All Forum Posts by: Will K

Steve Babiak So the typical rent in that area is about $700-$800. What are tenant estoppels? These are two separate buildings, and I already have pre-approval loans for residential properties, and the P&S agreement is a residential type.

Dennis Tierney I pulled the $600k number off a title search, showing that construction loans were taken out for each property in the sum of $300k each. The bank has already informed me they wont take into consideration rent for this property, but none-the-less pre-approved me for a $180k residential loan.

Dennis Tierney Brian Burke I submitted the P&S agreement with my Financials Addendum (described above) attached.

The RE Agent representing the seller phoned me yesterday informs me that the seller says because she is already being lowballed for the property, she is not guaranteeing anything concerning finances of the property, nor information on roof age, maintenance done, etc.

Given the background of the property above (the seller put around $730k into the property she is now taking offers of $180k for) I somewhat understand where she is coming from, however I am hesitant to purchase something without at lease seeing the leases and perhaps a few months of the previous rental history. The Seller's RE Agent tells me she wont even sign anything that guarantees shell hand over the leases after the Agreement is signed.

What are my options here? It is a 6 unit property, with only 4 of the units currently rented. One is section 8, and her apartment looked very homely and well taken care of, so I would be certain she is paying whatever portion of the rent she may be responsible for. The other 3 units were occupied by bachelors, two units did not have anyone there when I visited the property at 10am, but there was one unit where the tenant was there playing xbox at 10am on a Tuesday with his friend, and his apartment was a pigsty. No real damage, but just a slob's pad.

It looks like I might be facing eviction of 2 tenants right off the bat, which would drop occupancy down to 33%, at which point it would flow cash-negative.

The units are completely renovated with all new appliances and HVAC equipment, and fully occupied the property has a healthy CAP rate, so this would be a great deal with some redirection. However, the only thing I have to go off of for rent records is the RE agent's word. She has not provided any leases or rent income history.

I was thinking of dumbing down my Financial Addendum and only demand that I get copies of all current leases and rental income history of the last 6 months. If I cannot get this should I pass on the property?

Brian Burke Joel Owens Wow awesome advice from both of yall, especially Joel with getting into the specifics of why this particular property is probably not a diamond in the rough.

Well I was never seriously considering buying it due to where I live now and how much cash down it requires, but it was educating to find out why no one else has looked in to this deal.

Joel, just out of curiosity, how much would you offer for the property I linked? I know you say you dont but in Atlanta city limits anymore, but surely there must be a price point you would take that property at?

Joel Owens So management, occupancy, and maintenance are assumptions I make when I take a first look at the property. I use them in my model to determine if the property may be a good/bad deal.

Also, I am trying to take more of a buy/hold strategy for these properties. This property would have to drop to 30% occupancy before it started going cash negative. a 50% occupancy rate would still give me a 15% cash on cash return.

I just wanted to see what BP thought of this deal. It is actually not one property, but two I lumped together. Here is one of the properties:

http://www.redfin.com/GA/Atlanta/156-Fairfield-Pl-NW-30314/home/24648805

Seems like an awesome deal if someone has the liquidity to scoop it up.

Jon Klaus Ok so I had an error in my original post. I meant the Occupancy Rate is 75%, and this is a rate I assume when I run all my numbers.

The actual occupancy rate of the property is a bit above that, according to the Agent.

Jon Klaus Perhaps a fellow BPer? Hah I am not sure. I am new to this, so what makes the property distressed? The rents are in line with rents in that particular location.

Is 25% down unreasonable here? This is not a jumbo loan, and I know first time home-buyers that are my age (26) that get approved to buy $500k houses as their first purchase (to live in), and only have to put 20%, if that. While I think its quite dumb to be buying a house for that much your first time (especially in the bubble that is DC), but banks will do it for those guys, why would they look at a profit-driven investor of the same age and think its a higher risk? The banker's logic is lost on me. Defaulting on a loan is the same whether its a rental property or a personal house. I don't want to destroy my credit or lose $170k in cash anymore than the next guy. /rant

Two separate properties for a total of 40 units, all 2br/1ba.

In a C-/D location of big city in the south. Average rent of all 40 units is $450/mo with $450 deposit. Tenants pay all utilities except water. (what average water cost assumptions do BPer's make?) Asking price is $480,000, was thinking of offering $450k. Would have it managed by a competent property manager.

Assumptions:
Management fees: 16%
Taxes: 3%
Vacancy Rate: 75%
Maintenance: 10% of rental income
Insurance: 0.8% of purchase price
Misc Property Upkeep: $100/unit per year

Money down: 25%
Inspection fees: $10,000
Improvement fees: $10,000
Closing Costs: $25,000
Total Money Down: $172,000

Going off a 60%/40% expenses to NOI ratio, I see an $81,600 NOI, and after the $20,000 annual debt service I would get a $61,600 cash return. This gives me a 36% cash-on-cash ROI. The property has a CAP rate of 23%.

Seems like a great deal, but the only catch is this would be my first property, and I live a 2-hour plane ride away. What does BP think?

@dennis tierney the RE agent told me the current monthly rental income, so my analysis and offer was based on what she told me. i requested leases but haven't seen them yet.

It was listed at $260k and i offered $180k, expecting to get ignored. The RE agent ran it by the seller, and then sent me a PS agreement.

Although, the RE agent tells me theyre getting other offers and all signed Ps agreements (and earnest money) is due by this friday to be considered. The RE agent just sent me all the docs for review late tuesday. Almost feels like theyre trying to rush me into signing it and handing over the cash.

The other catch is that its a short sale. The deal is for two townhouses, 3 units each, so a total of 6 units. Seller bought them as shells for $130k total in 2005, and then took out almost $600k in construction loans to turn the shells into 3-unit townhomes, so properties that the seller put $730k into i would be getting for $180k. This is contingent on the bank OKing the short sale, which based on the above criteria does not sound likely.

Brian Burke I am using a "standard" contract, and just read over it a fourth time to see if those clauses were already in there but did not find them.

This is my first P&S Agreement, and I paid a lawyer $200 to go over it with me yesterday and he never mentioned anything about those clauses, it was something I realized I needed after reading through this forum. I know a lawyer I won't be going back to.

Thanks for the feedback. I realized #6 wont fly because the seller signed a disclaimer statement saying that she won't provide any disclosure about the property. I won't even bother keeping #6 in there.

J Scott Thanks, J. I will simplify it, I agree your approach would provide more opportunities to get out of the deal if something doesn't add up the way I'd like.

I was going over my P&S Agreement, and realized there is no section in there which would allow me to nullify the contract and get my earnest money back if I discovered the rental income was not what the RE agent had told me. I then realized there was also no way to get out of the agreement if there were "unexpected" expenses the RE agent "mistakenly" forgot to tell me about, or some tenants weren't paying their rent.

I wrote up an addendum that hopefully addresses most scenarios that would turn a deal sour. Any feedback would be appreciated.

The Addendum reads:

Seller must provide the following documents within five (5) days of signing the Purchase and Sale Agreement:

1. Copy of Current Leases: Seller must provide copies of all current leases.
2. Current Tenant Rental History: Seller must provide the previous 12 months of rental history payments from current tenants. Rental history must be in the form of rent rolls, bank deposit history, pictures of rental checks, or a statement of the financial health of the property as certified by an accountant. Statement of the financial health of the property must include rent history as well as current rental income. If Seller is unable to provide rental history then Seller must provide tax returns from previous two years as to verify rental income of the property.
3. Year to Date Profit and Loss: Seller must provide a summarized financial statement for 2011 and a year-to-date summarized financial statement for 2012. Each of these statements shall include total collected rent and any expenses, including maintenance, utilities paid by the Seller, or any other expenditures related to the property.
4. Copy of Management Contract: Seller must provide copy of property management contract if Seller uses a management company for the property.
5. Recent Repairs: Seller must provide breakdown of any repairs or upgrades performed on the property within the last year. Additionally, Seller must provide breakdown of any work done on roof since 2005, including replacement, repairs, or upgrades performed on the roof.
6. Necessary Repairs or Upgrades: Seller must provide list of repairs or upgrades that may be necessary for the property.
7. Recent Tax Bill: Seller must provide copy of most recent tax bill for the property.

Within fifteen (15) days from when Buyer receives items 1 – 7 above from Seller, Buyer shall notify Seller of an unsatisfactory rental history, as defined below, or that current lease rent rates below $700 for any currently-leased unit is unsatisfactory. An unsatisfactory rental history entails:

1. Late payment by more than twenty days by the same tenant, more than two times in the last twelve months.
2. No payment for more than one month by any tenant within the last twelve months.

Unsatisfactory rental income history or unsatisfactory lease rent-rates, as defined above, shall afford Buyer the right to terminate the contract. If the Buyer elects to terminate the Contract, the Contract shall become null and void, and the Deposit shall be immediately returned in full to the Buyer.

Should the Buyer find exception to any of the foregoing materials including rental income history, profit and loss statements from the last two years, or any of the items described in points 1 through 7 above, then and in its sole opinion, the Buyer may terminate the Purchase Agreement upon written notice to the Seller prior to the fifteen (15) day period as stated above. Upon giving of such notice of termination the Purchase Agreement shall become null and void, and of no further force or effect and the Deposit shall be immediately returned in full to the Buyer.