Posted by ScottE on March 26, 2000 at 19:28:22:
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Feedback on deal done today! - Posted by Vic
Posted by Vic on March 26, 2000 at 08:02:54:
Hi! I did a deal today & would like to get some feedback. Please feel free to be as critical or complimentary as you choose. I’m mainly interested in trying to better the deal, if possible.
This morning I saw an ad in the newspaper for a trailer. I called the lady & she said that she had 3 trailers for sale.
While I was there looking at them, I asked her if she had any other property for sale. She said she had a 4 plex. Turns out that this was a 4 plex that I had seen in the MLS & was int’d in but never could get in touch with the agent. (Funny, how things sometimes work out.) Anyway, I knew I was int’d in the 4 plex, so I thought I would package the whole deal into one neat little bundle.
They were asking $188,500 for the 4 plex (which is about what it’s worth) plus she said she wanted $17,000 for the 3 trailers (all from the 70’s, but in pretty good shape). So the total asking price for everything was $205,000. She also said that whatever deal we worked out, she needed to get $7500 cash by Friday, because she wanted to buy another trailer in a different area.
The 4 plex is bringing in $2200 a month in rent & the trailers bring in about $925 a month total in rent (this is after the lot rent is deducted).
Okay, here’s the deal that we agreed to. I would give them a total of $195,000 for everything. I am to give them $7500 cash this Friday, which we will say is strictly for the trailers,leaving $187,500 for the sales price of the 4 plex.
So in essence, I’m buying the 3 trailers for $7500 cash & the 4 plex for $187,500 (which is about what it will appraise for). The $187,500 is to be financed with a new loan for 70%(which is $131,250)& the seller will carry back a second mortgage of 30%(which is $56,250). This second mortgage is at an interest rate of 9%, amortized over 30 years with a 5 year balloon. (The seller will receive monthly payments of approximately $452 from this 30% second mortgage, then the balance at the end of 5 years of approx. $54,000 or whatever).
The 70% new first mortgage that I get will probably be a stated income mortgage with an interest rate of - gulp! - anywhere from 10.5% to 12%. That means monthly payments for the first mortgage (P&I only) will be anywhere from $1200/mo. to $1350/mo. The monthly pmt. for the second mtg. to the seller will be about $452. So the 2 mortgages combined will have a monthly pmt. of somewhere between $1652 to $1802. Insurance & taxes should be about another $300 or so, a month, bringing the total mo. pmt. to $1952 - $2102. Seller will not do a land contract for the first mortgage, so that is why I have to get a new one.
So to sum up, I will be paying $187,500 for the 4 plex. Rental income from it is $2200. My monthly pmt. PITI for 4 plex will total around $1952 - $2102. For the 3 trailers I am paying $7500 cash. The trailers have a cash flow of $925/mo. So the total cash flow of everything is $3125/mo. The total monthly payment of everything is $1952-$2102. My total cash outlay for the whole deal is $7500.
Now, does anyone have any suggestions on how I can make this deal better? Please also let me know if you think I should pass on it all together.
Also, does anyone have any suggestions on how I can get the $7500 without going to a bank. In other words do you’ll know of any private lenders that would loan me the $7500 at a decent or even high interest rate without having to give them any equity in the deal? My credit is good. I just don’t want that inquiry on there, because of getting the new mtg. I have no credit cards. The only thing I can think of at this time is to see if the seller will allow all of the deposits which total about $2400 to go towards this $7500. Do you’ll have any other ideas?
Lastly, since I’m a real estate broker I get a nice big fat commission on this deal of about $5625. But because of the way we do the loan, this will probably have to be considered as part of the down payment (the seller doesn’t quite have 30% so this commission will have to be used to reduce the loan amount.) I used 30% above to keep things simple. The seller actually will be loaning me about 27% with me putting up the other 3%, which is what this commission will go towards. Helps to be a broker & in my opinion every investor should get their license for situations just like this.
I know this is long, but please give me your feedback - pro or con. I won’t take it personally. Like I said my main goal is to better this deal & to find a way to get that $7500 by this Friday.
Thanks,
Vic
Re: Feedback on deal done today! - Posted by ScottE
Posted by ScottE on March 26, 2000 at 11:30:46:
Vic,
I just wanted to add to Brian’s post a bit. You said the seller mentioned that she “needed $7500 by Friday”. It seems to me she’s between a dog and a fire hydrant and you can use that to your advantage. Work a much better deal for yourself and let her know that you can get her the $7500 cash by Friday. In the meantime, pull all of your resources to make sure you can get that cash, including partnering. It would be nice to be able to use the rent deposits towards the $7500, but obviously you are going to want the titles searched and that will probably take longer than 4 business days.
I too applaud your going out there and getting in front of a seller. Fear is the biggest obstacle to overcome followed closely by making the wrong deals that sink your business (and sometimes confidence)almost before you start.
Good luck and keep us posted!
Scott
Re: Feedback on deal done today! - Posted by Tim
Posted by Tim on March 26, 2000 at 11:09:55:
Hello Vic.
I don’t understand the part about having to get a high interest 1st mortgage but seems to me that you can usually refinance it at a real interest rate in six months or so. All you have to do is hang in there for the six months.
A susggestion for the $7500: Try for 75% 1st mortgage. That would give you the cash to buy the trailers. If done that way, your total rental income from all can be applied to just two loans. A little easier to float but be careful to check your numbers carefully. If you have cash flow now you will do even better when you refinance at a better interest rate.
Also, by making the odd late payment on the second you could create a motivated note holder. That way, maybe in six months you can buy out the second for 40k or so.
Hope this gives you some ideas. Good luck.
Tim.
Re: Feedback on deal done today! - Posted by B.L.Renfrow
Posted by B.L.Renfrow on March 26, 2000 at 10:58:34:
Hi Vic,
First, welcome to the site! I’m sure I speak for many when I say it’s refreshing to hear from a RE broker who has something to contribute beyond listing why creative deals won’t work and why he won’t present them to his clients!
Multis and commercial financing are not my areas of expertise, so I usually don’t post regarding these topics, but just reading through your post, I noticed a couple red flags which grabbed my attention.
First, I see you did not include any figures for expenses beyond taxes and insurance. What about vacancies, maintainence and the like? The generally accpeted figure for expenses is 40%. Looking at your deal on the 4 plex with that in mind, here’s what I come up with:
Annual rents: $26,400
Minus 40% for expenses: NOI of $15,400
Using your purchase price of $187,500, that gives you a cap rate of 8%, not a good deal in anyone’s book.
Or to put it in another perspective, that’s $46,875 per unit. Again, I don’t know about where you are, but around here, that’s way too high.
Now, about your financing: If you have a 70% LTV loan at 12%, payments are $1350 per month. When you add the $450 per month on the second, that’s $1800 per month, or annual debt service of $21,600.
Now, compare that with your NOI. No deal. Not even break even. No way would any commercial lender finance that! You might say, “No way are my expenses 40%.” Well, that’s not atypical around here, but even if you cut it in half and say 20%, or an NOI of $21,120, you’re still in the hole.
This obviously considers the 4 plex and the mobiles as two separate deals, but I don’t see how you could really combine them.
And regarding the MHs, $2500 each for '70s mobiles seems a little high, unless they are in exceptional condition. In any event, if you do aquire them, why not SELL them on notes, rather than rent, with all the inherent problems of renting mobiles? You don’t mention whether they are in a park or on private land, but unless they are located on the same land as the 4 plex, and you’d have lot rents coming in, I don’t see how you can combine the deals. Obviously, the 4 plex should earn a positive cash flow after debt service…NOT have to rely on rental income from the mobile homes to make it work.
Unless you can negotiate the price down significantly on the 4 plex, I don’t see any hope of a deal there. But just in case you do, then yes, the security deposits are transferred to you at closing. Again, I don’t know where you are, but in my state the seller doesn’t have a choice as far as the deposits. Plus, if you close on, or close to, the first of the month, that month’s rents are yours also, so in your example that would be $2400 for the deposits, plus $2200 for the April rents for the 4 plex, plus $925 for the mobiles, for a total of $5525…not the $7500 you needed, but closer. Of course, that assumes all rents are due on the first of the month.
Clearly, though, you don’t have a deal with the numbers you posted. If you can pick up the MHs for, say $1000-$2000 each, then sell them on a note for $4-5k each (or more…sometimes way more), THAT starts to look promising. If you do want to get into mobile homes, I’d recommend Lonnie Scruggs’ two books on the subject, which are available on this site.
If I’ve missed something, please let me know. As I mentioned, these multi/commercial deals are out of my comfort zone, but I see no deal here.
Brian (NY)
Clarification of some key points. - Posted by Vic
Posted by Vic on March 26, 2000 at 14:03:04:
In my description of the deal above, I wasn’t as clear as I should have been. The only thing that I have to come up with on Friday is the $7500. The 4 plex is not scheduled to close until May 1st. The price of the trailers is actually $17500. They have all been remodelled with new floors, roofs sprayed, etc. They come with refrigerators, stoves, washers, dryers, sofas, etc. They’re almost fully furnished. The actual price of the 4 plex is $177,500. I took $10,000 from the price of the trailers & added it to the cost of the 4 plex so that I would not have to come up with more cash. I really believe that I could get $1000 down plus $200-$225 a month P&I for say 5 years for them. I’ll see. If not, I’ll just rent for a cash flow of $925. These trailers are in a trailer park & the lots are rented. I hope this clears some things up. The vacancy factor in the 4 plex should be almost non-existent. I don’t think the trailers will have a problem either, but we’ll see. As for repairs, I’m not sure. I hope this clears up some of the points that I didn’t totally explaine. So, with this new information, does the deal look any better to any of you all? Or would you’ll still stay away? My thinking is that if need be I can always sell the 4 plex to someone owner financed & at worst break even.
Would like to hear everyone’s suggestions. By the way as for the $7500, the lady needs as much of that cash now as she can get. She doesnt want to give the deposits up on the 4 plex until we actually go to act of sale on it.
Vic
Re: Something.has.to.give.or.there.is.no.deal.here. - Posted by Rich
Posted by Rich on March 26, 2000 at 16:49:06:
You.are.misleading.yourself.by.grouping.the.monthly
cash.flows.of.the.trailers.along.with.the.fourplex…
That.is.masking.a.negative.cash.flow.situation.on.the
fourplex…You.either.need.to.get.the.purchase.price
down.or.the.interest.rate.down…Preferably.both…
In.my.market.I.would.be.more.comfortable.paying.between
$110,000.and.$135,000.for.the.fourplex.and.$7500.for
the.trailers…If.she’s.really.desperate.for.the.$7500
then.she.may.take.the.offer.
Re: Clarification of some key points. - Posted by B.L.Renfrow
Posted by B.L.Renfrow on March 26, 2000 at 15:50:08:
You correct, as mentioned in your private email to me, that a 4 plex is not a commercial deal, thus the cap rate method really doesn’t apply. Nevertheless, it’s interesting for illustrative purposes.
So let’s break it down a little further. Taking just the 4 plex, and disregarding the mobiles for a minute, now you’re at a purchase price of $177,150. If you use only a 20% expense figure - and that’s a BIG if - now you’ve got a NOI of $21,120. That’s a 12 cap - definitely a move in the right direction.
Now let’s look at your financing. If you’re financing 70% of the above purchase price, that’s $124,005. If you could put an 11% loan on it, versus the 12% I used earlier, now you’ve got monthly payments of $1181. Using the same terms as before for the second, that payment would now be about $428 per month. Total annual debt service would now be $19,308, for a total cash flow of…$1812 PER YEAR! Well, at least it’s not negative any longer, but obviously it’s still not a good deal.
Now, about that expense figure: You say you don’t think vacancies will be a problem. OK…but what about maintainence and repairs? If you have to put in a new furnace, or a new roof your 20% figure would be eaten in no time. And we’re assuming there’s no deferred maintainence you’ll need to address when you take title. Personally, I don’t think I’d be comfortable with only 20%, but you might gamble and win.
And can you really obtain the financing with no cash in the deal, beyond security deposits and rents? If so, great!
Before I come across as totally negative, I hope it’s clear I’m playing devil’s advocate here. I think this deal MIGHT work - and please bear in mind I am by no means an expert in this area - IF you could get the purchase price down a little more, and/or get better terms on the financing.
Now, about those mobiles. Even if you’re in So. California, there’s NO WAY ON EARTH those things are worth anywhere near $17,500, even fully furnished and including appliances. If the seller could ever find a CASH buyer who’d pay that, I’d say she struck gold! The original figure of $7500 would be about the upper limit of what I would pay for all three of them…and then, only if they were in pristine condition.
Your figures as far as income if you sold them with financing are probably about right, maybe even a little low on the monthly payments. The general rule of thumb is to keep the monthly payment approximately in line with what a similar-sized apartment would rent for in your area.
Finally, as far as how to obtain the $7500 by Friday, since you mentioned you want to avoid an inquiry on your credit report, about the only way I’d see would be to bring a partner on board. It’s amazing how many people will come out of the woodwork when you offer 18% interest! That is, unless you have personal property or something you could liquidate. You mentioned you are a RE broker. Have you taken back any notes for commissions which you could sell quickly?
Anyway, as someone else mentioned, the important thing is you’re out there making some creative offers. Let us know how you make out on this!
Brian (NY)