All Forum Posts by: Jon Mauro

I would not bother with any cost approach unless it's new construction. I could build a mall in the desert and it isn't worth anything just because I paid $X to build it. Appraiser's include a cost approach to boost their reports.

A sales approach is a good check and balance against an income value. However, a sales approach is EASILY manipulated in an appraisal to justify a higher or lower value. There are too many variables for it to ever be relied upon alone.

An income approach is almost always the best valuation method, especially if the property has multiple tenants. Cash is what matters most. If the property is not stabilized, there are ways to account for this in a direct cap model. Alternatively, a discounted cash flow pro-forma can capture more complex scenarios.

There is sooooo much to discuss when comparing the two. I think it is very difficult to sum up in a quick response. The short answer I would offer is that you cannot say one is better or worse than the other. It really depends on the individual property. I think multi-family is lower risk in general if you have a larger number of units. You likely won't encounter major vacancy issues and you can always reduce the asking rest to fill vacant units. Office property is a completely different animal influenced by different factors. If I had to pick one, I would choose the property type that is more in demand in your market for the next 5 years. Multifamily has been the preferred property type for the last 5 years but Class A has become overbuilt in some areas. Personally, I would stay away from any Class C office property. I think you can run into high maintenance short term tenants and get into extended vacancy issues. In addition, your pool of lenders will be smaller as many banks won't want to deal with lower stock office.

I would narrow down your question in order to facilitate useful replies.

If it is a commercial retail complex, I would be uncomfortable having you self manage without retail experience if I were the lender. Managing a 17 tenant retail complex is VERY different than managing single family homes.

Are we talking about a multifamily property? If yes, you can probably make a much better case to the bank as to your qualifications. If it something other than multifamily, I think that's going to be a more challenging pitch.

Regarding a fair management fee, for a 17 unit multifamily property (assuming that is what we are talking about), I would guess around 6%? That is just a guess though as this is not my area of expertise and rates can vary by region. I am sure someone else can give you a more accurate estimate.

I have worked in CRE lending for quite some time and have worked with various types of lenders. I have never heard of any hard or soft rule which dictates a 1:1 ratio of loan to net worth. I am sure there are some lenders who might use that as a guideline, but I just have personally never run into that. Further, most lenders recognize that liquidity matters way more than net worth as net worth can be inflated and is often illiquid, especially for real estate developers. The bank of course loves to see a high net worth but it is one of many considerations. The bank wants to know if you WILL support the property just as much as they want to know if you CAN support it. In short, they are judging your character as much as your balance sheet. Above all this comes the merit of the property itself and your ability to delivery on the strategy.

I'd echo much of what was mentioned above. I would start with small to mid-sized local banks. LTV should not be an issue. I would have a good story ready for the lender regarding what qualifies you to make the leap from residential homes to a $5MM commercial deal. Hiring a professional property manager will help this case for sure. I also agree with the comment above that credit score will have less weight than you might think. For commercial deals of that size, the bank will likely care much more about the property cash flow, your personal resume and your personal financial statement than your credit score.

One thing I did not see mentioned... What is the property type? This will matter as you attempt to diversify beyond single family residential.

Personally, I would walk away unless the offer comes with some very wide doors for me to walk away without any money lost. Is the broker allowing you to inspect the property throughout prior to making an offer? If so, maybe you can get a better sense of what sort of rent can be generated. Sometimes people who behave like there is something to hide actually have something to hide. Just my opinion...

Borrower will ALWAYS pay the legal fees. That said, I would recommend talking to the lender about the legal costs. They may be willing to use a more affordable attorney or capping the legal costs. As a lender, I had a stable of law firms I could use. I knew I could use certain firms for simpler deals or deals where I knew my borrower would be more sensitive to legal fees. I used other firms for more complex deals or deals in which I knew the borrower would be more tolerant of higher fees. In addition, as a borrower, your can do your part to keep legal costs down by keeping loan document comments to a minimum to minimize the billable legal hours. Of course there are important issues to push back on at times so try to negotiate any of those items before lawyers are engaged.

Borrower will ALWAYS pay the legal fees. That said, I would recommend talking to the lender about the legal costs. They may be willing to use a more affordable attorney or capping the legal costs. As a lender, I had a stable of law firms I could use. I knew I could use certain firms for simpler deals or deals where I knew my borrower would be more sensitive to legal fees. I used other firms for more complex deals or deals in which I knew the borrower would be more tolerant of higher fees.

I would agree with just about everything Brian said. I think a broker is a good option, particularly for a unique or challenging circumstance such as the one described above. I would just add that if you have the cash to self finance initially, you can always look to cash out later after the property has been further stabilized. It's always easier to finance a propert that you already own free and clear. After you own it, you have more leverage with the banks and you can control things more readily. If your investment plan succeeds, you will be able to refi down the road. Lenders will get more creative for larger loans, but for smaller loans such as this, things need to fit in the box more so or it's not worth their time and brain power to figure it out. In addition, the more creative real estate finance minds aren't handling these smaller loans.