All Forum Posts by: Brandon McCombs

@Jason D. how will you know the utility amount to charge for the deposit? Most states have limits on what you can charge for a security deposit, so keep that in mind as well.

This goes back to why I'm asking. If the utility amount can just be considered part of the rent anyway then no further distinction must be made for the situation you cited or the situation I'll cite. OH has a state law that states a deposit higher than the rent can earn interest on the difference. However we keep deposits at the rent amount to avoid this overhead. But if the utility amount can't be deemed as part of the rent then obviously we would have to ensure the deposit doesn't include the utility amount.

If we state rent is $750, utilities included, then that's still rent, plain and simple, even though utilities will differ month to month, is it not?

Although the actual reasons don't matter ( I do understand some concerns voiced such as running up the bills), to satisfy everyone I'll state that oil and gas workers are relatively transitory. They prefer keeping things simple. So they prefer just having a single bill to pay for housing expenses and then they go back home to their families for half of each month where they and their spouse must still manage the utilities for their own home. 

The utilities in question will be placed on budget (or avg monthly payment plan) anyway so month-to-month the amounts will be the same or nearly the same. Admittedly those amounts do get reviewed and updated eventually. And because the O&G workers aren't at the rental unit half the time their usage is typically lower than if a 'regular' tenant was there all the time. This will only apply to electricity and gas. We already keep water and garbage in our name because of a single water meter and the garbage service provides a discount for keeping them in our name and paying for 2 units on the same property.

I'll review our lease to ensure we can be protected in the event someone does take advantage of it. A cap may be useful to have stated in some way. 

I appreciate everyone's answers and the differing opinions and information provided.

We have started to allow tenants retain utilities in our name but we have wondered whether the amount we add on for utilities should be counted as part of the monthly rent, especially for reasons of aligning with the security deposit. What's the fairest way to do that? I'm of the opinion that utilities do qualify as counting toward total rent, especially when considering the issue of when a tenant skips out. Then the security deposit, which would be equal to the base rent + utility amount would cover everything for the last month. I searched for this using Google but couldn't find this specific situation addressed in this manner.

I'm currently seeking a construction loan for renovating a 9 unit apt bldg after a casualty loss. 95% of the building will be touched during renovation. Only the exterior walls and half the roof will be untouched (other half of the roof was already repaired immediately after the loss). The question is whether I should expect an appraiser to include any type of reserves in his/her calculations considering the building is essentially going to be new construction? Will he/she ignore that to always calculate in some reserves or will those mitigating circumstances actually be considered?

While I'm asking that I'll also ask whether there is anything I can say to the appraiser to convince him/her to not include management fees in the operating costs? I'll be managing it myself and I know they have to do calculations that would be in a sense worst-case to accommodate another owner (like the bank) who may have to hire a mgmt company but to get the best valuation possible I was hoping there may be some wiggle room there too. 

The bank said they won't be requiring any repair reserves or mgmt fees in their calculations but they will just be relying on the appraiser's numbers. In the small amount of experience I have with appraisers they have always included those numbers which means the bank is still going to be requiring them from a calculation perspective, unless I can justify somehow not having the appraiser include them. Any ideas?

thanks

@Jon Holdman Actually the revenue supports a DSCR up to 1.28. The issue I most frequently have been encountering depending on the cap rate is satisfying an 80% LTV due to needing to cover the existing loan plus the new construction loan. I've put $189k into the project so far for repairs since the fire but banks are not viewing that as cash equity but rather just "including" it by virtue of inherently being part of the as-complete value. We don't have any other add'l cash ourselves to inject into it.

The appraiser who did mine made a quick buck off a bad appraisal by not taking the time to create an accurate appraisal as a result of:

1. using a building that was vacant for over 3, if not 5, years as a comp (thereby not validating the comps in their files before using them in future reports), 

2. comparing a 95% newly renovated building (mine) to one that was reported to me by the property mgmt company to have not been renovated in over 5 years and didn't have central A/C and heat for the units or in-unit W/D but yet, despite those differences and not making adjustments for them, specified in the appraisal report that rent for my units would still be only $650 for a 3BR even though the comp's units were being rented for $750,

3. claiming that my projected rents were above market rate (rent ranged from $850-1025 for 2-3 BR) but yet using a comp that was 2 addresses down from my building that had a 3BR unit with rent of $950 (but the report was done so hurriedly the appraiser didn't even put the rent for that comp in his report; I had to call the owner to obtain it),

4. and suggesting that $50 should be the spread between 3BR/1BA units and 2BR/1BA units. 

The above 4 items are just the largest of many errors in the appraisal but the common theme is that all the errors (minor and major, both substantive to the final value and not) indicate an inaccurate report based on out-dated information that leads to performing a grossly negligent assignment. 

The rents they said my units could garner are below even what HUD FMRs are for the area. The appraisers told the bank they could get it done in 1 week (despite others in the area needing at least a month because of their backlog and just the inherent time it takes for commercial appraisals). But these guys did mine in x days. Their 'reconciliation' process for the 3 approaches was merely to average the income and sales valuations despite stating in their report that the income approach made the most sense. If it did then they contradicted themselves by simply averaging them nor did they provide a valued service due to never explaining the rationale for the averaging or the rationale for choosing certain values they choose from numerical ranges in other areas of the report.

I found an old appraisal they did for a utility company 2 years prior which contained the exact same sentences in the reconciliation section which proved all they do is copy/paste across their appraisals. That isn't necessarily a bad thing but for the parts that are unique a copy/paste isn't adequate.

The insurance on the building was known by the bank. They didn't question it since the insurance was adequate for their lien so that's all they cared about.

@Thomas S.

Yes the current primary lender is aware of the situation. They aren't willing (and they are small so they may be unable) to finance the reconstruction. The only thing they are willing to do so far is to become 2nd lienholder on the new loan, but since both loans have to be included in debt calculations their willingness to be a 2nd only helps me in a situation where the new bank can't do the full amount of the construction cost and taking out the current primary loan. At the time that would have resolved one issue with BB&T since they only allowed 750k for the loan (and at the time our construction costs were still above 800k) but other things killed the deal with them as I originally mentioned.

And I haven't told them I'm prepared to walk away but have told them that we don't have the personal income to pay for the loan payment and insurance and property taxes every year. in their underwriting I'm assuming they only cared about the loan payment. If it was just the loan payment then, sure, it would suck but it would be doable. That's a whole other issue I don't know how I'll deal with if and when the time comes (which will be soon). And given the state of the building as I mentioned to Anthony, if I let them foreclose and then they sell it they would surely get much less than the principal balance so then the they would come after us for the difference. But it may be the easiest option. I'm screwed regardless what happens if we don't get a loan. I'm just hoping I don't lose my house.

@Anthony Dooley 

It may come down to having to sell but with the building being unhabitable and really only existing as a shell  of a building (with interior still needing some demolition to begin reconstruction) we wouldn't be able to get much for it. The appraisal we had a year ago claimed a market value only about 15k below what we had originally paid for it, despite the fact there is no infrastructure in the building. Only 15% was adjusted for 'interior finish' by the appraiser. Although that was generous of him we knew it wasn't realistic. I doubt we'd get enough to pay off the primary note (or the owner financing) but it would be a start. But since it wouldn't pay off either note I'm unsure what would happen at that point, such as for example, whether the bank would then call the remaining principal balance due all at once or let us continue making payments.

As for your other recommendation, the idea of 1 unit at time won't be possible since there isn't any infrastructure in the building. There will be 9 units across 3 floors so at least a couple hundred thousand would be required in the beginning. But I get your idea. 

We'd also need to borrow enough to get enough units completed to have income but not borrow too much where the rent for those same units couldn't cover the payments for what we borrowed. A difficult catch22 for sure. Another idea is to do a floor at a time. Still dicey though, given we'd have to invest a lot up front for just basic infrastructure before even having money required to finish specific units. And the big question in my mind, because of not doing something like this before, is how does an appraiser appraise the building in that situation and would a bank even go for that type of situation? 

I can ask the contractor to try calculating the construction costs for the first floor but I think he is getting tired of working on stuff for us without seeing any light at the end of the tunnel with a bank.

@Mayer M. Although I sort of see your point it also sounds like circular logic. There is obviously no cash flow right now but that's because of the state the building is in. Putting money back into it to make it even better than it was will obviously allow it to cash flow again, even more so than it did before for that matter. I've not actually had any bank say it won't work because of "no cash flow". I have had banks say the as-complete valuation won't be enough, which is based on the cash flow of course, but they all know that the building can be in the black. I'd be comfortably in the black with my rent projections (which are based on comps in the area rather than my pie-in-the-sky view as a stressed out landlord; my wife is a real estate agent as well so she has seen the comps).

I'm not sure which forum this should go into so I just picked the lending and mortgage advice forum. Hopefully it will be the right one.

I need some ideas. I'm running out of ideas, cash and time. I'm not sure where else to turn so I'm hoping someone on here can help.

TL;DR - I need advice on securing a construction loan for about $750k to do renovation to a 9 unit residential apt building that is currently uninhabitable and therefore making no money after a casualty loss a few years ago. Banks keep telling me various things: no room in their portfolio, loan is too big for them, we need more equity, the as-complete appraised value won't be high enough, etc. even though banks are also telling us the rents are fine but those other reasons keep popping up to block the loan from even getting to the appraisal stage again. 

Long version:

3 years ago I had lightning hit my, at the time, mixed-use apt building that I had only purchased 8 months prior, so I had barely touched the principal. Through some miscommunication, to say the least, with the insurance broker the building was also insufficiently insured but had enough to allow the primary lender to approve the loan. Two loans were taken out: a bank was primary lender and then a smaller loan with owner financing.

I hired a contractor to repair the roof from fire damage, encapsulate the smoke, dry out the building, and perform mold mitigation. That consumed most of the insurance money.

We waited a year for them to give us an estimate for reconstruction and they never gave it to us. Lots of money wasted waiting on them. Finally got a different contractor and had an estimate within a few months. Took it to the bank. They approved it. Got an appraisal and the appraisers screwed us to make a quick buck. Bank denied based on appraisal. We since got a third contractor involved to get the cost down even more with more work being done. But we've been dealing with banks for over a year now. I'm running out of banks in my area to talk to. I'm literally talking to the last one or two that have returned my initial call.

I'm almost to the point of needing to use personal income to pay bills for the property and not having enough in reserves to even make payments on a construction loan even if I got approved again. BB&T have told me they will loan up to $750k but they are imposing $150/unit/mo repair reserves (even for new construction) which kills my NOI and causes the DSCR and LTV to fail because I can't get rents up enough to compensate for $16k/yr being held in repair reserves.

I need someone who will either trust me enough to be an investor/partner with me who has serious cash lying around and wants to entrust it to me (it would held by the bank though) or trust me enough finance me completely. I can provide more details offline if anyone is interested. I doubt hard money would suffice at this point since interest rates are so much higher on those loans, plus they probably aren't intended to go for a full year, which is what our contractor estimates construction time will be.

thank you

Brandon

Thank you guys for your replies. I assume whether the first floor (the other 2 floors are residential apartments) or the building as a whole is considered class B or A is largely based on opinion or are there specific attributes that make a bldg class A rather than B?  I've seen properties on loopnet that I thought would be considered class A because they are newer (5-10 years old) execute office suites listed by the agents as class B along with apartment complexes that are 15 years old. I assume effective age may help distinguish class A and B but otherwise are there any specific items so I know whether I should market mine as A or B? 

In case it helps: I will be using modified gross leases. There won't be any janitorial services provided. There won't be any grand entrance with 30 ft high windows or anything like that but I will have reception and lobby areas like a small real estate office would have. And everything will be completely new afterward because I'm doing a 95% renovation (only the ext walls and roof are not being touched) as a result of a fire.

Thanks in advance for your feedback.