buying apartments - Posted by AdviceNeeder

Posted by Daphne Lowe on July 03, 2006 at 18:25:10:

In that particular deal, Ray may not have brought his cash, but he did bring his expertise to the table. He has a proven track record successfully completing turnarounds. This is a skill valued by sellers and banks. They were convinced that he could solve the problem, and that is essential to obtaining flexibility from them.

Daphne

buying apartments - Posted by AdviceNeeder

Posted by AdviceNeeder on June 01, 2006 at 10:25:57:

Hi,
Has anyone done a seller financed deal where instead of the seller providing a purchase money mortgage, the seller sells the property to the buyer’s corporation and then becomes a member of that corporation receiving a preferred return from cash flow or other compensation to satisfy the seller? Any advise on how to approach a seller with this scenario?

Re: buying apartments - Posted by Patrick S. Lawson

Posted by Patrick S. Lawson on June 01, 2006 at 10:48:34:

What is your motivation? What is the benefit to the seller?

Re: buying apartments - Posted by AdviceNeeder

Posted by AdviceNeeder on June 01, 2006 at 11:02:40:

The property is a c-minus multifamily building with lots of deferred maintenance in a c class neighborhood. The property is very difficult to finance due lack of income, due to high vacancy, due to mismanagement and deferred maintenance. The benefit to the seller is that he sells the building at the desired price. The building has been mismanaged so there is upside potential with proper management. My strategy is to buy the building, rehab the units bringing them up to a rentable state. Once operations have been stabilized, the plan is to refinance the building and buy the seller out of his position in the corporation. Benefits to the seller are the seller relieves himself of the costly property and ultimately receives the sale proceeds he desires.

Re: buying apartments - Posted by ray@lcorn

Posted by ray@lcorn on June 01, 2006 at 11:15:47:

We used that very strategy for a deal we sold last year and that I use as an example in seminars. (Note: It’s better to use an LLC instead of a corporation though)

I posted the summary of the deal last fall in a longer thread at http://www.creonline.com/commercial-real-estate/wwwboard5/messages/18352.html

ray

Re: buying apartments - Posted by AdviseNeeder

Posted by AdviseNeeder on June 01, 2006 at 13:14:08:

Thanks Ray. The Money Pump example was a smoking hot deal with a 12% cap rate! How much cash did you put into the deal? And did the $350,000 budget for repairs include interest reserves for the bridge financing? Did you continue to receive rental income during the rehab to help with interest payments on the bridge financing?

Re: buying apartments - Posted by ray@lcorn

Posted by ray@lcorn on June 01, 2006 at 13:32:32:

Actually the 12 cap was generous for a property needing that much work. We wouldn’t have paid that much had the seller not stayed in the deal.

We put no cash up on acquisition, and no, the loan did not include funds for debt service. One thing I’ve learned to avoid is over-leveraging a deal. We collected rents during the rehab period, and had positive cash flow throughout.

The key was in knowing the market and the potential rents, then doing thorough research to establish the cost of improvements. We then designed the deal structure to meet the seller’s needs, fund the improvements, and give us the time required to complete the plan.

ray

Re: buying apartments - Posted by Advice Needed

Posted by Advice Needed on June 01, 2006 at 13:52:00:

Wow, sounds great. But don’t banks require at least a 5% equity position from the investor? How did you get financing with no money in the deal?

How did you approach the seller with this scenario?

Re: buying apartments - Posted by ray@lcorn

Posted by ray@lcorn on June 01, 2006 at 18:53:46:

Good question. You’re correct, if you call a bank and ask for apartment financing the standard answer will be 15-20 year amortization, floating rate, 75%-85% LTV with at least some cash invested, usually 10% or so.

Many non-bank lenders won’t allow the flexibility of any seller financing, or conditioned to maximum cumulative LTV. You either fit their loan criteria or not, no exceptions. So you have to first choose what type of lender is right for the deal.

There are over two dozen types of lenders, and banks are only one of them. A deal like this is when it pays to develop a good relationship with more than one lender, each of whom understand your business, your resources and track record, BEFORE you need the money. With an ongoing, working lender relationship the terms can be developed to fit the deal, rather than vice versa.

It also helps to understand what kind of loan to ask for. Not all lenders have all loan types. A bridge loan is a combination a short-term (