All Forum Posts by: Louis Bergman

It is a sign of the madness of the time we live in.
Read carefully what it says.

By the end of 2012, some $153 billion in loans that make up CMBS are coming due, and close to $100 billion of that will face difficulty getting refinanced, according to Deutsche Bank. Even though the cash flows of these properties are enough to pay interest and principal on the debt, their values have fallen so far that borrowers won't be able to extend existing mortgages or replace them with new debt.

The very first task of a Banker is to do all he can to turn a bad loan into a good loan. What these guys are saying is that as a result of a rule that made sense in a different era under different circumstances someone is knowingly going to pull the trigger and unnecessarily destroy over $100 billion in capital.
So even though these properties are healthy and performing excellently, they will be destroyed.

I am so very glad that I am now a retired banker, as I cannot see myself in good conscience functioning in a climate where a sub mediocre bureaucracy blindly enforces a rule because it's there. And the saddest part is that the press, the players and the public just passively sit and watch while it happens.
How can anyone in good conscience foreclose on performing properties?

The people who enforce this crime against capitalism should be banned to 10 years volunteer work doing micro lending in the poor villages of Bangladesh and Vietnam.
Hopefully they will sober up and return with a healthy respect for what was build up by hard work to a level that it is still the envy of the free world.

Sorry for the rant guys.

Hey Rich, another great post!

Personally we will only purchase properties if we can use a so-called HUD Loan because it has the greatest terms around, but as a result there are some differences in approach.
I will try to avoid those issues in my comments, but there are some additional items to share for those who will use Rich's post as a road map for their purchases of Multifamily.

Our contracts have a standard 180 days to close with two 30 days extensions. That usually means that at some point some of the earnest money goes hard. But as these points are defined by us, we have no problem with that.

We have chosen a top notch national Professional Management Company to work with. They know that we always try to build up to about 1,000 units in a Metro market. That could very well be split between clients and ourselves, but that number gives them a solid base to send some of their better people out there.
In a good relationship they will even scout out new properties for you that are not listed with a realtor.

The PMC normally charges $25 per door to do an extensive due diligence, but we worked out a deal where they will do so for us for substantially less. So they go in as soon as the contract is signed and within 10 days we have on our desk an extensive list of repairs and deferred maintenance broken down on a per unit level. This includes estimates on costs and time to get everything back in shape.
As Rich points out in his blog, this is the best info you can have for your first round of re-negotiations.

As soon as we have preliminary agreement with the Lender on financing, a professional Inspection is ordered. Our Lender usually has a decisive say in the choice, and our mission statement to them is "Take it apart!".
This gives the history of the property, a history of the relationship with the City or County, structural issues, the works.

The next step is making the Seller understand that we are seriously considering walking away, but we're reviewing our options. Why? As Rich implies, you have to get control over the Seller.
Here's where a flurry of our people start walking in and out of the property while we maintain a hermetic silence.

What always happens next is we get a call from the Seller's representative with some kind of veiled threat that they will want to opt out of the contract.
But I'm sure Rich will more than cover the ensuing song and dance of negotiation in his next chapter.

I guess my main point is that you need a team if you want to play this game. Our fixed players are the Management Company, the Lender, our Attorney and at least one partner. Locally we add an Architect, a Contractor, an Attorney and in some cases a Partner.
If everybody does their assigned job properly, the final inspection is a breeze.
One last thought; if you like the deal you owe it to yourself to get "control" over the Seller.

Your money is made when buying, not in selling.

Great blog idea Rich!

Just adding a few things to the phase you're describing.

With existing properties you'll find that the existing lender required the seller to make reserves for roofs, windows, doors, kitchens, etc.
Those amounts are usually deposited in a separate bank account (escrow) every month.
The balance reflects the remaining economic life of the item.
Make sure you negotiate that you (the Buyer) gets to retain the balance of that account.
Some sellers consider that as a "savings account" that they receive when they sell.
I say negotiate hard on that, and make sure you don't start from zero when you become the new owner.

I also suggest you have your own inspection done.
That gives you an objective listing of the condition of the units, as well as other items that might need replacement or maintenance over time.
Personally I prefer to have my my (new) management company do this, as they will be responsible for the budget for the next years.
Their expertise is greater than mine, and they usually are brutally honest and supply great info that enable me to go back and renegotiate hard in the critical weeks before the closing.

As Rich says, don't ever accept a pro forma as gospel.
Do your own due diligence.
As a buyer your starting point must always be that the pro forma is intended to picture a perfect world.
You as a buyer will never see those numbers happen, so dig in and find out what is really there.
Visit the property several times with different members of your team to see it through their eyes.
Never hesitate to go back to renegotiate based on your findings.

This blog is a great initiative Rich; I truly believe that it will be extremely helpfull for anyone considering moving to the 100 plus units multifamily investment.

Looking forward to the next chapter.

Louis Bergman

Your should be focusing on drumming up another buyer real pronto. It seems you've lost your win-win option here.

I suggest you do an all out marketing campaign on the house over the next few days. Place signs, run some ads and have a couple of open houses with realtors if needed.
If your comps are right, you still have a great deal there and should be able to squeeze some dollars out of the transaction.

In the meantime keep negotiating with the seller and your buyer to see if you can improve your position to where it makes sense.
And if all fails, write it off as another lesson learned and move on. I would certainly use this experience to tighten up my documents, as this a classic example of the risks in a flip where no earnest money is involved, and poor performance by the seller has no consequences other then putting you in a squeeze.

Scott nailed it.

Sub 2 is the best way to accumulate a porfolio of properties based on no cash - no credit.
But realize this, if you don't have a buyer lined up, you will have to make (up) the payments to the Lender.
So make sure you have a solid and extensive buyer's list, and you'll be just fine. :mrgreen:

Have your end buyer deposit 25% of the purchase price in non-refundable escrow 2 business days before the closing.
Make a deal with your HML to be on standby in case the second closing does not take place.

The "pain" of the 25% loss is a virtual guarantee that he will close as planned.

Angela,

The Title Company may not have understood your question.
If I interpret your post correctly, it seems to me you are referring to a situation where there are truly 2 closings.
That means 2 separate HUD statements; so there would be no "disclosure" as such on either HUD statement.

If my memory serves me well each State has its own rules on whether you should disclose to the end buyer that you are contracting to sell a property that you do not own, but have under contract to purchase.
So your Attorney could very well be right; just check with another Attorney to make sure on that.
Now I do not have a simple clause that covers such a disclosure.
What I do have on file is an Addendum to the Sales Contract with your end buyer.
I've never had to use it in years past, and in re-reading it just now, it still scares the hell out of me.
But if you need a copy, just PM me your email and I'll email you a copy.

Is your Closing Attorney requiring you to come up with the Funds for the first closing?
Or has he requested a POF letter from you?
If not, he seems like the perfect guy for your business; cherish him.

Always remember though that if your end buyer does not close for whatever reason, you now own the property and have to come up with funds to pay the seller.
But I'm sure you know that and covered yourself adequately for that contingency.

Don't forget to post how it all turned out.
Happy hunting! :cool:

Allen,
I went to Google and searched for "Maryland REIA".
There are 13,100 posts there.
The first one I opened gave a list of 6 REIAs.

Google is a wonderful tool and I suggest you just replicate what I did.
Spend a little time there on research to find one that is close to you.
REIAs are always eager to get new members and you'll have a great opportunity to network and meet your local players.
Come back here and let us know how you're doing. :D

Brent,
My impression is that you're just starting out and kinda looking for your bearings.
If that's correct I suggest you start visiting the meetings of the MREIA (Miami Real Estate Investor's Association).
Bob Burns is the President and he is a very active investor and just one helluva nice guy.

You will meet several HMLs as well as Brokers who will gladly show you the ropes.
Be sure to talk to the representative of Equitymax, a Fort Lauderdale based HML and realtor.
They have a very low treshold and always have a number of properties they took back that they can offer at very attractive conditions.

I haven't been there for several years now, but you will find a great group of people there and I'm sure you'll end up just fine. :cool:

It certainly makes sense to add a good Commercial Money Broker to your team. Don't worry about the expense, as they get paid by the Lender. You will find that there's less need to meet face to face in the Commercial field. Most business is conducted by Internet and the phone, and there's no real need to meet over coffee on a regular basis to discuss.
That's just the nature of the business.

Keep in mind that what may seem like a big issue to you due to being a newbee, most likely is a relatively routine issue for a Pro.
You have quite a good number of solid professionals right here on the Forums who will gladly advise you and compete for your business.

I suggest you just post the basic outlines of your deals, and test the waters here. You'll be pleasantly surprised... :mrgreen: