Still trying to close on 37 unit.....need some advice on negot. - Posted by AL

Posted by AL on April 15, 2000 at 16:30:06:

Thank you for your replies. The negotiations are done…for the moment. The financing was lined up prior to this, but the mortgage broker’s lender, had a death in the family, and will return Monday. I expect the deal to close in less than 2 weeks now. Plus, the fellow who had the land contract was not recorded, and was knocked out of the deal. The person I am dealing with and his lawyer regained control of the property on Wednesday of this last week.

Cap rate as calculated is 15%, and this is a decent property. It is located 0.3 miles from the hospital, public library 1.2 miles, police station 3 miles, post office 1.0 miles, museum 4 miles, fire station 3.1 miles, and university 1.3 miles, park across from buildings with frisbee golf, and outdoor hockey, tennis courts, jogging trail.

Note: Quote from appraisal: It is believed that a typical investor would be looking for a return of approximately 14% on equity. In the market place today, real eastate investors are including price appreciation and equity investment rate. This means the investor could be looking for about a 14% rate of return on his equity and this rate includes future price appreciation as well as the equity build resulting from normal payment on the mortgage.

Sales comparison approach was not valid due to the unique arrangement of the buildings.

Vacancy rate was what was used from Charter One Bank. That is an estimate: current occupancy is 34 of 37.

Management: He is actively managing the property, but, when things break, the tenants call on person who has been in the building for years, (rent is comparable to everyone else), and they then call the owner. The owner makes the call based on what this person recommends as far as type of problem, etc. I can drive there myself as well. The owner then is on site for the repair, unless it is an emergency water shutoff or the like, and supervises the crew that is doing the work. Crew being from a list of contacts that he had, and now I have. I also have my own contacts I use for the 2 and 4 unit I have.

5% management fee was required for the calculation by the original bank I went with. I plan on managing this myself. I was a Captain in the Army deployed several times, worked with several million dollar contracts, moved 3000 soldiers from US to Kuwait, and housed them etc. I was facilities officer for the brigade I was in, for 900 soldiers, and I understand the issues with large buildings. (Yes, even we had some problem tenants, and I have some experience with them with the 2 and 4 unit).

Payroll is non-existent at this time. I do not need to keep people on payroll as I have qualified professionals that I have good working relationships with currently.

I plan on holding the property, improving it, and refinancing it to pull the equity out and go on to bigger and better projects.

There is pretty good upside.

The only thing I plan on doing better than the current owner is, managing the property well, doing the improvements that are necessary, get the experience under my belt for around 3 to 5 years, then going to a property management company. At that point I will switch from landlord to investor, and buy bigger properties.

I have actuals on the bills: I contacted the Trash, Electric, Water, Gas, Taxes, actual on insurance, actual on vacancy (per leases), and yes some people are more difficult to collect from than others. Snow and mow is exact past history.

All of that said,

The negotiations are done I believe. This fellow had one need, that was to walk away with $50,000 at close. His first was around $295,000 and the second he had $60,000. Back taxes were $15,000. He wanted those paid plus he walked away with as close to $50,000 in his pocket as possible. He had reduced his asking price from the price that I had financing lined up at of $617,000 to $550,000. We tried to work the numbers such that the 80/20 ratio was met for the bank, and it just wouldn’t work using the $550,000 number.

We backed up, went into another room, and worked through the numbers again. The only way for me to get into this property and satisfy his needs was to go back to the original sale amount of $617,000. He gets his $43,000 at close, and I walk away with $38,000 + $1950 security deposit money + $162 per month note from seller (12 month payoff) balance of deposits + 1/2 per day of pro rata rents if closed on prior to the 1st of May.

So,

I have a property worth $645,100 with $135,000 in equity (from tentative closing statement), $40,000 cash to me at close and a cash flow of $4,000 per month at an occupancy of 34, current occupancy. ASSUMING I can get this to close in the next 2 weeks, I forsee no problems there. All title work is done, appraisals, inspections, etc.

Thanks again,

AL

Still trying to close on 37 unit…need some advice on negot. - Posted by AL

Posted by AL on April 14, 2000 at 01:38:43:

Hi again,

Still trying to close on that 37 unit.

Here’s the breakdown…
$645,100 appraised
$617,000 original offer
$ 61,700 Wife’s Commision / 10% down payment
$ 17,400 Credit back for closing costs
$ 61,700 Seller Second / 10%
$493,800 New 1st Mortgage

Here’s the twist. I am almost ready to close and the guy I have been dealing with is out of the picture on the property. Had to do with his land contract not being recorded, other issues, etc. So now the original owner who land contracted it to the fellow I had a purchase agreement with, has gone to my lawyer, and made an offer to sell to me for $550,000.

My lawyer told me he has around $300K payoff at his lender, and he is in dire straits due to iminent IRS foreclosure.

Do I try to negotiate him further down from his $550K, or work from that number with the following results:

$550,000
$ 55,000 Wife’s Commission / 10% down
$495,000
$ 55,000 Seller Second / 10% down
$440,000
$ 17,400 Credit back for closing costs

Seller walks away with $423k approximate, pays off the underlying loan at close, pockets difference between his 300K payoff, for use with IRS lien, or whatever.

I would have equity of:
$645,100

  • 495,000
    $ 150,000 at close

at end of 3 years after payoff of 2nd, equity =
$150,000

  • 55,000 2nd mort amount
    $205,000 (equity not including appreciation)

  • 3 yrs appreciation @ 3%, equity =
    $ 705,000 building worth(doesn’t include planned improvemnt)

  • 440,000 (Max. Loan balance)
    $ 264,000 Equity

Cash flow around $4,100 per month

Now the real question…
Be satisfied with the above? or are there other ways, i.e. better ways to structure this

Oh yeah…by the way, I go into negotiations at 11:00 a.m. 14 April 2000.

Short notice :o)

Re: Still trying to close on 37 unit…need some advice on negot. - Posted by Mark (SDCA)

Posted by Mark (SDCA) on April 14, 2000 at 11:43:00:

This deal looks good to me. Close it. I have never been one to squeeze every last cent out of a deal. Doing so may cause you to lose the deal entirely.

Mark

Re: Still trying to close on 37 unit…need some advice on negot. - Posted by JoeKaiser

Posted by JoeKaiser on April 14, 2000 at 10:19:20:

Al,

Negotiations started a long time ago. Maybe you’re meeting them today, but negotiations started way back when.

The only thing that really jumps out at me is the notion that you need to “bump” up the price to get credits. This is rarely the way to do this sort of thing. Those credits are usually well earned and normal costs to the seller, and by inflating the price, they now become your costs.

Finally, an unrecorded real estate contract may still be fully enforceable. You mentioned other circumstances. I’d make sure that thing was really out of the picture.

Joe

Re: Still trying to close on 37 unit…need some advice on negot. - Posted by Bill K- FL

Posted by Bill K- FL on April 14, 2000 at 07:39:21:

Here is some food for thought.It sounds like this might be your first endeavor at buying income property of this size. I can tell that by your relying on an “appraisal” instead of analyzing the income stream and calculating an appropriate market value. ie, it appraises for 645K yet the owner is so desperate that he has to sell to you for 95K less. Don’t you think if he thought he could get anywhere near the appraised value he would be able to. Is income property that hard to sell in your area, or is this one in a bad location? What is the cap rate at these different prices? What is the general market cap rate for similar properties? Income property values are driven by net income not an arbitrary inflation appreciation factor. You say cash flow is 4100 per month. Is that before or after expenses. What is the expense ratio you are using? If these terms are foreign to you it would behoove you to get professional advice before going any further or you might be the one in dire financial straits.

Re: Still trying to close on 37 unit…need some advice on negot. - Posted by AL

Posted by AL on April 14, 2000 at 09:07:50:

Thanks for the information:

I have been trying to acquire this property since September 1999. I have analyzed the property to death. Also, I have had the buildings professionally inspected: pests, foundation, building, plumbing, roof, replacement costs, est. time to replacement, walked through with a general contractor for these estimates.

$4,100 is after all expenses are paid. Income is $12,000 plus per month. The appraisal was done using all 3 methods.

Yes the owner is desparate, as I mentioned before the IRS is going to slap liens on his other businesses he has, but we are getting this one free and clear prior to this occurring. And I have financing and all the paperwork done, theoretically I should be able to close within a few days.

My lawyer has been involved in all of this.

The property is in a good location, 1 mile from the University, across from the park, 1 mile from the Major hospital, and a golf course adjacent to it.

The purchase price was inflated to include the commission to allow us to have the amount we needed down.

I had taken this property to the banks, before I went to a mortgage broker, and I got everything that was necessary.

I have walked through the buildings myself several times, and know what has to be replaced. etc ad infinitum ad nauseum.

All the homework has been done.

What I need to know is, should I try to push this guy lower on his offer, or try to accept, at his current offer.

I am not under pressure, he is.

Gross $158,730
Vacancy $147,619
Insurance $6,240
Water $5,340
Electric $5,100
Gas $13,116
Taxes $13,992
Snow & Mow $2,000
Mgmt Fee 5% $7,936
Expenses $53,725
NOI $93,894

1st mortgage $53,078
2nd mortgage $6,000
Debt Service $59,078

Debt Service
Ratio = 1.59

DSR 1.25 PASS on low side

Per unit
analysis
Asking Price $617,000
Number of Units 37
$ per unit $16,676

All of these numbers are actuals, I called the utilities, and based on the first contract. The original owner wanted $537,900 and we bumped the price to include the commission and closing costs, prior to the appraisal.

Thanks for the response.

Re: Still trying to close on 37 unit…need some advice on negot. - Posted by Bill K - FL

Posted by Bill K - FL on April 15, 2000 at 08:40:08:

Your figures indicate a 17% cap rate which in my area is very high for decent properties. You didn’t mention what was the current market rate for your area for similar properties. Do you know what it is? You also use a 7% vacancy and collection factor. Is that an estimate or factual? I am also assuming you have included maintainence and replacement reserve in your expenses (10% or higher). With regards to management is he currently using outside managers or live ins? Is 5% the actual cost or an estimate? What about payroll? You also didn’t mention your plans for the property. Hold or resell. Is there any upside? The biggest mistake investors make is underestimating expenses and thinking they can do it cheaper than the present owner. I think if you take a hard look at all the expenses you will see your NOI drop which still doesn’t rule out the deal. Just makes the deal more realistic and will help you in your negotiations.

Re: Still trying to close on 37 unit…need some advice on negot. - Posted by Doug Pretorius

Posted by Doug Pretorius on April 14, 2000 at 09:23:06:

Sounds like an awfully nice place!

If the guy is that desperate you may as well try to get it for less (assuming you can still make it work with the down payment.)

Why not just sit down with him and discuss the situation, you should be able to come up with figures you are both happy with and then sign that deal away.

If he won’t go lower you can always accept the $550,000.