The bank turned me down! Now what? - Posted by Jim Beavens


#1

Posted by Jim Beavens on October 15, 1998 at 16:26:25:

Your last line says it all. If he gives a little on price, or gives a little on terms, I think I can run with this. If he doesn’t want to give on either, then he’ll have to find another buyer.

As to the available reserve funds, if I could find a way to assume this loan without the bank getting their greedy little hands on the pro-rated rents and receipts (which should total $8-9,000 for all three buildings), then I would be set. And I think the only way I can do this is to assume the whole thing without any strings attached.

FYI, there are several areas in KC that are cheaper, however I really feel that the midtown area I’m investing in is primed for improvement in the next couple years. It’s already starting to happen, and the slightly higher prices reflect that. But there’s still alot of upside, IMHO, and I think that upside will happen quicker than if I were to invest north of the river, or in Kansas City, KS.


#2

The bank turned me down! Now what? - Posted by Jim Beavens

Posted by Jim Beavens on October 15, 1998 at 13:59:17:

Ok, this may be pretty long because there’s a lot to bring folks up to speed on my situation, so please bear with me. I probably should have come to my “partners” here sooner, but there isn’t a whole lot of creative financing going on here, and so far I have trusted the professionals I have worked with. But now things aren’t going so good.

I currently have two properties under contract. They are both 6-unit apartment buildings that are on the same city block, with a sales price of $90,000 each. This price of $15,000/unit is right around the market price for the area. I am buying these properties to buy and hold; the gross rents of $2,400/building and the cap rate of 15+% will provide good cash flow, and I expect this area to improve quite a bit in the next year or two (the city has shown a commitment to invest in urban renewal, and there is commercial development literally blocks away from the area).

I had about $17,000 in cash to invest, which came from a $10,000 home equity loan, and $7,000 from borrowing half of my 401(k) account at work (no, I’m not looking to replace my job, just trying to turbocharge the return on my savings ;). One of the reasons I wanted to buy these properties is because the loans were assumable (after being qualified by the bank, of course), so I wouldn’t necessarily need a full 20% down payment, and therefore I could buy both of them. =) Or so I was told…

After my broker wrote up my initial offer of $80,000 with $7,500 down for each building and presented it to the seller (the broker is also the listing agent in this case), the seller called up his bank to see if this would work and if I could get both buildings with the amount of cash I had. They said that if they could get the pro-rated rents and deposits of about $3,000/building, then I had enough down payment to assume the loan. The seller thought that getting 12 units for $15,000 cash out of my pocket was a pretty good deal for me, so he checked with the bank and counteroffered with the full price of $90,000. Since the low cash down was most important to me, and the numbers still came out good with the higher sales price, I agreed and got them both under contract for $90,000

Now, I never did really get good information about the current loan, which was probably my first mistake. My broker was kind of reluctant to give that information to me, because I was still trying to figure out what kind of offer I wanted to make at the time, and he wanted to be sure he wasn’t leading me to make a lower offer and jeapordize his fiduciary responsbility to the seller. What I do know is that the seller has one commercial loan that covers three properties; these two plus one more that is a similar 6-unit but is located about 12 blocks away, and is also for sale at $90,000. At one point I did hear him mention the number $220,000 for the loan amount, but he quickly followed that he’d have to check at his office for the exact loan info.

I never really pressed this point, because I was assured that I could get both buildings with my cash, which is all I really cared about. I was told that this loan would probably be restructured with the seller, and then I would assume the two new loans that were created for each building. Or something like that. When I would ask my broker for details, he’d say that first I would need to be approved by the bank, then all of the loan details would be worked out. So I waited for the approval.

All of this transpired in mid-August, with a closing date scheduled for October 5th. As we neared this date, I still hadn’t received approval from the bank. I had been told 3 times it was going to committee for approval, but each time the loan officer said they ran out of time. The seller even started pressuring them to get it done, since he owns several businesses in the area that are financed by this bank, and supposedly has a lot of pull with them. He continually expressed confidence it would get done, as did my broker. In what turned out be a jump of the gun, I went ahead and paid $850 for an inspection of both buildings as part of my due diligence (which turned out very well for such old buildings, but I’m now out $850 on these properties. I know…dumb). We went ahead and signed an addendum extending the closing date to November 6th (now a little over 3 weeks away).

To make a long story short (I know, WAY too late), I heard from the bank yesterday and my application has been denied.

Making this even more frustrating is the fact that the loan officer I’ve been working with is on vacation this week, so I was informed of this by someone who wasn’t familiar with the details. He said I was denied because of “liquidity issues”, whatever that is. When I asked him to explain, he said something like, “there’s concern about having enough cash when the loan is due”, or something to that effect. When I pressed further, he said I’d have to call back next week to get a detailed explanation from my loan officer. So frankly I’m clueless at this point as to what happened. Part of me wonders if it made any difference that this went to committee without the loan officer there, who could at least say that she has met me, shook my hand, that I appear to be an upstanding citizen, etc etc. Maybe I’m just grasping at straws now.

Anyway, I informed my broker, and he says it’s not over yet, because the seller is going to try and find out what happened and see if he can’t get something worked out. I asked my broker if we should start looking at other financing options, at which point he said anything else would be difficult with my small amount of cash. He told me to wait until next week to see if we need to go to plan B, and in the meantime he’ll try and figure out what plan B is. Frankly I’m tired of leaving all of this in other peoples’ hands, and I’m beginning to think I need to step up and take control.

Which is why I’m here.

First of all, I’m wondering if anybody can translate the “bankerspeak” of the guy that called me, and explain what their problem is. After thinking about this for a while, I’m starting to think this was a fancy way of saying that the LTV is too high, and if they had to foreclose they don’t think they could get all their money back from a sale (despite what they said about me having enough cash, grrr). This is actually something I was worried about, and was kind of surprised that they would restructure their $220,000 loan so that $160,000 was put on two properties valued at a total of $180,000. I’m not that surprised that they would take another look at this and ask themselves what they gain by doing this, especially when the higher-leveraged properties are being bought by an unknown entity (ie, me ;). I don’t know, any other interpretations out there of what they meant?

Secondly, does anyone have any ideas about how else to structure this deal? The seller says he’s motivated, but he’s not willing to carry any of the financing (so much for motivation). He’s a tired landlord who owns a golf course and would prefer to spend more time there than driving 40 minutes into downtown every weekend to do maintenance on his buildings. He’s actually OVERmaintained these buidings, and they’re in much better shape than most other buildings in the area. That’s another reason I like them, because they’re turnkey and fully rented.

It seems to me that one way or another, because I’m buying these at market price, I’m going to have to find somebody to carry a second mortgage if this thing is gonna fly. And I’m not even sure how this would all work out since one loan is covering three properties. I might need to buy all three! =) (which wouldn’t be a bad thing, and would even increase my cash flow, it just means I have LESS cash as a percentage of the purchase price).

Excuse me while I think out loud for a moment, but the only thing I can really think of is to create a second mortgage and immediately sell it for a discount. The seller would get less money this way, but perhaps if I offered to take all three properties off his hands (which I know he would prefer), then he might be accomodating to this. Plus I could try again to assume the loan, but not mess with restructuring or anything else that would give the bank a chance to screw up this deal again. If the current loan was for $220,000, then I could buy all three for $270,000, pay $15,000 down, have the seller hold a second for $35,000, which would immediately be sold at a 70% discount for $24,500, leaving him with $39,500 in cash (an effective sales price to him of $259,500, which isn’t much of a discount on a $270,000 transaction). Hmmm…I kind of like this idea. Plus I could educate the seller that by holding the note for 3 or 6 months and letting it get some seasoning, he could get an 80% or 90% discount for a few extra thousand (couldn’t he?). Any tips on how to best structure a second mortgage in this situation that would make it attractive to a note buyer? In this case, the note buyer would have about $50,000 in equity, which is about 18.5% of the property value. Would a 70% discount be realistic here? I’ve never sold a note before, any tips on how to find a buyer?

I guess my third question would be how I could better deal with banks. I’ve only worked with mortgage brokers in the past when buying my home, and am unfamiliar with the commercial loan process. Once the application has gone to committee and been turned down, is it over? Is there any chance now for reevaluation if we find out there’s something they don’t like that I might be able to fix? I’m just wondering how much effort I should put into this bank, or if I should just move on (I have an excellent credit history but a high debt/income ratio because of my loans to obtain my cash, while my wife’s credit isn’t too good with some significant credit card debt and a few late payments. They said they wouldn’t look at my wife’s credit, but I’m not sure I believe them). Another great thing about assuming this loan is that it won’t cost me anything in loan fees (at least I don’t think).

My final option is to only buy one of the properties and put 20% down, but I fall short of my goal of acheiving 40-50% cash-on-cash return; 6 units for $15,000 would only give about a 25% return. If it comes down to only being able to buy one, then I’m going to start looking for other properties first that might have a more motivated seller. But I’m not quite ready to give up on these yet, considering I have them under contract for the next 3 weeks and I’ve already put some money into them.

Anyway, thank you for reading this far, and I appreciate any response. At the very least, this has given me a good chance to sit down and really think about how to solve my problem. I think I’m going to fax my broker with some of the financing suggestions I mentioned here, and see what they think. So thanks for your help so far! (grin ;).

Jim

P.S. These properties are located in Kansas City, Missouri, however I live out of state. So that presents another potential problem in this whole thing, in that I can’t take as much of a hands-on approach as I otherwise might (to see how I came to purchase property out of state, see www.terratour.com; not a plug, just an explanation).


#3

Re: The bank turned you down! Good! - Posted by Mr Donald (NORVA)

Posted by Mr Donald (NORVA) on October 17, 1998 at 22:28:01:

Jim,

Great! Now you’ll start thinking Creatively about real estate.

Stop relying on mainstream sources for funding, and you’ll find that your opportunities will increase accordingly.

The greatest limit to success in Real Estate is thinking conventionally - because all you’ll get are conventional deals, conventional financing, and conventional returns. Boring and quite pedestrian. So you’ll lead a conventional life as a result.

Look to a mortgage broker, private investor or hard money lender for your next deal and let us know the result. You might be pleasantly surprised.

Mr Donald
dlm@bellatlantic.net


#4

Re: The bank turned me down! Now what? - Posted by CLINTON CARY JR.

Posted by CLINTON CARY JR. on October 17, 1998 at 21:06:07:

1st find out if your buildings are in a community development block grant (cdbg) targeted areas, if so there are some great loans available.

you sound like me. i am only interested in property that cash flows so well that i dont want to sell it. if a great opportunity arises i will sell, in order to reinvest in a better deal, but basically i dont buy properties i would not be totally happy owning forever (good cash flow).

banks are all a pain in the neck. i try not to use them if possible, and i enjoy walking away from them with a “well, you had your chance” attitude.

if you cannot make the deal and are still looking to invest i have a few properties on line which will generate a much better cash flow than what you are talking about, they are not in your area, but that is what management companies are for. one thing carlton sheets does, but he does not teach others to do is invest out of the area if that is where the money is to be made. i wonder why?

anyway, i am also an investor, not an agent or broker. my job is computer programming. the units i mentioned run from 12 to 78 per property and are in the range of 8 to 12k/a door. they are in cdbg areas and are fully capable of generating 100% or more return on investment (cash on cash)in the first year. the cap rates for these properties are in the 20% to 32% range. i know this sounds sort of impossible, but it is true. anyway, use the info to pressure your seller and/or bank (banks hate to get outsmarted by investors), and if it doesn’t work out, e mail me and we can talk about the properties i mentioned above. i am trying to line up a group of savvy investors with a little money (by the way i also have money, and would invest right along side of you on these deals) to set up a group so together we could buy larger properties (roi is better in these) to hold. however, the group would have to be flexible as to selling a property in order to buy something that was much better. ie. buying to hold


#5

Mid-town blues - Posted by Mark R in KCMO

Posted by Mark R in KCMO on October 15, 1998 at 19:05:17:

Jim,

Pricing in KC is a tuff call with out knowing the exact address, for an example the vaule can vary as much as 15K across the street (school districts).

I know that there are several “agents” that set up tours to KC and sell off properties that apear on paper as being good deals, only because last month another out of the area buyer bought another property that so you can find appraisals. Mid-town has Several different area, some of wich are great places others many of the local will not touch, also some of the areas in the “Mid-town” area are going to have additonal expenses as the Redevelopment plans are kicking in.

There is a section that is just east of the Plaza that looks like a great area to buy in and you can buy cheaply, however, the city has plan to turn the area into “Open Space”. This isn’t on the offical books yet, at a minum you should talk to the city development people about the exact address’ that you are looking to purchase.

You might want to check out what you can from “Landlords Inc” about where you are going to purchase your properties (office number is 816-753-2606)

Some of the landlord talk here is about Code enforcement problems, The building where the Neighborhood Presevation Department is located (also considered in the mid-town area 3410 troost) has been sited with code violations, you would think they would know what was good and what wasn’t.
Also the Mid town area is filled with “affordable Housing area” (read section 8) that effect the marketablity of properties.

To Quote Larry Myer of the Midtown Real Estate Services…

“Theres a perception that when you get a tenant who has a housing voucher that they are more likely to tear your house up and cause problems and have drug related incidents and things like that”

Oh yea I left out he is the treasurer for Landlords inc.

If there is no wiggle room then walking is your best bet. At a minimum, verify that the rent rolls in the area exclude Section 8 tenants, that is what the real market values are.

Hope this helps

Mark R in KCMO


#6

The bank turned me down! Now what? So what. - Posted by Bud Branstetter

Posted by Bud Branstetter on October 15, 1998 at 17:07:12:

If we espouse taking over a non assumable loan on a residential property what is wrong with doing the same thing on this property. Land trust or lease option would seem to get you both to where you want to be. 15K option consideration to give you time to qualify or find a new loan doesn’t seem out of line. I will re-read the post and responses again. This guy may not want to sell, just not do the management.


#7

Re: The bank turned me down! Now what? - Posted by Jimbob

Posted by Jimbob on October 15, 1998 at 14:46:44:

Jim,

Two things, what the bankers mean by liquidity issues are, you dont have enough available cash on hand in case of emergencies, vacancies, repairs, non payment of tenants rents, evictions, etc.

And two the bankers are not convinced of your ability to manage the properties by showing them a track record of your business management capabilities, plus the properties are out of state from where you live, you’d have to be an absentee landlord (very tough to do).

Basically, you are trying to go after something too big in the beginning. I can relate to your frustrations but this may be a blessing in disguise, if the area is marginal now, you may have trouble collecting all the rents every month and will have to come out of pocket, that can really add up for the number of units you mentioned.

One thing you need to keep in mind that most new or semi new investors always overlook is, the higher the cap rate, the more volitile the property. I would bet half the reason the owner keeps going into town to visit the properties is to collect rents, the other half is to repair damages created by the tenants.

This isn’t what you want to hear but you should seriously think about chalking this one up to experience, cut your losses and move on to something smaller and closer to you.

Jimbob


#8

Re: The bank turned me down! Now what? - Posted by phil fernandez

Posted by phil fernandez on October 15, 1998 at 14:22:14:

Jim,

It appears that your seller is really not that motivated. You’re paying FMV at $90,000 apiece and he won’t hold a second. I would tell this seller that if he doesn’t hold a second than you can’t do the deal. At that point, his response will tell you how motivated he is.


#9

Re: The bank turned me down! Now what? - Posted by Jim Beavens

Posted by Jim Beavens on October 15, 1998 at 16:49:23:

Yes, I agree that the reserve funds are probably a big concern. As I mentioned in a response below, if the bank would keep its grubby hands off the pro-rated rents and receipts, then this wouldn’t be a problem.

As for the management, you can be assured that I would never have bought these properties if I didn’t have a property manager lined up that I had complete confidence in. Everybody I talked to were practically glowing about the guy I’m going to use, praising his knowledge of the area, and his ability to consisently find quality tenants. One thing that’s really big right now in KC is the suburban in-migration to the urban core, and this guy gets alot of these folks that are looking to cut their housing expenses in half by moving closer to the city. High-quality tenants, to be sure. Even after paying 8% management fees, and half a months rent leasing fee for finding new tenants, these buildings still cash-flow quite nicely.

I appreciate your concern, but I’ve looked long and hard at what kind of investing I want to get into, and buying-and-holding best fits what I want to accomplish in real estate, and the best bang for my buck is through multi-unit buildings. I actually think I’m starting out rather small, and that these small 4- and 6-unit buildings that are all over the place in this area provide a great way to get started.

But your mileage may vary, of course. =)

The reason I’m in trouble now is that I played the role of naive beginner a little TOO well, and let everybody else make decisions for me. I’m only now starting to get my feet under me, and it took some bumps in the road to make me realize I need to take the wheel.

Thanks for your help, and I’ll keep you posted on how this turns out.


#10

Re: The bank turned me down! Now what? - Posted by Jim Beavens

Posted by Jim Beavens on October 15, 1998 at 16:18:13:

These were my thoughts as well. So far we’ve been trying to be creative with the bank, and it’s gotten me nowhere. Now I’m going to try and be creative with the seller, and if he balks then I’ll walk. Frankly, there’s not a whole lot of creativity here. He really doesn’t have to carry a whole lot of financing, or take much of a discount on price. At any rate, we’ll see how it turns out.


#11

Re: The bank turned me down! Now what? - Posted by Jennifer(NH)

Posted by Jennifer(NH) on October 15, 1998 at 15:12:32:

My sentiments exactly.

Also, I think the banks concern stems from the fact that all of your liquid assets (easy access money) are being used for the purchase of the building. In the investment properties I have purchased the banks have always liked to see additional liquid reserves that way if there were ever a problem i.e. vacancies etc they would know that I would have the funds to cover the mortgage. So maybe this bank is thinking the same way. They don’t care about your liquid reservers once you buy the buildings its only in the approval process that they care.

Laslty, This doesn’t look like such a deal. Mark from KCMO (who posts here) has indicated to me that he could find 4-unit for about $40,000 which makes the per unit price $10,000 and they are easier to purchase using a 10% down investor program.

I think you should rethink this opportunity unless the seller becomes more motivated and holds a second.

Good Luck

Jennifer


#12

Re: The bank turned me down! Now what? - Posted by JPiper

Posted by JPiper on October 15, 1998 at 19:03:21:

Jim:

As a resident of KCMO and an active investor in the area I was quite interested in your comments about the area.

I don’t mean to rain on your parade, but phrases like “in-migration to the urban core” and “folks looking to cut their expenses by 50%”, along with “high quality tenants” are buzz words. Buzz words are used to sell property…but may or may not accurately portray the area.

If I were new to the RE investment scene, I would be VERY cautious about an out-of-town investment. Much better to cut your teeth on something that is near you, that you can monitor better…until you learn the ropes.

If you choose to ignore this advice, you may wish to keep my name handy. I would be happy to take a look at the properties if you get into trouble with them.

JPiper