All Forum Posts by: James C.

Kyle,

At 1800 FCF/MO (21,600) you are looking at a 5% cap rate (21,600/420,000).

However at 70% expenses (30% Profit) it's 137,000 x .3 = 41,000/420,000 = 10%cap rate.

Capex is going to need to be higher than average to repair boiler and water heaters, those are probably coming sooner rather than later. I'd discount the asking price for these, if possible. Take repairs right off the top. Kind of sounds like the current owner knows that some big bills are coming due and wants out before they hit.

 If your tenants can't afford $25/mo for a security deposit, then $148 for RUBS won't fly either (50,000/12/28). I'd nail that down ASAP, since that is where you are looking for profit to replace the systems. The deal is going to be tough if you can't get back the mechanical costs.

Overall, if your net is 1800 (cap rate 5%) it's not good. If it's at a 10% cap it's better... but the mechanical stuff and it's cost recovery needs a good fine pencil point.

Good Luck,

Jim

Jerome,

1) Run your numbers and due diligence according to your business model and analysis.

2) Make your offer based on your analysis. 

3) If they accept, do your post acceptance due diligence, and if it all checks out, close.

4) If they don't repeat 1 & 2 until #3 happens enough you are satisfied.

You can't control the other side, so don't try. Control your business, not theirs.

Good Luck,

Jim

Joshua,

You may be able to be added to the title. Make sure that it doesn't invoke any due on sale clauses. An hour or so with an attorney would be the best way to go.

I would explore creating a partnership agreement with your brother, then get added to the title.  This way if things go wrong, you have recourse in writing. Again, discuss this with your attorney and brother. 

As Jerry W. said, you would be responsible for the mortgage payments on the HELOC.

I'd get an attorney involved and not try to do this alone.

Good luck, 

Jim 

Anthony, 

This is confusing: you mentioned you have done this before, selling on land contract then refinancing?

If you have done this before (sold on land contract, then refinanced at a bank) then you are co-borrowing with the buyers, creating a partnership. You both have equal rights to the title, and your land contract is probably null and void, meaning you can't get the property back easily if they default, and you are on the hook for the whole mortgage.

If you have only sold on contract, then you are the owner, and the buyers have an ownership interest, and you are the "lender". In this case, the standard land contract rules apply... the buyer looses all their investment, you retain the property etc. etc.

It's typically not possible to refinance and sell on land contract. The way those deals are structured is to do a "lease purchase" wherein the buyer has no ownership interest, other than the lease portion, until they execute on the purchase. If they break the lease you keep all the rent money, and the option fee, and retain the house. You are responsible for the mortgage.

What has happened is that your co-borrower (buyer on land contract) is not able to be underwritten at the bank, so the bank won't loan.

I'd be interested in seeing how you structure your deals on paper.

Good Luck!

Jim

Donnell,

If you can catch a break, that can be a good thing.  

I'm going to bust your question into 2 parts 

1) Should you use a buyers agent?

2) What about this buyers agent?

Answer to #1 is a qualified yes, it won't cost any more if the property is listed already (you shouldn't pay more because of their fee in this situation ). If it's not, then you could be paying additional for their services. Read the contract, and make sure you know where you stand.  If this is your first deal, I wold be inclined to use their services  and have their help through the process. 

#2 Only if they check out. Google their name and read the reviews. They won't always be 100% positive,  but there should be more positive than negative by a wide margin. 

Generally if mortgage brokers and real estate agents recommend each other they have a good working relationship and can close deals. They both get paid only when deals close.

Above all, make sure whatever happens is a good deal for you, fits your business plan,  and you can handle financially. 

Good luck! 

Jim 

Rich,

Non conforming property issue in this instance deals with the underwriting of the loan. Properties must meet certain criteria in order for the note to be sold on the secondary market. When I looked at the property it appears to be a MH on land, and older than 1974. I could be wrong on that.

There are mortgage brokers that hold the loans they close, and package them for sale to the secondary market. In order to hold the mortgages, they need to have a line for credit to pay everyone off at the closing. This line of credit is known as a "Warehouse line of Credit". Most lines have a small portion of the line available for non-conforming loans. Non-conforming loans are loans that can't be sold on the secondary market for one reason or another, mostly because they don't meet some underwriting guideline. There is a potential for this section of the line to generate some good profits, but it needs to be managed closely. Going over the limit for the non-conforming portion of the line is a good way to get yourself in hot water with your lender.

Given Scott Carson's statement above, I am obliged to suggest that it's probably the reason why it's discounted. It's a dead simple explanation, whereas mine, while possible, are more complex.

Thanks,

Jim

Sean,

Couple of things: 1% rule and 50% rule. Both are scans... 1% rule, you need to have 1% of the value of the property in income each month. ARV = 200,000 *.01 = 2000 actual income = 2080, so we squeak by on that one.

50% rule says that 50% of the yearly gross income/CAP rate should be equal to or greater than the purchase price of the property. So, 2080/2 = 1040*12 = $12,480/.08 = 156,000 to get to 200K our CAP rate must be about 6%.

What this means is that the price of the property will probably not allow for positive cash flow. Keep in mind 2 units are priced on comparables, not on cash flow. However, if you are looking to make money, then cash flow is king.

A more in-depth analysis (below) shows the monthly cash flow to be about -800.00 per month. Keep in mind that the analysis forces 10% of invested cash, and 10% on the invested cash as an expense. Also, don't short yourself the management fee... bad business.

Hope this helps.

Jim

Payton,

First off.. commercial property is priced according to it's income generating potential. So, your seller doesn't have to "Put" 145K into it, they only have to raise the rents to get another 145K of value. (looks like about $75/unit/mo might get you there). 

5x in the last 15 years is a bit of a yellow flag, especially since it sold for the same amount each time. Why? What part of town is it in? Can the rents be raised? Are the apartments in good shape? To me it sounds like it's going to need some rehab. If your seller has done some, then that is good. 3 vacancies is about 21% which is high. It could be that he is charging rents that are too high for the building, or that he just hasn't rented apartments out yet since they all became vacant at about the same time (Why were they not pre-rented?). Another option is that they are so badly trashed, they aren't in rentable condition. The owner could be doing a bit of rehab on those units, so they are off market for a bit.

Your best bet is to view the building with an EXPERIENCED muti-family professional (Read Investor, Property Manager, Asset Manager etc.) who can look at the building and offer advice.

Good Luck!

Jim

Anthony,

You put the cart before the house er horse. You needed to get the equity out of the property BEFORE you did the contract. Now that the folks are in there, they are in the chain of title and the bank has to consider them. I'd also be worried about their ability to complete the deal at the end, but that is a different ball of wax.

Fixes:

If you have a good working relationships with the folks, cancel the contract and let them stay there as renters (you can create a side agreement if you have the tolerance for this) then reinstate the contract AFTER you get your funds.

Sell your interest to someone who will purchase it.

Create a mortgage, and sell it on the secondary market (May need to take a discount, hire an attorney etc.)

Hard Money Lender

JV partner

Private Money

Good Luck!

Jim

Isaias,

1) You could refinance to pull the equity out for the next deal. 

2) You could get a line. The equity would help on the line. Lines usually come with maximum LTV, say 80%. So your total LTV is the sum of all of the property values divided by outstanding balance of the line. This essentially cross collateralizes all your properties.

3) You could 1031 up to a more expensive property.

4) You could take a HELOC (Home Equity Line of Credit) and use those funds. (This doesn't cross collateralize your properties, if you run separate mortgages)

5) Keep the equity in the house and use it only as a show of strength in the next loan.

Whatever you do, get that second unit rented out (assuming you aren't living in it).

Good Luck,

Jim