All Forum Posts by: Brandon Yuan

Originally posted by @Hadar Orkibi:

@Brandon Yuan another way of doing it is to purchase the property with local bank and refinance to long term agency debt once the asset is re positioned. 

this way you lock it in long term and when non recourse it goes off your balance sheet.

 hmm interesting point.  this particular deal is fairly stabilized and there's no crazy uplift on the rent vs expense. so it may not make sense to refi in relatively short term. i'd still expect moderate growth and better control of cost though in the long run

Originally posted by @Jeff Kehl:

@Brandon Yuan for me, the big difference is 20 vs. 30 year amortization. It makes a very large difference on your cash-flow. 

 Yes true. not to mention it have a year or two of interest free option which would also help the cash flow additionally in the first couple of years, especially if you have to spend a bit time/money to stabilize the property..

but other factors together make this less straightforward .. sometimes i wish I just need to consider one thing to decide lol

Originally posted by @Conor Freeman:

@Brandon Yuan

It sounds like you have a pretty good understanding of the Freddie and bank products. I would say the choice will depend on your pressure points, and that may be deal specific. Are you okay with recourse and lower leverage to have lower up-front costs and a flexible prepay. Are you looking for good cashflow with a 30 year am? Are you on the cusp of qualifying for Freddie and may have some headaches getting that box checked? All things to consider.

Its also a relationship play. Getting in with Freddie bodes well for that relationship and future deals, as it does with a local bank; but the bank can only lend in your footprint, may have a cap on an individual borrower etc. In my experience, borrowers move into agency financing after 3-4 deals with their bank(s) and as they start to do larger deals.

You understand the pro's and con's of both so I would get with a mortgage broker (or do it yourself since you already know the bank) and compare the quotes side by side. Run your proforma on both and then make a decision.

 Thanks @Conor Freeman for your comment. Do you think good relationship with a specific local bank proven more valuable than with loan agency, or vice versus? 

Also one of my main concern is the prepay penalty on Freddie Mac loan which then lead to selling the property with assumable loan in future. I get that with the upward trend of interest rate this could actually be a plus for future buyers a few years down the road, but is that a fairly accurate assessment? Some may argue that it actually may limit potential pool of buyers because some may find it challenging to qualify. How are deals with assumable freddie mac loans perceived in the market? 

Hi BP members:

What's your thoughts on doing a Freddie Mac vs. local commercial bank loan for a small MF apt (acquiring a 30 units apt)?  Freddie Mac loan has its own advantage obviously (non-recourse, fixed rate, 30 year amortization), but it has more stringent qualification requirements, higher closing cost (origination fee, other report like PCA which is not required by local bank, etc), and prepayment penalty (this could be a plus or minus since future buyer can assume the loan depends on how you see it). On the other hand, the local bank (I'm already a client for another loan) has less stringent qualification requirements but it's floating interest rate (based on prime rate), personal guaranteed, and only 20 year amortization. What would you prefer the better option to go and why? Thanks in advance

Originally posted by @Michael Le:

I would say $2-3k. I'm sure you could find cheaper, depending on your needs.

 Thanks Michael. that seems reasonable range, although I'd like to keep it at $1k if possible as Jeff suggested. I talked to two attorneys so far and I'm leaning towards the slightly more expensive one. I may end up spending a bit more as I may have more questions initially stepping up to 20 units deal. 

Originally posted by @Jeff Kehl:

@Brandon Yuan I think Michael Le is spot on as a maximum. I've bought two in that range and spent <$1k in legal for each of them. You really wouldn't need to spend anything on a property of that size other than normal closing costs unless you're doing something creative or just really want to make sure everything is covered.

Review/revise contracts - do you have a broker assisting you? They should do this as part of their services. You can also have an attorney review but generally they are going to use state-specific standard templates.

Review title committment/exceptions - in Georgia that's what you pay the closing attorney to do maybe that's different in Texas.

Thanks Jeff. 

I'd feel very comfortable if it's $1k or below for legal for this size of deal

we are indeed utilizing standard TAR commercial contract (Texas Association of Realtor). However, seller's attorney drafted a 2 page special addendum to the standard TAR contract and that's the main item I'd like to have an attorney of my own to help review and revise if needed. the listing broker is acting as intermediate for both seller and buyer, so you know how that is. He's good and fair, but I don't think I should just listen to everything he says and do so. In the special addendum, I'm especially interested (or concerned may be the right word) on the "As Is" language (a full paragraph) seller attorney drafted and would like to get some professional legal opinion. 

As for the title, we don't typically do closing attorney in texas. it's done by title company and closing officer. maybe they can answer some of my questions, but I'm not sure if they can serve at best of my (buyer) interest since they're 3rd party mutual. just want to be careful if anything they exclude is abnormal. Hence the need for potential attorney's review. at least that's how I see it. It may be wrong or unnecessary. 

How much is a reasonable budget for legal cost for small apartment acquisition (20 to 30 units)? Activities may include review/revise contract (any special language addendum outside of standard TAR contract), review title commitment/exception, etc Thanks

Good luck! 6.5 cap with value add upside is not bad at all for montrose.

Originally posted by @Hadar Orkibi:

@Brandon Yuan yes you should pay an inspection to do all the units. ans take your building after to receive feedback from him regard the inspector findings. 

You can get your HVAC guy in to do inspection for these and check for potential maintenance issues. 

Also get the GAS check, everything needs to be done! 

You may need Phase one environmental report too.

 thanks Hadar. phase 1 environmental will be done as it's required by lender. 

I certainly understand the importance of knowing condition and issues on every unit. Just trying to determine if it's worth spending money to hire professional inspector to do every unit. I'll walk every unit myself with a contractor but we certainly aren't professional inspectors, and contractor's opinion may be somewhat biased. 

If we were to hire inspector to inspect every unit, is that equivalent to pay for a Property Condition Assessment report (PCA)? I heard a lot about that but obviously haven't done one since this is my first true multifamily deal. Any idea how much PCA cost per door? (I'll call a few to get a budgetary quote as well)

20 units for $3MM in Houston? I assume that's inside the loop? a bit pricey for Houston market. what's the cap rate? I hope you have value add opportunities in it

it's a tricky situation. On one side, there's possibility that seller may have manipulate the rent/leases for recent months to support higher sale price and insisting only have 4 months to supply (not unlikely but much more difficult to manipulate a full 2 years of record than just 4 months). On the other side, seller may be telling the truth that he's just simply not a sophisticated owner and he simply don't have longer period of record to provide. I'd suggest try to validate those info in a different way by conducting marketing research of comparable rent, asking the tenant directly how much they're paying, etc. In the end, you'll have to make decision based on whether you feel like the seller is lying and hiding something or if he may be telling the truth (subjectively so no guarantee if you made the right decision or not). If the rent comparable supports it, I wouldn't worry too much about those month to month. Worst case you can replace them with 1 year lease new tenant with current market rent, just make sure you factor those turnover cost in your budget.