All Forum Posts by: Christopher Telles

Originally posted by @Chris Martin:

Originally posted by @James G.:

  @Chris Martin Thank you for your response, great to hear you've had lots of success with this. To clarify, you, as Equity Trust Company, provide a POF to your investor. However, your POF is not utilized in making the offer because your investor submits cash offers based on their POF, then closes with your capital? In this case, the investor has cash-on-hand for 100% of the purchase price, less the deposit, for their POF. Did I understand this correctly?

In my case, my investors are new to private lending and, therefore, do not have a formal company they utilize to lend. Also, while I will putting money into the deal, I can't show a POF for 100% of the purchase price.

The POF is material to the offer in some cases. It really depends on the circumstances. The flipper may or may not have all the cash. In some scenarios he puts in a 10% EMD with POF from ETC and his own bank statement for the remainder. The seller (and their broker) most likely look at the offer and say to themselves I don't think he'll walk away since he has 10% deposit.... But each deal is different, and depends on the circumstances.

Putting in a 10% EMD increases an investors beta (I use that term broadly) significantly. If the investor is unable to secure funding then they're essential out their deposit or it sits in limbo until its arbitrated/negotiated.

I'm not a flipper per se, but I would think it advisable to structure an EMD say as 2-3% initial deposit with the remainder due at the end of the due diligence period. Any blowback from the seller/broker would then be directed to the offers all cash basis. At least that's the way I would approach it.

I guess if there is no due diligence the investor has to rely on their confidence they'll be able to get it funded. It just seems to me the 10% deposit adds greatly to the risk profile in a transaction that already carries enough risk in and of itself.

Sometimes the best to deals are the once you walk away from.

Originally posted by @Oliver Trojahn:

Bill, 

Thanks for the response.  All your concerns are items I am looking into as due diligence.  I don't see 6% as over the top.  Their 60 to 100 dollar increase annually is nothing compared to their investment on building their space out.  These companies have to much skin in the game already.  Their business decision to move out after spending 60k in tenant improvement does not seem likely.  Then spend the same on a new space.  Rents are already under market and the 6% increase is in the lease.  They signed up for it.  Again, that is my rookie opinion.  Could be wrong could be right, I dont know.  but I have confidence in the lease in hand.

No repairs needed, HVAC's all separate and tenants responsibility.  Each lease has the additional monthly fee's required for CAM, Management, Real estate tax/insurance all in addition to my previously stated Net Income totals. 

I defiently don't know him well, probably misspoke.  Our relationship started when he wanted me to work/partner with him on some development opportunities and or help with some of his projects (all which i still may do).  I believe he is looking out for my best interests.  I also think there is a lot of negotiation room on the financing and cap rate.

Property is located just north of plaza off main street.  Don't know the traffic count but it must be one of the highest in the city.  road is very busy.

Just to confirm you opinion.  You feel 25 years WSJ+2% is a good note.  Even if it adjust annually?

 "I don't see 6% over the top".

If you were to buy this strip center the issue you may face in the not to distant future is that the "under market" rents are no longer under market, and in addition to tenants either being driven out of business because they can no longer pay the rent or just flat out move (and don't be fooled they will) you'll experience significant vacancies. 

If and when you might go to refi the property a lender will discount the rents to market, and or not refi based on the tenants financials making a refi difficult. 

I don't know CAP rates for your marketplace so I will reserve comment on that issue, but you should do some research as to what other strip malls similar to those in your marketplace have traded for recently. This isn't to difficult to ascertain if you have access to CoStar or know a commercial real estate broker in the local marketplace willing to share some comps with you.

The owner financing aspect to this proposed transaction is attractive, particularly the ability to leverage the down payment as you described. I would recommend you negotiate hard for the elimination of a prepayment penalty, or in the worst case a phased prepayment that reduces over time e.g. 6,5,4,3,2,1 or something similar (I did this in a commercial deal during the S&L crisis and used what the RTC used as their standard prepay).

Being able to get into a deal easy is terrific when its achievable, but you also want to ensure the economics of the property over the next several years will allow the project to remain economically viable.

6% annual rent increases are steep, particularly for mom and pop businesses. If I were sitting in your shoes I would underwrite the rental increases at current CPI (or historical CPI rates) to ensure you're covered. Its may not exist today, but yo will get blowback from the tenants moving forward with 6% rent increases.

All the best.   

I enjoyed your post for the worthy goals you describe, and humorously in the way you refer to your "age". Let's start with the latter, perhaps my perception is skewed but at 55 I'm of the opinion you've just enter a life phase where you can do so much, experience great things, and create great wealth while in the process. My 93 year old grandfather to me recently "I know I've got at least 10 years, but if I could just get another 20". He was speaking in the context of growing his business of 50+ years. A business he still works at 5 days a week putting in 50+ hours. My point here is you are young (I'm five years your junior) and have many decades to grow and operate your yet to be built real estate portfolio. Now go do... As far as your plan, it actually sounds solid, and you want to know why, because you have a plan. It's really that simple. You made a plan, which is way more than many will even attempt, and now it's time to execute. The important thing is to just get started. You can make adjustments as you move along while executing your plan. Now, go do!

Originally posted by @Andriy Boychuk:

@Account Closed

it was online payment and I am not able to reject it. One option I have is to refund it. I use eRentPayment

 You've already mentioned you refunded the money, and separately you are planning on consulting an attorney. 

One question you'll want to ask your attorney is if the refund per jurisdictional standards constitutes constructive receipt. 

If it does you'll then know and can make appropriate decisions. 

I believe @suekelly has nailed it, if that is actually the law in PA (didn't click through to the link).

In CA if you accept a partial you have to go back to court to get another court ordered eviction. A lot of tenants will try to play this game to get as much time out of unsuspecting landlords.

Its best to return the partial payment to the tenant by certified mail or FEDEX/UPS if its not already been cashed, and then continue on with the initial eviction order. Better to get the tenant out and get your unit rented while simultaneously trying to collect the back rent.

If you've already accepted then you may need to start the process over again.

It would have been very beneficial to list the questions you intend to ask of the attorney so the community could fill any holes, get me?

That said, your conversation should be geared towards two major topics:

CYA., aka "business entity" and deal structure procedure.

You mentioned you are "stationed" in New Mexico and reading beyond the text it appears you might actually call another state home. So you'll want to check with the attorney about the proper entity you will create to operate from and whether its a C Corp, S Corp an LLC, and in what state it should be formed. If cost is a factor, and based on your comments it appears that it may indeed be, you might elect to forgo creating a Corp or LLC and simply create and then operate using a trust which is pretty straight forward. Creating one shouldn't cost much if you shop around for its formation (you don't need to use her services, she's only providing you initial advise which you are paying her to do. You won't owe her anything beyond that initial advise unless you feel its warranted to continue to use her services).

The deal structure questions should be presented in the format: If (A) and (B) apply to a potential transaction and don't work out like originally planned, and I insert (C) or potentially (D) how does that impact the risks to me in the deal (from a legal perspective not necessarily an economic risk; you as an investor should know the economic risk). 

There are numerous other items you could discuss (at least I would) but since its unknown what you already intend to ask I'll leave you with the two "legal" questions mentioned.

The police will not respond to the tenants call. The issue is a civil matter and the tenant will either need to consult an attorney for any damages they feel they incurred or file a complaint with the housing department in whatever government agency has jurisdiction oversight for housing in the area of your property.

fyi, should you get an invoice for a "hotel" bill send a reply with a copy of their rental agreement or lease asking them to identify where it states they should be reimbursed. 

Personally, I'd incur a vacancy and give the person a termination notice if your rental agreement or lease allows for such (providing it keeps with local housing regulation compliance).