Familiar with strategies used by Dolf DeRoos? - Posted by Christine

Real Estate Investing
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Posted by tom on October 16, 2003 at 08:40:18:

Ray et al…

I am working on a deal right now, scheduled to close next week. it is a hard money (investment group) forclosure (i tried buying from bankruptcy court). the previous owner occupied many of the commercial spaces (22k sq ft multi tenant commercial with apartments), and is now out of the picture.

bank is lending 80% of purchase contract.
appraisal came in @835k, price 720k with 20k credit to buyer @close. bank does not want to hold this, tho i offered. loan product is based on FHLB advance. i chose a 3 yr reset product with call in 10. i think that is 5.75%, 25 yr am.

at close the bank will be in 69% LTV on appraisal price. debt coverage was figured with projected income on vacant spaces @1.9 by the bank. i figure it @1.35 on current income.

i guess because the deal is very good, and i asked, they are offering another 50k for some building improvements i wish to do in 6 months time (dry season, i want to repoint the brick). this would put me @90 loan to purchase price. they are not requiring any documentation on what i would do with the money. i am going to spend it on the building anyway, but…i could spend it on anything i wished. they wanted at first to do this up front @ close, but because this is my first commercial deal, they said they would do it after some rent up. this could conceivably done during escrow (as Dolf states), but i believe is unlikely, and impossible to get 100% financing this way.

But it seems it is possible to get 90% loan on price if LTV, debt coverage, and EXPERIENCE are all solid. however, i do not believe it is possible to get 90% LTV on a refinance as he states, nor 90% on purchase price, as he also states.

this by the way is my first commercial closing, tho i have 7 rental homes, two of which are free and clear (that is where my down is coming from).

best,
tom

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Familiar with strategies used by Dolf DeRoos? - Posted by Christine

Posted by Christine on October 06, 2003 at 21:34:09:

After reading all of Dolf’s material, I was quite interested in his strategy of finding a commercial property that was empty or partly empty, finding a tenant, then taking the Agreement of Intent to Lease to the bank and having them include the aggreement in their valuation of the property. Then being able to purchase the property with little or nothing down. I tried this theory in Brisbane, Australia and I had my financial broker approach 4 banks, and they all said that they would not take the agreement into consideration. They said that they would still only loan 65% of the actual purchase price. Can someone tell me if this strategy is a country specific thing? Or, do I need to do something differently to structure a deal in this way?

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Re: Familiar with strategies used by Dolf DeRoos? - Posted by ray@lcorn

Posted by ray@lcorn on October 07, 2003 at 09:43:04:

Christine,

I have not read Mr. DeRoos’ material, so I can’t comment on specifics of his techniques.

However I can tell you that the strategy you mention is one that depends heavily on the experience and capacity of the investor, as well as the nature of the lender. By inserting a third party into the mix (your financial broker), you’ve complicated the process already.

In order to use a proposed lease as part of the valuation for an appraisal, I would prepare a detailed business plan that reflects all costs and expenses associated with locating the tenant in the building. This is known as a source and use of funds statement. It includes both capital improvements and any deferred maintenance items. I would also prepare a projection of operations for at least three years that reflects all income and expenses in the normal operation of the project. My loan request would ask for 100% of the cost of improvements. The apprased value of the project would be prepared on the bass of the completed project value with the lease in place. Most lenders want to see a maximum loan amount of 90% of cost, and 75-80% of completed value. Also, the debt service coverage ratio must meet their criteria, usually a minimum of around 1.25:1 on this type of project. I have seen DSCR requirements as high as 1.4:1, which makes for a difficult deal with high leverage.

Along with the business plan, I would include my personal financial statement and a resume of past experience showing development and management expertise.

I have had no firsthand dealings with Australian banks, but I understand the banking system is fairly conservative in comparison to US banks. Perhaps there are other types of lenders that would look at the deal? If you are just beginning, then even more liberal lenders are going to want to see real equity from the investor.

Hope that helps,

ray