All Forum Posts by: William Yeh

This deal stinks to high hell. I hope you're getting it at an insane discount from fair market because there are more red flags on this deal than on any deal that I have ever seen.

I can't endorse enough @Roy N. 's original post. In all of the multitenant deals I've been a part of, the seller providing that level of due diligence once in escrow is par for the course.

At this point, anything that is likely to be wrong with the property probably is, hence the total lack of transparency. You've already identified multiple sources of potential litigation, lost rents and heartburn which could be flung on your doorstep like a flaming bag of poo on day one. Stay sharp on this one if you decide to proceed.

By the way can you elaborate on your decision to use an attorney as opposed to an agent?

@Neda Navidnia First off, the onus of due diligence should not fall on you, the agent, unless you have such a strong relationship with the seller that you don't believe they will sue you if the asset doesn't perform as you've suggested it will. From one agent to another, I can't stress this point enough.

That said, as an agent, you should help facilitate the deal and provide your input on the due diligence items provided, assuming you have the appropriate expertise. Financial reports provided by the seller are a good starting point but contrary to what @Danger Brown suggested, I would not take them at face value. They're a starting point from which to refine the financial analysis of the asset. Owners can easily pad the numbers to make an asset appear to perform stronger than it actually dues (ie. free rent or other incentives to lease up a property which won't appear on the pro forma)

Yes the tax return will be some indication of the actual performance of the asset but it's still not something you can completely rely on. Major items that WILL impact the new owner's financial results vs. the old owners include a new tax basis based on the sale price of the property (normally higher than the previous transacted price), deferred maintenance, changes in management, lease up incentives, etc.

Steps you can take to corroborate the numbers include comp sales, comp rents from property managers in the same area with similar units rented, inspections by licensed inspectors to determine useful life of major cap ex items, checking with county assessor/tax collector's office to determine new tax rate based on sales price, etc. This advice should really be provided to your investor but it's a good education for you the agent none the less.

Hope that helps and best of luck.

Hi @Neda Navidnia . The best place to get numbers on a property is from the seller directly. You can always share your opinion on whether the numbers are realistic but there's no better source unique to the property in question than from the seller.

Hey @Joseph Duff 

As @Jonathan Wilks mentioned, financing is entirely based on the cash flow the property generates. The lower the LTV from the bank, the lower their confidence in the performance prospects of the asset. That said, every lender has their own underwriting procedure so shop the loan around.

Realtors always like to have preapproval along with the offer. If they don't have some evidence that a buyer can afford a property, they risk wasting their time and reputation doing work on a deal that was never going to pan out. That's pretty standard. Realtor was clearly panicked as every Realtor is scared to death their client will go to another agent or go directly to the owner. A competent Realtor should have earned your trust enough for you to have them reach out to find out the availability of a property so I find it interesting that you thought it necessary to reach out yourself.

On offer strategy, I'll share with you a story. My group was bidding on a true 8% cap multitenant office building and submitted an offer of $3.45MM. We lost the deal to a group that offered the ask price of $3.57MM. After the fact, we found out that they brought the purchase price down to $3.45MM through inspections and haggling with the sellers for credit. Moral of the story is if you think it's a good deal, tie the property up first at market value and bake in enough time in contingencies to do all inspections/due diligence you need and adequately protect yourself from risk of liquidated damages. In this case, receiving disclosures after you're in contract will be grounds for you to go back and chip away at the purchase price which is a very common practice in the commercial RE world.

As for if it makes sense to bring your management in, that's entirely a business decision that you'll need to make based on what your time is worth.

Hope that helps.

Cheers,

Billy

Hey Jonathan,

Yes nationwide there is a wave of babyboomers entering retirement age and they will slowly filter into all of the various housing solutions geared to that demographic. However this type of product is highly localized. You've got to know your market and what the absorption potential is for your product. Having the 55+ chasm will definitely segregate your product from general multifamily for better or worse so do your homework.

The best way to do this is to form a solid relationship with a general contractor you can trust who will be doing your reno work upon acquisition and have them walk the property with you when you tour for the first time. If you don't have such a relationship, consider paying them for their time.

Hi Nazz,

Leases are a must. In addition, I'd request estoppel certificates from all tenants. This is typically delivered as a due diligence item over the course of escrow and negotiated into your purchase agreement so have your agent include that clause.

If they have financial reports, I'd request those too so that you can dissect how they arrived at the 9% cap rate advertised. Note that your property taxes are going to shoot through the roof once you acquire it so make necessary adjustments on your pro forma to reflect the hit to cash flow this will cause.

I'd also request the maintenance records on the building and on the individual units. That combined with the help of an experienced building inspector will reveal how much useful life there is on the big cap ex items (HVAC, water heaters, roof, furnaces, etc).

If you're working with a lender, now would be the time to get them involved. They should have their own due diligence items that they want to see to underwrite the loan, all of which you should be screening as well in your DD.

May I ask where the property is located?

Hope this all helps.

Hey Jeremy,

You're on the right track. I would add to your due diligence items a 3rd party home inspection and be sure to walk the property and neighborhood, preferably on the weekend when neighbors are home and can be observed/talked to. See if the area is heavily rented or if it's mostly owner occupants. Too much investor activity will most likely negatively affect your exit, which can chew up any positive cash flow or principal pay down you've been able to achieve.

Do you plan on self managing or hiring a PM? In either case, I would talk to a property manager to find out the scoop on that area. Consider how much inventory they have available, typical vacancy rates, rent trends, and what the rental market climate looks like. If you use a PM, be sure to factor in both their management % as well as lease up/renewal fees. If possible, time your lease termination to end in spring/summer so that you aren't stuck off peak market with a vacant property.

As an agent, I would also recommend title insurance and factoring that cost into your cost basis, whether you're going through an age or not. Last thing you want is an encumbered property.

If you can get the property financials from your friend, assuming he tracks them, that would go far in assessing the property's financial performance.

How long do you plan on holding the property for and what's your goal? That will also be a big factor in how you structure the acquisition, assuming all other DD checks out.

Hope that helps and best of luck.

I echo the other posters here and recommend doing both, ideally your walkthru first then a home inspection. A home inspection won't tell you if the fit and finish of the property is to your expectation and a walk through won't reveal any major issues. Both are really necessary to ascertain whether a property meets your expectations.

Be sure to get a licensed independent home inspector not associated with the seller to do the inspection.

Hey @Jason L. I'm in much the same boat as you shopping for buy and holds in Indy. I'd advise you to corroborate all figures in the pro forma with other independent sources. I'm also talking to turnkey operators but I'm adding to the mix wholesalers and agents working off the good old MLS as well as market research on my own. If everything sounds consistent then your odds of getting into a solid property are that much higher.

As for how to factor in the cost of turnovers, ask a PM as others have suggested what the typical length of stay and cost of turnover is. After you've figured out the costs tied to that, add an additional contingency on top to cover any unexpected items.

In general, I think it pays to take your time, be as thorough as possible, and mull over your financial model for a while. Talk to a bunch of people on the forums and only move when you are totally comfortable with the picture you've painted.

Hope that helps.