Ed Garcia's 18 questions answered - Posted by John (NJ)

import · March 17, 2006, 11:36am

Posted by Ed Garcia on March 17, 2006 at 17:03:32:

John,

A smart investor with cash will never go into this deal. You?re going to spend $500,000 in tenant improvements and the upside doesn?t warrant it. A prudent investor will put their money in a deal that may have problems that they can solve and in doing so create upside. If this can happen within 6 to 12 months the investor will be in a position to refinance it getting back their original investment to go do another deal.

The market this property is in is 11 cap, based on the information you provided, so where?s the beef on this deal. If I find a property in an area that commands a 7.5 to 8.5 cap and I buy it at 10, I?ve made some money.

If you can do a little wheeling and dealing with terms and conditions and it will cash-flow, go for it.

Ed Garcia

import · March 17, 2006, 11:36am

Ed Garcia’s 18 questions answered - Posted by John (NJ)

Posted by John (NJ) on March 17, 2006 at 12:36:09:

I’ve come across a 216 unit apartment complex for sale in Eastern PA. I’ve done a few single and 2 family rehab projects, but this would be my first attempt at a large complex. I intend to buy and hold. The owner is asking $6.2M (Negotiable). I have found out via the courthouse that he bought it in 2004 for $5.3M. But he didn’t keep up with the maintenance due to poor management.

Here are the answers to Ed’s 18 questions:

(1) Describe The Units and the surrounding area?

This is a C type property. However, the area is seeing a lot of investments and upgrades and apears to be on the uprise. Also, a Harrah’s casino is being built in this area

(2) How old are the units?

40+

(3) What’s the unit mix ( how many 1 br. 2 br etc)

All 2 bedrooms

(4) What’s the vacancy factor in the area?

10%

(5) What is the gross income of the units?

$1,316,736.00 yearly

(6) What is the vacancy of the units?

10%

(7) What is the NOI?

$724,400.00

(8) What are market rents in the area?

$575-$600 for 2 bedroom

(9) Are there any other Units in the area for sale?

No

(10) If so at what Price?

N/A

(11) What are the going Cap rates in the area on multiple units?

11%

(12) Have any other Units in the area recently sold?

Yes

(13) If so at what price?

$36,000 a unit

(14) How much does the seller owe on the units?

About $4,000,000

(15) If there is a loan, is it assumable?

No

(16) Will the seller carry a second?

Yes

(17) Is there any differed maintenance?

Yes

(18) If so, estimated cost of maintenance?

$500,000

FICO score: 690

This is the preliminary information that I got from the seller to gauge whether or not it is worth pursuing. If that turns out to be the case, I will then ask to delve into the seller’s books, and do some more research on the area, to corroborate it.

I Would like some ideas as to the possibility of acquiring this property from a financing stand point. The seller is flexible on the asking price, and would consider any offer. I don’t have any cash reserves, and am more than open to taking on a cash partner.

Any input will be appreciated.

Thanks,
John

import · March 17, 2006, 1:01pm

Re: Ed Garcia’s 18 questions answered - Posted by Ed Garcia

Posted by Ed Garcia on March 17, 2006 at 14:01:10:

John,

I?m sorry to say that I?m really busy today and don?t have a lot of time to dwell on your deal, so I?m giving you a fast go through.

ANSWERS

(1) OK

(2) OK

(3) Good unit mix

(4) High vacancy area

(5) Your average rent is $566 so you have some room.

(6) Conforms to the area so management is doing their job.

(7) OK

(8) There may be a little up-side if your numbers are right.

(9) Need more info. Call Grubb Ellis, Marcus & Millichap, and Coldwell Banker just to name a few. These are National Commercial Brokers who can provide comps ect.

(10) Researching your intended acquisition is important. I don?t feel you?re doing a good job because you?re not sure if you can do the deal, so you?re taking shortcuts. It?s paramount you know what?s going on in the area because you?re purchasing an income stream that has to compete in the area.

(11) That means that you?re paying market for this property, why is that such a deal?

(12) Too vague, When? How many? What price? Etc.

(13) $36,000 per door could be misleading. It can depend on age, number of units, condition etc, you need to know all of this to see how your acquisition compares. It?s also another way of establishing value.

(14) OK

(15) OK

(16) The answer to this question is especially important because I have the feeling you?re going to try and buy with little or no money down. The answer to this question compensates for the lack of down.

(17) and (18) are deal killers. Your numbers are all ready tight and now we know why the seller has not done the repairs needed.

In looking at the information thus far, you?re paying FULL MARKET or more. You can?t ask for a price reduction because you?ll kill you seller carry-back and you don?t have CASH for down payment or closing etc. So the only way this can be feasible without a partner is Terms and Conditions. NOW?s when you find out how MOTIVATED the seller really is?

Ed Garcia

import · March 17, 2006, 2:48pm

Re: Ed Garcia’s 18 questions answered - Posted by John (NJ)

Posted by John (NJ) on March 17, 2006 at 15:48:06:

Thanks for the reply Ed,

I will be meeting with the seller early next week at the property location. I will get the info you’ve suggested and also find out as much as I can about his true motivation.

I will post the outcome of the meeting on CREonline,

Thanks again,
John

PS. I am very open to taking on a cash partner on this.