All Forum Posts by: Jeff Groudan

Quote from @Carlos A.:

Quote from @Jeff Groudan:

Investment Info:

Large multi-family (5+ units) buy & hold investment.

We built this 6-unit apartment building from the ground up. We bought the lot, had an architect design the building and contracted for the construction.

What made you interested in investing in this type of deal?

We like to invest for both cash-flow and appreciation.

How did you find this deal and how did you negotiate it?

We looked for a value lot with enough square feet to build a multifamily in our desired neighborhood.

How did you finance this deal?

Commercial Loan

How did you add value to the deal?

We optimized the design for cash-flow and what we necessary in the particular neighborhood

What was the outcome?

We have close to 100% occupancy every year. Property has appreciated over $250K in 3yrs. Consistently cash-flows about $2000 per month.

Lessons learned? Challenges?

Our only challenge right now is maintaining cash-flow while managing increases in:
- Interest rates
- Property taxes
- Insurance rates

Wow! Congrats on the build and the success!

May I ask, when you talk about optimizing the design for cash flow, what are you focusing on? Are there design specifics that you have noticed can help create more income?

 Hi Carlos, because we built it from the grounds up, we were able to design specifically to the market and the lot.   Things like:

-  What were the most units we could get on that lot

-  What size and configuration of the units would get us the most income.   The building was in a neighborhood with a lot of old 2 bed/1 bath bungalow rentals.   So we configured the apartment with 2/1s with finishes and rents that allowed us to compete really well with the bungalows (less than the bungalows but still a really good rent for us.

- We designed the units for low maintenance (tile floors, only electric - no gas fixtures)

- We had 9 parking spots for 6 units so we rented out the 2nd spots.   

- We had a utility room in each unit so we could rent washer/dryers for extra income

All of this is in contrast to buying a building and remodeling it.  While you can customize certain things you are more limited with your degrees of freedom to change an older property.

Investment Info:

Large multi-family (5+ units) buy & hold investment.

We built this 6-unit apartment building from the ground up. We bought the lot, had an architect design the building and contracted for the construction.

What made you interested in investing in this type of deal?

We like to invest for both cash-flow and appreciation.

How did you find this deal and how did you negotiate it?

We looked for a value lot with enough square feet to build a multifamily in our desired neighborhood.

How did you finance this deal?

Commercial Loan

How did you add value to the deal?

We optimized the design for cash-flow and what we necessary in the particular neighborhood

What was the outcome?

We have close to 100% occupancy every year. Property has appreciated over $250K in 3yrs. Consistently cash-flows about $2000 per month.

Lessons learned? Challenges?

Our only challenge right now is maintaining cash-flow while managing increases in:
- Interest rates
- Property taxes
- Insurance rates

Hi all - thanks for the replies...

Hi all,

We have a number of rentals in Houston and do a pretty good job of keeping vacancy very low by lining up new tenants during the 30 days after the previous tenant gives notice.

However, we have had a couple of recent issues with a few really messy tenants who when they gave us their 30 day notice, their units were effectively unshowable.   Which means that we had to wait until they move out and then fix the unit up before we could even begin showing the unit which almost guarantees at least 14 days vacancy or more.

While we know this is part of the cost of doing visit and do plan for vacancy, it would of course be better if we could limit the vacancy.

My question is to other landlords:  Has anyone created a custom addendum which effectively requires the tenant to have the unit in a clean and orderly condition at the time they give their 30day notice to allow for showings?   And if not, then their is some financial cost to the tenant?

The standard TX lease says they have to allow showings but showing a disaster apartment is worse than not showing it at all.

We would love to hear any best practices on this!

Thanks,

  Jeff

Thanks all!   Two follow up comments

The lease agreement (Texas) actually does say late rent fees is something that could be debited from the security deposit.   What was not clear is whether this could be done during the year or only at the end of the lease (either the end of the contract or if the lease was terminated early for non-performance.)

We know in all likelihood this 1 tenant, of the 3, will be a problem but as Joel implies, it is a very good deal for us, even with the tenant issue.   That said, we like to know what the "letter of the law" is on security deposits as we try to resolve...

Thanks again for all the responses...

Jeff

Hi - we are working to finalize a contract to buy a 3 unit apartment and the contract clearly says that security deposits transfer from seller to buyer.   No question here.  I know the security deposit really belongs to the tenants and needs to transfer to us at the sale.

However, the seller is saying that the tenant in one of the units has not been performing and has accumulated a lot of late fees during the year and he has used the security deposit to pay the late fees and therefore he only intends to transfer 2 of the 3 security deposits.

My question is whether the seller is allowed to use the security deposit in this way and now that he is selling, is he accountable to transfer us a full security deposit?    Ultimately, everything is negotiable but I am trying to understand if there is a black and white rule on this or if a grey area.  

The contract language states security deposits transfer to buyer.

Thx,

   Jeff

Hi Shawn,  just to be sure I understand, when you say "deeded in trust", do you mean:

- You used a deed of trust OR

- The deed calls out a Trust instead of a company or person?

To answer your questions:

- We usually don't have the new buyer take title in a trust.   So the new deed, after they buy is Just in their name.

- We do sometimes take initial ownership of Sub-To's as a Trust. The Trust then usually has an LLC as the beneficiary. The seller finance note then is between the Trust and the Buyer

- We always use a warranty deed and we always get the title insurance for both sides of the sale (when we acquire and when we sell)

I hope that helps.  Good luck!

I usually ask for $10K-$20K as down payment although 10% to 20% is also a good guideline depending on the price of the house.  I also generally price the house slightly above the market price as seller financing buyers tend to care more about terms (monthly payments, interest rates, down payment) than the actual sales price.

For interest rate, I would consider something a few points over the market interest rate for a residential mortgage.  With today's rates, I would say between 7%-8%.

In terms of length of the loan term, it really just depends.  Do you want your cash out soon or do you want to maximize your income.   If you want your cash out, than I agree with Steve, go with a 3-5yr balloon.   If you think the buyer might not refinance anytime soon and you want to maximize your return, you can go with longer terms.   We have a few we have done with 30yr terms.

In terms of Owner Financing vs. Renting there are different pros and cons

- If you are the landlord (renting) you have to deal with repairs, vacancies, tenant issues, etc...   However, if your home is in a high appreciation neighborhood, you get to retain the appreciation.

- If you go with owner financing, you become the bank so you get paid every month but repairs, property taxes, etc... are no longer your problem.

You know your personal financial situation as well as the condition of the home as well as rents in the neighborhood so you will have to decide which model is best for your situation.

Good luck!

There are lots of different opinions about wrap mortgages.   Many real estate investors swear by them, other people say they should never be used.

The reality is that wraps are a little complicated if you have never done one and hold some small risk of a bank calling the note but CAN be a useful tool when used correctly with two (or three) willing parties

Regarding the terms of most residential mortgage terms, specifically the "due-on-sales clause", they generally say that the lender "has the right to call the note" but not the obligation.   Another way to say it is they CAN call the note but they don't have to...

We have done a lot of seller financing deals, a large number of which were wraps and we have never seen a bank call a performing note due.  We also work with many other investors who would say the same.   It is expensive for banks to foreclose and potentially have to sell the house - they would almost certainly lose money.   Banks like performing notes. So, as long as you keep paying the loan on time, you are fairly safe.   

Some precautions to consider:

- Make sure the person who is the borrower of the underlying bank mortgage fully understands the implications  of a wrap, as well as the buyer

- Consider a 5 or 10yr balloon note (vs. 30yr fixed) if you are worried that the seller may have 2nd thoughts down the road

- Buyers should need to bring a significant down payment to the deal so that they have skin in the game

- If your state allows a Deed of Trust for the wrap note, I suggest using that document (vs. a Mortgage) as it will put a lien on the house allow the Seller to pursue a non-judicial foreclosure if the buyer does not perform.

- The home insurance after the sale (the new owner is the "insured") should retain the name of the previous owner(payor of the bank note) on the insurance as "additional insured" so as to not set off any alarms with the bank.

- Use a 3rd party loan servicing company to collect all mortgage and escrow payments and make all appropriate payments to the bank lender as well as seller finance lender.   The bank lender will generally make the property tax and insurance payments directly.

I will say, there will likely be other, perhaps contrary, opinions on wraps on this forum.   Your risk tolerance plays a role in whether you get involved with wraps or not....

Good luck!

If the property is already listed, then really, your only choice is to go through the Realtor.

Realtors are legally obligated to present offers to their clients so they should present yours.  That said, many realtors don't understand seller financing very well and may be skittish so they may warn their seller off.

If the Seller still has a mortgage balance, seller financing is a tough sell as structuring a seller financing deal with a wrap around is complicated!   If they own the home free and clear your chances are much better.

One way to get the sellers attention when using a Seller Financed offer is to offer at, or a little above their asking price to get their attention!

Also, I like to show them the difference in the $$ they would receive between a traditional offer where they cash-out at closing and a seller financing deal where they get interest income over a period of time.

Example:  If the Sales Price is $150K and they own their home free and clear:

- Conventional Cash + Bank Financing:  Seller gets $150K at closing.

- Seller Financing with offer at $160K, $20K down, 6% interest,  30yr Amortization, 10yr balloon:  Seller Gets $237.8K over 10yrs

By showing the a really solid offer on price PLUS illustrating how much more they can make over time by offering financing, you might be able to open their eyes to the benefits of offering seller financing.

Good Luck!