Can you all help me make a no-money-down offer 20U? - Posted by Steve

Posted by awa on June 09, 1999 at 11:42:22:

Thank you for your prompt response.

45% seems to be the general consensus for expenses. The 45% was used for the 20 unit complex. Does the same hold true for other rental properites (single-family, mobile homes)? The reason I ask is I am considering purchasing a two-story office building with about 6,400 ft2 of rental space. If the expenses are 45% of gross, then I will seriously need to reconsider my position.

Also, could you give an indication/breakdown of what comprises the 45%?

Again, thank you for your help.

Can you all help me make a no-money-down offer 20U? - Posted by Steve

Posted by Steve on June 07, 1999 at 24:33:41:

I have made three purchase offers since I’ve started studying creative financing with no counter offers. I’d like to pursue another property but like everyone, I’m trying to avoid rejection. (I’d at least like to receive a counter offer.) I’d really appreciate some seasoned input on how to make this deal work or at least realistic to the seller. The property is in Los Angeles:

20 unit complex fully occupied (below market rents) Fixer “C” neighborhood-
Asking $725,000
Assumable 1st Mortgage: $495,000 ($3,750 per month)
Sellers Equity: $230,000
Current NOI: $66,000 (I could reduce this by at LEAST 5%)
Me: Prequalified for conventional $200,000 property
Me: Very little down payment cash ($2,000)

Some ideas that have occured to me: Lease option? equity participation? Partners?

I know this may just be academic, but I know if I had the knowledge, I could make this deal work no money down, without negative cash flow.

Thanks in advance for your input.

Re: Can you all help me make a no-money-down offer 20U? - Posted by J.P. Vaughan

Posted by J.P. Vaughan on June 07, 1999 at 09:15:03:


Here are a few comments. First, stop looking for “properties.” Instesd, spend your time finding MOTIVATED sellers. Go to our “How-To Articles” page and read “Why I Quit Looking for Properties” by Joe Kaiser.

Next, you state the NOI is $66K per year. We have no idea what you are basing that on. It should be all income minus all expenses, AND expenses should be around 45%. If expenses are stated as lower, you may be in for a big surprise.

Next, if we accept $66K as the NOI, that equals $5500 per month. The current debt service on the first mortgage is $3750 per month. That leaves $1750 per month that the current owners are receiving.

You state the seller’s equity as $230,000. That means the seller is looking for someone who will pay two-hundred and thirty-thousand dollars for the right to receive $1750 per month, along with all the headaches and hassles that accompany this kind of property.

Does this really sound like a deal to you?

It’s not even close. Even if the seller carried ALL of the $230K as a 7% second, your payments would be $1530 per month. Add that to the rest and you are looking at $200 per month… ASSUMING you never need to incur any other expenses. Beleive me, that will be a zero possibility.

You keep saying you want “creative” ideas. If it’s not a deal, it’s not a deal. Unless the seller will come off this price substantially, this isn’t a good deal.

If you want to stay in this business, you must ALWAYS make your profit going IN to the deal. You must ALWAYS make your profit going IN to the deal.

You can make profit in three ways:

(1) Cash at closing
(2) Positive Cash Flow
(3) Equity

Unless I am missing something, I don’t see any of these here.


Re: Can you all help me make a no-money-down offer 20U? - Posted by Steve

Posted by Steve on June 07, 1999 at 08:22:13:

I understand that rejection exists and nothing down deals are not always going to work.

I am just looking for advice on this property on structuring this deal so it is appealing to the seller despite not getting a lot of cash at closing (cash is still an option if I bring in a partner). Yes, I meant the NOI could be increased by at least5%. All operating income was derived by a breakdown of expenses provided by the sellers. I will make my purchase offer contingent on confirming these figures.

The seller is willing to carry a second but would prefer cash at closing. Based on our conversation, I believe they would consider no cash if the deal were appealing.

Since we are talking about such a large second mortgage, and I believe cash in their pockets does not motivate the sellers, I’d like to hear some creative suggestions that would be appealing to the seller.

I’m looking for some insight into creative offers. Perhaps they will not work with this deal, although I’m still going to present them to the sellers, but I’d like to benefit from other investors’ thoughts.

Thanks again for any input you can offer.

Re: Can you all help me make a no-money-down offer 20U? - Posted by SCook85

Posted by SCook85 on June 07, 1999 at 07:53:32:

I hate to bust your bubble but regection is a part of this business. Don’t fall into a trap thinking that every deal can be done with no money down if only you knew how to do it. Not every deal can be done.

You have to have participation from the seller or an outside partner or lender to pull no money down deals off. If the seller is not willing to hold paper and let you walk in with no money that leaves a lender or partner. A lender or partner is going to look at the deal very closely (all the things that johnboy mentioned below). If the deal doesn’t make sense they won’t do it.

You can limit the amount of rejection by making offers that make sense to both parties, my guess is that the reason you have not received any counter offers yet is because your offers have been so far off from what the seller was looking for they don’t even want to talk to you anymore.

Are you finding out the sellers motivation? Are you asking why are they selling? If the seller must have $150,000 in cash for one reason or another you can bet that if you don’t get $150,000 cash in his/her pocket you won’t get the deal done. You need to address the sellers needs.
Also you said that you can reduce NOI by at least 5%. NOI is Net Operating Income, you don’t want to reduce this. I’m guessing that you meant that you could increase it by at least 5%. If this is the case, what are your plans for doing so?

Come back with some more information. I’d like to see what type of advice you get, these are the type of deals that I may be pursuing soon.


Re: Can you all help me make a no-money-down offer 20U? - Posted by JohnBoy

Posted by JohnBoy on June 07, 1999 at 01:03:54:

What needs to be repaired?
How much will it cost?
What is the current gross income?
How old is the roof?
How old are the appliances, carpeting, air conditioning, furnances?
What is the mix of units? How many 1 beds, 2 beds, etc.?
What is market rents Vs. current rents?
How old is the building?
How much are the security deposits?
Will the seller carry anything on a 2nd?
Why is the seller selling?
How long have the tenants lived there?
Are they on yearly leases or month to month?
What have comparable buildings sold for in the neighborhood?
Does the landlord pay any utilities like water, heat, electric?
Who manages the property? Landlord, management company, or on site manager? (If on site manager, what do they pay for rent and what does the landlord pay the manager?)
How many years left on the first mortgage?

Need a little more info.

Re: Can you all help me make a no-money-down offer 20U? - Posted by JohnBoy

Posted by JohnBoy on June 07, 1999 at 11:53:39:

You don’t say what the GROSS income is. Assuming you have allowed enough for expenses which should be at least 45% of the gross income, then that would put the current gross income at $120k to get a NOI of $66k.

A purchase price of $725k with a NOI of $66k would put a cap rate at 9.1. Not a deal. The cap rate should be at a minimum of 11% which would put the purchase price at $600k with a NOI of $66k and that’s assuming the annual gross is currently $120k in order to allow 45% for expenses.

You said this was a fixer. The cost of the repairs would need to be taken into consideration on this also and adjusted accordingly against the purchase price. Then you need to consider the deferred maintenance. How soon will you need a new roof, carpeting,appliances, ac/heating replaced, etc. The sooner these items need replacing the more up front expense your going to incur. These things will need to be adjusted on the purchase price or at least on the operating expenses under deferred maintenance. The sooner they need to be replaced the higher the deferred maintenance will be. You need to estimate the life expectancy of these items and what they will cost to replace. Then divide the replacement cost by the number of months left before they need replacing. That needs to be added to your expenses under deferred maintenance. So depending on what repairs this needs 45% for expenses may be to low. You may need to adjust the expenses to account for this which could make total expenses 50% - 60% of the operating income. The 45% for expenses is used as a rule of thumb just to determine whether you have a potential deal or not. If the numbers don’t work at 45% expenses then the purchase price has to come down regardless of the terms you can buy the property at.

Based on your post the most equity I can see is about $100k. Not $230k. The property sounds way over priced, and that’s using the $66k NOI they’re claiming and assuming that represents at least 45% for expenses based on the gross income, which should be at least $120k to get $66k NOI.

Re: Can you all help me make a no-money-down offer 20U? - Posted by awa

Posted by awa on June 07, 1999 at 16:34:36:

Does the example of 45% for expenses include debt service?

Re: Can you all help me make a no-money-down offer 20U? - Posted by JohnBoy

Posted by JohnBoy on June 07, 1999 at 17:01:49:

No. Debt service is paid from the NOI and anything left over is your profit.