All Forum Posts by: Tony S.

Does anyone know of any good MF lenders in Albemarle, NC or Charlotte?  I've got a 10+ value-add apartment under contract but the loan is too big for one of my lenders and too small for the other. Thanks!

I got an 18-unit with direct mail after just a few months.  I only sent about 30 mailers/month.  But my letter was very targeted and I included the offer in the letter, so my case may be unique.  I've also spent $2,000 on direct mail for wholesaling and got a hit for someone willing to sell 3 properties, but my wholesale fee only made me break even and one of the properties ended up being a nightmare existing tenant situation.  

Basically, it's going to be a case-by-case situation, but I do think you'll get your money back with a $5,000 direct mail campaign if you stay disciplined and follow through.

Thanks. Back to the drawing table I go, what are you typically seeing for LTV?

Properties were built in 70s and 80s.  The $30,000/door came from a recent 18-unit I stabilized in the same market this last year.  These properties are in a similar condition to the 18-units I purchased and stabilized.

Once I achieve the $1,100/avg for 82 doors, I plan to put long-term debt on all the properties at 80% LTV. My estimate is that the value of the properties will be $8,300,000 at 6.5% cap rate and 50% expense ratio. That will be enough to pay off the first and second lien notes, and a portion of my equity lines. The remaining equity lines will be paid off with cash flow.

Hi BP,

I've been investing since 2016 and now have 27 rental units in my wholly-owned portfolio.  I'm actively chasing a big off-market value-add portfolio deal in my farming area, but the owner needs some motivation to sell. I'm trying to sweeten the deal as much as I could with it still making sense for me, so below is my offer price.  Would you do it to get the deal done?

Unit Count: 82

Current rents: $700 average/unit

Rehab cost/unit: $30,000

Total rehab cost: $2,460,000 (funded through private lenders at 10%,  second lien priority)

Average rents once rehabbed: $1,100 with ability to raise rent by $50 each year.

Purchase price: $5,070,000

Down Payment: $1,134,000 cash (I'll fund the down payment with existing credit lines against my current portfolio and cash)

Seller-Finance Note (first priority lien): $3,936,000 amortized over 30 years, balloon payment after year 7.

Interest rate: 6.5%

Would you do this deal? My goal has always been to own 100 units and then I'll retire. Taking down this deal would bring me to 109 units and take me 2-3 years to fully rehab and stabilize.  I have a property management company and this deal is in my backyard.

Any pressure on MF market is artificial, which will snap back up with a vengeance once interest rates stabilize.

One thing to note is that the replacement cost for MF properties have soared substantially with inflation.  In my opinion, such replacement cost acts as a floor for MF prices regardless of the cap rate (i.e., MF prices won't go down below replacement cost for newer or renovated/stabilized MF products).  

With those parameters in mind, I just bought an 18 unit complex and hope another acquisition opportunity comes up in the next 12-18 months before the commercial real estate market becomes too hot again.

Quote from @Jason Bott:

@Tony S. In regards to #2, it will be difficult to cleanly get the claim assigned to you.  The insurance carrier by law needs to pay the "Named Insured" on the policy at the time of the loss.

Our client had to give a credit at closing with funds tied up in escrow until the claim payout was settled 90 days later.

Jason,

Why establish an escrow account?  Was it because the claim was to be paid to the seller by the insurance company and the buyer just wanted to ensure that the buyer would get paid?  Why not guaranty the credit to the buyer (whether or not seller gets paid by insurance), since this loss was incurred by the seller during seller's ownership?

Thanks,
Tony

Quote from @Charles Seaman:

@Tony S.  I bought a property with an open fire claim earlier this year.  My replies to your questions are below in Italics.

1. 1. Should I forget about closing this year? Or can I still make it happen?  It's possible that you can still close this year.  Are you obtaining traditional financing to acquire the property or is the seller financing the sole source of debt?  If you are using traditional financing, then it might make it tougher, but it's still possible.
2. 2. How do handle processing this with the seller’s insurance if we close next month? Can the seller assign the insurance claim to me as the buyer?  The seller can assign the insurance claim to you, however it'll likely be easier just having them keep the proceeds from the claim and giving you a credit to the purchase price now.
3. 3. The purchase contract states that the seller will indemnify me as the buyer for any claims arising from anything that happened before closing. Should I be worried abiout anything from a liability perspective?  Your best bet is to speak with your insurance broker or attorney about this.  If the seller has already filed the claim or will file it prior to closing, then your liability should be limited.  While indemnification provisions are good in theory, there are times where it can be tough to enforce them in practicality.
4. 4. If I estimate about $40,000 in damage and the unit being offline for a couple of months, how much of a purchase price reduction should I request.  $40,000 + whatever lost rent you'll incur.  Keep in mind that your insurance premium will also most likely increase if you provide your insurance broker or carrier with updated loss runs that reflect this claim, so you'll want to include a further reduction to reflect that.
   5. Any other considerations I should be thinking about?  If you haven't already done so, then you probably want to have an electrician and a structural engineer inspect the property to evaluate any further issues that you might encounter.  If you're getting the deal at an attractive price and you're planning to bring the units down to the studs, then you'll likely be fine.

 Thanks, Charles! I appreciate the sage advice and guidance, I feel a lot better about going through with this.

There was a fire yesterday evening in one unit with injuries at an 18-unit property I’m under contract to purchase 3 weeks from now. How should I proceed?

My diligence period ends this Saturday, though Seller has already agreed to extend the diligence period to allow us all to react to this new development.

There are substantial tax considerations to close on this property by year end from both the seller’s and my perspective. Almost all of the tenants are month-to-month, this is a big value-add project ($20,000 renovations for each unit) and I’m getting these properties at an attractive price with great seller-finance terms. I was going to strip these units down to the studs anyways to fully rehab them, but it appears the fire has damaged some of the trusses in this unit.

I’ve never dealt with a fire before. The tenant was found unconscious by the fire department at the property (suspected smoke inhalation), was conscious on the way to the hospital in an ambulance, though was subsequently put into an induced coma due to soot in lungs. I’m unsure of the tenant’s condition now.

The fire department is saying it’s a stove fire, though admittedly they have a lot of questions since the properties still have some knob and tube wiring, and this is the second fire originating from a stove at this complex this year. Out of the 15 years the seller has owned the complex, there has never been a fire incident under their ownership until this year.

I was planning to upgrade all the electrical anyways in each of these units, but how should I approach handling this fire incident in light of closing? Because this is the second fire this year, I think maybe this property now has the city’s attention (not in a good way), so the risk profile may have increased for me now.

Questions:

1. Should I forget about closing this year? Or can I still make it happen?
2. How do handle processing this with the seller’s insurance if we close next month? Can the seller assign the insurance claim to me as the buyer?
3. The purchase contract states that the seller will indemnify me as the buyer for any claims arising from anything that happened before closing. Should I be worried abiout anything from a liability perspective?
4. If I estimate about $40,000 in damage and the unit being offline for a couple of months, how much of a purchase price reduction should I request.
5. Any other considerations I should be thinking about?

Any help or advice from anyone that has gone through this or has any experience would be greatly appreciated! I’m set to have a conversation with the seller about this issue tomorrow and want to have thought through everything ahead of time.

As a courtesy update, I walked all 18 Units yesterday and decided the best course of action for long-term success will be to remove all paneling and replace with new drywall.

Thanks for everyone's input!