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.
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.