All Forum Posts by: Peter Giardini

At the risk of shameless self promotion I just posted a blog article on finding lenders and creating relationships.

You can probably find it by looking through my profile.

Good luck.

Tim,

While there are GURUs out there that seem to have figured out how to navigate these waters (Alan Cowgell SP) seem to be one of them... the reality is that once you have someone lend you money you are entering some special realm involving securities. That is what my lawyer tells me.

Cowgell advocates that you should never mixe funds provided by multiple investors... doing so is considered "pooling' and there are any number of rules that apply.

The best approach is to do what every other serious investor looking for funds does... develop a Private Placement Memorandum supported by a business plan and shop it around. As I mentioned, I am on my third go around with this approach. This time to create an exclusive purchase pool for my clients... and this is the exact approach I am using.

A word of caution here... by shopping it around I don't mean posting it on a billboard or taking out ads in the newspaper.

Instead talkng to accountants, lawyers, financial planners and certain friends and family about what you are looking to do and how their clients or each of them individually can participate.

There are some stringent requirements regarding the types of investors you can talk to... but I will leave that for a different discussion.

OK...

Here is the background.

Picture yourself in front of a judge defending why the tenant did not deserve her security deposit back.... and being told by the judge that it looked like we forged the documents... essentially calling my wife, Vicky, a liar.

We lost and Vicky was completely devestated... and that actually became a good thing because her motto after that was... "a tenant will never get one over on me again... EVER"

Here are the mechanics of the system Vicky put into place.

Upon move-in the tenant is given a three-carboned property inspection check-in sheet. This is their opportunity to note things that could be come issues upon move-out. Things like a small stain on the kitchen floor or nic in the counter top. Sometimes tenants also find things that you as the landlord need to address.

This move-in inspection is in their words/handwritting and when completed they get the original. The other two copies go into the tenants folder.

Now you have a baseline in the tenants words of the condition of the property... and yes we take pictures of the tenant as they are inspecting the property.

The safe and clean inspections are intended as a mechinism for you to routinely (90 to 120 days) to inspect to ensure there are no issues with the tenant or with things you need to fix. They are announced via a standard letter to the tenant which spells out what we were looking for and what they should be preparing for.

You conduct this inspection. While it is nice to have the tenant there it is not required.

Again, three-carbons. The original and a copy stays in the tenant's folder and a copy is left for the tenant.

If there are issues then another inspection is scheduled... usually within 2 weeks.

The move-out inspection is just the opposite of the move-in.

You conduct the inspection as part of the check-out. Make sure to have the move-in inspection with you.

You note any issues that you find with the property. Things like a broken screen or bugs, or dirty appliances. I am being nice here... I have moved some tenants out of some pretty trashed places.

Anyway... the move-out inspection is your record of how you found the condition of the property. We request that the tenant sign the document acknowledging the items found. In many cases the tenants would not... but it didn't matter... we always won.

And of course we took photos of the items we were noting on the move-out inspection.

Since Vicky implemented this approach our reconciliation of security deposits was almost never questioned and the few times we found ourselves in front of a judge it was a slam dunk on our part.

It's all about having the right paperwork and using it!

I hope this explains the process further.

No repairs.

Access to premises with 24 hours notice

Allocation of payments in this order... Late fees, fines/citations, water/sewer, and finally rent.

As an aside but related... we implemented a rigorous move-in, safe and clean, and move-out inspection system that protected us 100% when standing before a judge.

The quickest way to failure... is biting off more then you can chew. Ask how I know this!

The seller will gladly unload his problems and risk onto you for $900K. And as mentioned, if you buy the LLC no telling where the bodies are buried... so to speak. Like... are all of the contracts paid up and happy.

Assuming the gross income is correct this building could have a value of over $2Million. But to get to the number you would have to take on a tremendous amount of risk... and renovating and tenanting a 40 unit Section 8 complex (in other words your very own project) is a daunting task.

As mentioned above... unless you find a highly experienced partner... I'd keep looking.

I think Corey nailed with his comment on item #4.

Based on the information provided I don't see a motivated seller... just a very smart investor hoping for a greater fool to come along and pick up his deal for above full-retail. At this price the ony way this property would cashflow would be with a very high downpayment... killing the ROI.

Ariane... I would bet that what attracted you to this deal was the fact that the seller would consider carrying a second. While this may get the deal done for him... it only exposes you to very high levels of unacceptable risk.

Having done this twice already and getting ready to do it again... the SEC has some very specific rules about these kinds of things.

Most of the rules captured under a generic term called 'Blue Sky Laws" deal with how you approach different levels of investors... John C, alluded to accredited or otherwise screened investors.

Also, if you have any plans to pool these funds, instead of using one persons funds for just one deal the rules really get challenging and the approach you use will include a Private Placement Memorandum and business plan.

Good Luck... and running this by a lawyer would not be a bad idea.

In addition to the advise provided...

Assuming that your lease allows you to enter the premises with sufficient notice show up for the inspection. And bring a camera.

Also, in the future always send coorespondance to tenants certified and first class.

A couple of things...

The bank is all about risk management/reduction and you are bringing them one of the riskest category of deal that you could in this market. So... your entire presentation is going to have to focus on how you will mitigate every risk they can think of.... and there will be many.

Banks are interested in primarily three things.

1. The deal itself. Is this a good deal and if it is, is it one they want to participate in. You will have to convince them that this is a good deal... and just because you are getting those lots for 50% of their appraised value in July.... only means that the bottom probably hasn't been reached. To offset this, you will need to provide comps on currently available/sold lots and how fast they are selling and why you think you can match that performance in your market.

In addition, relative to this being a good deal, you will need to include comps for similar homes. The biggie here would be the absorbtion rate for new homes vs. existing homes within your market... and of course the sales price.

2. Next the banks are going to look at you financially. Their biggest concerns today will be... how much skin will you have in the game and what type of reserves are available when everything heads south.

They are going to look very closely at the individuals who will guarantee these loans... so the principles will have to look good on paper... and themselves have reserves.

3. Your overall experience with similar deals and I would add in similar markets. This one could be a tough one unless you have extensive recent experience and have survived to talk about it. The banks primary interest will be on your experience getting these properties sold. So make sure you fully understand your exit strategy and can communicate that to the bank in a clear consise manner.

There is probably more I could add... but this will get you started.

Once again great advice.

I will add a few more things...

More then likely the reason the old owner sold you the property is because they were tired of dealing with tenants... and maybe even these tenants specifically.

And guess what... you just purchased their problem.

You primary goal with any new tenant whether one you chose or one you inherited is to TRAIN them to do things your way.

Here is what I found in almost 100% of the cases where I "inherited" tenants.

They will start the relationship by testing you at every turn. Whether it is late rent, bugs, maintenance issues... you name they it are testing to see what you are made of.

If you don't set the tone... "train" them from the begining you will only be creating a more challenging situation.

So... how did I train them?

Once I owned the property they got a letter indicating the basics of the lease. They will need to be reminded... remember they will test you.

The next thing you need to do is schedule a safe and clean inspection. This gets you into the property on your terms and allows you to set the standard around which you expect them to live in your property.

Once in... in addition to performing the inspection, this is a good time go over the lease and ensure they know what their obligations are.

Also, don't be surprised if the inherited tenants attempt to claim that they had a special deal with the previous owner. Of course they won't have any paperwork... so don't let them get this one over on you.

There is probably more... so just ask.