used to take me 2-3 days can be done in less than fifteen minutes. ( My 1st flip made me around 80k, it took me 3 months, and I netted around 46k. I knew plenty of buyers and people who wanted to fix and flip/hold. I went and met with the Portfolio/ Inventory Manager of National to regional banks. I would look at 3 criteria: 1) length of mortgage the bank had held 2) length of time it had been unoccupied 3) Comps. I would offer 40-50% LTV on assessed value( 20-30% under appraisal if in good condition. I had to spend hours sifting through records. I would then sell it at 10-15% over my price to someone looking for a deal. Reciprocal Strategy created a great pathway for myself, the buyer, and the bank( they usually had already made 2X on the assessed value. Revenue now becomes Write-off). I can do this within 5 minutes right now.

5) I worked with 5 million dollar funds to 5 billion dollar funds, and they all stopped lending. They waited for the full impact of recession, Rental properties( both SFR and Multi0 are 90% controlled by Funds i.e. banks. They control the market. =70% swing in 3 years

As Josh stated there are a million variables, but those variables are almost completely made up on not buying good deals or changing your lifestyle based on a number written on a piece of paper. I welcome any challenges to these points. If you have a track record of being able to buy good deals, pull your equity out by any means necessary.

Here is a guide that I use.

1) contributed equity is going to earn you a guaranteed ROI of 0% or less. No, 4.5% interest on a loan has very, very little to do with this. Another myth, if the average consumer Refinances every 3.5 years, because of 90% of your payment being front end loaded, why did Dodd-Frank eliminate interest only loans, calculated using simple interest? Most people pay interest only anyway but just under much worse terms. What other investment would you seek that has this ROI?

2) Change your vehicle not your lifestyle, this is why the market crashed. vehicles and lifestyles were changed.

3) why would you want to limit your buying power in a down market, this is when Occ. Rates go up and stay that way.

ABSOLUTELY NO RISK, THIS IS A MYTH

If you are cash-flowing and generating profit from your properties, use your equity. I would do this up to whatever LTV you can get loans on them and only be concerned with my ability to cash-flow the property. The Real Estate Market is always going to fluctuate. In fact, the idea that the market dropping on commercial or multi-family properties being a negative or stress-inducing area, especially in regards to properties that are cash flowing is somewhat illogical from an investor's perspective. There are basically only two reasons why it can be a bad thing.

1) Your Cash-flow is your source of income. If you are relying on your Cap for income, then the solution isn't to modify your loan by increasing your equity. I would suggest that you are over-capitalized within a single sector.

 Effective Cap rates are the only thing that matters. Here are a few ideas that I think are grossly misunderstood and taught within the industry:

1) Equity has an effect on future equity- Absolutely !! Unfortunately not in the way that drive most of the common homeowner or investor thinks. It absolutely has an effect on your ability to create wealth at an accelerated rate. Suppose my commercial building is worth 3.5 million at 5.5%. I can go to 70%, I would be at 2.8- $19,261

 I can get it to 95% so this leaves me at 3.325 million with payment of -$22,872 - I am cash-flowing $282,064 with a Cash on Cash return above 8%.

This gives me 525,000 in cash, which because I am netting 300k annually on my leases, I'm in a better position at 95% than I am at 70%. I use the "dead" money to acquire 2 other properties at 1 million each. What did I risk? What did I save? I risk the first years improvements on my property and the leases of 900k, which is now offset by a loss on the land of 22%. Suppose I only net 25k annually on each property- I have maintained my "equity", I haven't lost anything. I actually would have incurred a net loss on my cash-flow by reducing my LTV to 70%.

I have a higher basis in the event that I want to 1031( I am using the assumption that I only operate one llc for the example of a 1031 exchange.( I don't want to delve into this too much but in order to meet 1031 requirement, this is why I use a single purpose llc for every acquisition, gives me hundreds of options to 1031, most of which have nothing to do with Real Property). I only bring this up because whether you are planning on a 1031 or wealth building for generations, I want to realize my basis as early as possible in order to avoid eating up years of paying a loan down.

I only care about my Cash on Cash return, Total Return on Investment, and my annual cash-flow. As long as these are positive, LTV should only impact decisions of how much I can borrow on my property.

I broker and acquire deals( they are only deals because someone used the illogical thought that LTV's impact equity)all of the time because of these two themes. my partners and I just acquired a business for 2.1 million( 300k above the valuation that the seller listed but 400k lower than the listing. In just these 5 years, the previous owners spent 4.8 million. While netting 140k annually. I made the offer of 2.1 because they had paid off their 1.8 million dollar loan, pulled out 400k to start another entity, and then made some absolutely preposterous decisions which resulted in a 2.8 million dollar tax credit. I bought them separately so I could adjust their accounting for depreciation( 150k). I then sold the entity solely for the credits at 70 cents/ dollar and assets for 560k. We now own the property and assets, this deal cost us 400k. I paid 10 on the money for 60 days.

It may seem like I'm tooting my horn, this is not my intent. I also immediately borrowed money on the land at 150% LTV,based on the surrounding land comps of 11.50 per sq. ft.

I point this out because most of the theories are the problems with SFR's and overextending yourself. The best thing that banks perpetuate during a downshift in sales prices is the problems caused by the result of poor Consumer spending choices, which gets blamed on equity. I used the "dreaded" option arm, or negative amortization loan, to increase my equity in my Primary Residence by 650k in 4.5 years. I saw my loan increase by over 125k from negative am and my LTV went to 106%( though my actual basis increased by 37% offsetting the 16% shown on my loan statement.

My advice:

1) keep the 10k saved up

2) Using a HELOC would be wise because of the low interest rate. I would personally then use the 40-50k to increase my buying power using Hard Money/ Angel Funds/Etc. While you are going to pay a higher amount of interest( significantly higher). I don't know what kind of property you have in mind but you will be fairly limited on LTV and rates that isn't going to vary much from what you could get on Alternative Funding.

3) I would highly suggest you prepare for a purchase using whatever financing method, but then offering a NNN/option with the same amount being offered as a down payment. This is one of the most utilized tools of seasoned buyers.

4) No, you wont pay taxes on the HELOC. It is a loan and a loan wouldn't be considered income.

5) While I am not assuming you don't know this, one of the most common misconceptions I regularly run into, is the idea that Cash Flow= Income. Cash flow can be revenue and cash flow can be income or profit. You will pay taxes on the Net Revenue or profit after your expenses, which will be your Income. There are various ways that will affect this as well. If I am leasing a property or buying one, regardless of where and what type. I create a Single-Purpose entity( almost always an LLC, just depends on the state). This alone will allow you to control much of the way you are taxed.

Goodluck

The agent actually has a fiduciary duty to write the offer up as soon as possible. This can very frequently have legal implications stemming from : fines, suspension, criminal charges, etc.

You could and should immediately fire the realtor in this situation, however, there are details within your story that allow your questions too only be answered in theory. While I am not saying that this is the case, one thing that is worth considering is the State that you mentioned. While I have never been an Agent in any State, I have sold hundreds of properties and am fairly familiar with Ohio's laws and procedures. All agents are subject to the duties within the Fair Housing Act(Federal Legislation)but Ohio passed additional criteria regarding specific criteria intended to avoid discrimination. While I am not accusing your agent of doing this nor would I think it is why it took so long for an offer to get a seller( FYI, while I don't know of any specific analysis, I would guess that 80% or more of Agents violate it unintentionally.)

Again, I don't think this was the reason for your predicament, I would likely chalk it up to someone who is inexperienced or more of an AINO( job requires license " Agent In Name Only") depending on the compensation level of the agent as an office manager, they might not be as interested as your typical agent.

You are absolutely able to fire an agent at anytime if they aren't meeting normal industry standards. 4 days is terrible. I don't usually use an agent but last week I was involved in a transaction where I bought a business and the land separately in order to maximize the tax benefits through the acquisition. I had already made the offer and then to save time I called an Agent and said I need a CREPC sent to ABC in the next hour, can you do this? If so, I agree to X% on the commission... It was sent to me within 30 minutes. This was the Broker for the entire Agency. 

Main Point- It's admirable that you are keeping your commitment because of ethics. Please understand that you have no ethical requirement to continue working with this agent, regardless of the status Monday. It's completely inaccurate to feel like you can't fire an agent for not meeting 'their duty" to you as a client, it is beyond inaccurate/irresponsible to tell you that you have established a contracted relationship. In order for a contract to be considered valid in Ohio,( verbal or written) 3 things must happen:

1)OFFER

2)ACCEPTANCE 

3) CONSIDERATION.

I think # 1 was met by you. #2- if your terms have not been presented to the seller then even a signed contract would not be considered Accepted- it could be 3 weeks or 3 hours and you have the Absolute right to revoke this if you don't want to use their services. #3 Consideration- Not a chance. you could easily call up any attorney in Ohio and ask if their opinion, I would be in shock if you weren't told that you could revoke the offer immediately. I would be wary of waiting to see... What about your past experience with this agent gives you the confidence that he will meet your expectations moving forward.

Goodluck

This isn't ever going to go away. I have occasionally sold properties to these "investors".  I have ended up buying or partnering with 100's of these people though, I have found that this group is usually compromised of 2 parts. 1) Hungry and willing to go to work. 2) Students who just are being taught wrong. Instead of turning them away, try quickly finding out if they are willing to be mentored. If they are, then replicate yourself and find more deals.