I came across a 16 two bedroom units, multi family property that the owner needs to sell, probably 60-90 days from foreclosure. I know what she paid, $493,000 in September 2005, and there is some work needed, a few units are unrentable, probably $30k in work. Should I try to see if I can assume her mortgage if it works for me? Or let it go to foreclosure and buy it from the bank?
It just all depends on the comps in the area today, the 2005 value is irrelevant.
What are other 16 unit w/2bedroom unit apt buildings selling for in the same area today?
Also keep in mind…that once it goes to the bank as an REO there will be a ton of competition , it’ll be on the MLS for the world to see.
If it were fully rented and maintained I would say around the same price right now. But do not want to shell out the $30k in addition to a 20% down payment. Anyone deal with a rehab loan that would fit this type of property?
assume her mortgage, a.k.a. assume her problems???
9 times out of 10, she paid too much, which is why she is losing the property. Why not wait, let it be foreclosed on, then go after it through the bank(at a big discount) that would be my plan, even if I thought it was a deal now.
One of the problems was she took the cash flow and put it in her pocket instead of maintaining the place. She tried to manage it with her partner, but neither were experienced and he left. Last Nov. she hired the company that manages my property there and it got partially fixed up but then stopped paying them. She tried to refi but couldnt so here we are. I got the call because people in the area know I am looking to buy properties. I can probably get it for $25k a unit which is good, but I dont want to spend money fixing the rest of the units. I would rather get a mortgage that includes a budget for rehab. I dont know how much she still owes, but would be willing to take a look at her mortgage to see if I can assume it.
Bring your numbers. Exactly how many units need work and how many can be rented and for how much.
If you assume the mortgage “Subject To” you will not assume the debt.
You also have the possibility of doing a short sale.
Ok, first of all if this lady bought this property for $493k in September 2005 the chances are good she never refinanced it because of our impending melt down starting in early 2007.
To buy this property for $493k means she probable had to put at least $50k down and possible as much as $100k so her original mortgage balance was probable right about $400k or a little less in 2005.
To be in foreclosure in 2009 means she had to have been paying most of the payments from November 2005 through 2008 anyway so roughly 10% of her original mortgage has been payed down.
I would guess this property has only about $360k or a little less owed against the mortgage or about a $3k a month payment.
I think assuming the mortgage is the very best way to take this property over, if you request a short sale you end up putting money down, if you wait for it to be foreclosed on you end up putting money in as a down payment.
If you assume her loan you take it over “No Money Down” and use the money you would have had to use for a down payment to partially fix the place and use positive cash flow off of units to finish the rest.
Any way you cut it to get a commercial loan on 16 units you would have to put 20 to 25% down and pay closing cost’s.
Just make sure you do your due dilligence, cover all the bases and this requires this lady to sign over her interests if the bank will let you take over the principle balance.
This should be a no brainer for the bank and they really have nothing to lose if you have decent credit and local references as an investor, and as for unpaid outstanding bills you should be able to negotiate these down to cents on the dollar and get agreements to pay off out of positive cash flow.
This property being a 5 unit or larger complex value is going to be based on a gross rents multiplier and a cap rate, so income generation is key, make sure you factor in all of your monthly expenses as part of due diligence.
This is probable a huge potential upside and something investors don’t walk into every day, so sit down with a pen and paper and run the numbers, do some due diligence and go for it if you can make it work.
I suspect this property could probable be worth upwards of $850k to $1m in good condition with proper records and rent rolls and a restored property.
Good luck,
GR
Current stats
16 units - 11 rented - $4615 a month
5 vacant - 4 unrentable as is and in need of rehab.
If I were to assume her mortgage in a “Subject to” can she file bankruptcy down the road and affect this property while I own it?
Also, do I need the usual insurance appraisal if I change insurance companies? Assuming I do not have to use her current policy. This would be my first experience assuming a mortgage.
$419 a month for a two bedroom unit? I would think this is actually low but you will have to work this up over time and with re-working units.
If you assume or take over her mortgage from the bank or lender she no longer has an interest or effect on the property. (Your going to have direct conversation with her lender and sign documents taking over her multi-family commercial mortgage)
Your just becoming the new owner saving the bank from foreclosing!
You probable can get a new policy through the same insurance company who probable will not require a re-visit to the property.
The mortgage when your done will be legally yours!
Just double and triple check everything before you pull the trigger, but make sure you have a legal contract with her with a bunch of contingencies so you have plenty of time to work this.
I think I would try to do this as quick as you can get the due diligence done as to save the lender continueing monthly losses since she is not paying them.
Good luck!
Calculate it into the purchase price. For instance. If you’re going to buy it for 470K and need 30K in cash for repairs. Tell her you’ll pay 500K (start less, but strike here), but you want 30K back at closing as a repair allowance.
She wont be making a profit on this if she were to sell it. So there would be no cash back at signing. And I would expect below $400k.
Gotcha, I finally read through the whole thread. (have a bad tendency not to).
I like Gold Rivers advice. I’d be conservative and value your property at a 10 cap.
If you assume or take over her mortgage from the bank or lender she no longer has an interest or effect on the property. (Your going to have direct conversation with her lender and sign documents taking over her multi-family commercial mortgage)
Your just becoming the new owner saving the bank from foreclosing!
That wouldn’t really be assuming the property but rather buying it as they will draw up new papers and do a closing.
Watch out on that insurance stuff. I have a buddy that has a number of apartment complexes and he said that there are only two insurance companies in the country that he has been able to find that will insure apartment complexes.
He said when he buys one most often the insurance company will refuse to reinsure it as they are not doing apartment complexes any more.
If I were to assume her mortgage in a “Subject to” can she file bankruptcy down the road and affect this property while I own it?
I have heard that if she files bankruptcy within 90 days the judge will likely include it and if past 90 days he likely will not. You will have to show proof that you bought it and the date of doing so. The banks are happy if they keep getting their payments right now with interest rates so low. They have not been calling the Due On Sale Clause lately. BUT, when interest rates rise and get up over 10-12% or higher, expect to see banks calling loans, primarily if the present loan has a highly favorable interest rate to you. A bankruptcy in the future could raise a flag to the bank that she in fact no longer owns the property IF her lawyer sends a notice to them that she will be in bankruptcy, and they will make a judgment call at that time if they should call it or not based on the present interest rates.
I don’t know why he would though, unless she told him that she still has some stake in the property.
16 units - 11 rented - $4615 a month
5 vacant - 4 unrentable as is and in need of rehab.
How you would stand presently if you gave her what she wants. No consideration of the unrentable units as they are useless to you presently. They will have to be determined separately. Like many people here, I won’t touch a place unless I get $100 per door minimum. To determine value, I would figure out what 100 per door would equal relating to the purchase price on those 12 good units. Then take the the other rehab units and determine the total fixed up rent on each, and multiply Rent X 35 minus repairs which will give you close to a $100 per door scenerio. This add or subtract this value from or to the 12 unit figure.
This is how you presently stand if you offered what she wants assuming that she bought it for $493,000 and put down $50,000 bringing the loan to $443,000 in January 2005 at 7% interest (probably more) for 20yrs. Her balance and your purchase price now would be $390,362.
12 Operable Units
Gross Income: $5,034/mth = $60,408 annual (added the extra vacant unit)
Expenses (50% rule of thumb) - 30,204
NOI: $30,204
390k@7%/15yrs: $42,066 (15yrs is all they will lend at now)
Yearly Cash Flow NEGATIVE $11,802 OUCH
Now we know why she would be willing to give up her equity. Because this property is presently costing her $11,802 per year to operate. Your offer will have to be significantly lower than her loan amount, therefore this is a Short Sale property and definitely not a Subject To property.
This is why it is important to do the math on a property prior to making any hasty uneducated decisions. Now if you can find out exactly what she owes (she could have put down more than 50K) or what she is willing to sell it for if that is more than what she owes, than we can run some real numbers and get to the bottom of this.
Before we go rain on Brian06’s parade, let’s look at a few hard and fast facts!
First there are no hard and fast rules for this situation, however for those of us who have been investing for more than a few years and remember back in the 1970’s and 1980’s remember that we used to have no qualifying assumable loan clauses in our note and deed of trust.
A commercial property loan is strictly based on and loaned on the property, a borrower shows the lender responsibility for finances (Fico Score) and some experience understanding how to manage properties.
(If the thing goes south most commercial property borrowers do not have the ability to make good on the loan, and the loan even foreclosed does not show up on a credit report.)
In this case the current owner, I’m not sure where you got the idea the property is for sale from, would simple turn the property over “Deed in Lieu of Foreclosure” and walks from the property.
A judge will not have a thing to say about a miss managed commercial property being turned over to lender that is in foreclosure and has serious management problems with the current owner.
Brian06 is looking to simple take over the current owners commercial mortgage for the same amount and terms as the existing note and deed of trust. (There does not need to be an escrow as nothing is changing and nothing is being transfered, due diligence is important to decide to take the property over.)
She does not want anything at this time nor do I believe in reading this thread that Brian06 has even proposed taking the thing over.
The bank will let Brian06 actually sign papers assigning legal responsibility of the commercial loan to him or his company. They do not want to hold almost $2m in cash against this foreclosure nor do they want to own or manage a property with problems and a slew of defered maintence items.
Right now the property is grossing $4615 per month, well first month I would completely remodel the four uninhabitable units and all of the $30k in defered maintence items.
By month 2 I would be renting all four completely rehabbed and remodeled units at a premium raising the rents to the higher part of the market and adding an additional, let’s say $700 a unit or $2800 a month to gross income.
I would then go back and systematically remodel one unit every month moving current tenants who are paying as agreed and capable of paying current high end rent’s and move them into new unit’s making a old unit in need of remodel available for the rehab.
With 11 unit’s curently rented, I would do the four and come back and remodel unit # 12, before disturbing the first tenant in 3 months and giving a choice to move over into newly rehabbed unit # 12.
Dam, if that doesn’t change everything, wow! ! ! ! !
Where or what in the h_ _ _ is a $100 a door deal, gotta be some guru somewhere, well let me tell you from experience, in the actual investment I had better dam sure make a h _ _ _ of a lot more than $100 a door or I surely won’t make money in real estate.
Truth be told you can make money in real estate at break even, negative $100 a month or paying full price and don’t let these guys tell you you can’t because I know better, from years and years of experience.
There is no commercial lender in this country who will make a commercial multi-unit loan on a property with only 10% down payment, now I am not talking about cross colateralized loans.
And of course we know a lender will sometimes allow a owner carry note for some portion not to exceed 10%, and not knowing whether there is a second on this property from Brian06, however since it seems Brian has been looking at the fact’s and did not tell us there is a second.
I am going to quantitate this by saying on a $493k purchase, the current owner presumable put down 20% ($98,600) to 25% ($123,250) so the underlying commercial multi unit loan probable started at $394,500 or less.
In 2005 a 20 year note due in 5 or a 20 year note due in 10 were available so the payment on this property is probable between 7.5 and 8.5% and probable is set at about $3300 a month at 8%.
And this loan should have been paid down to roughly $360k now.
Now according to my calculations you put in $30k for remodel, $4620 for rent deposits (assuming the current owner has not impounded them) you cover your $1k per month negative for 3 months and your personal supervision overhead cost’s and your in an investment for $40k or so.
Your monthly income second month should climb to between $6015 and $7415 or positive for at least $21.8k a year or over $1800 a month.
By the time you get to the end of year one you should have almost all the unit’s remodeled and tenants paying your new $700 a month rent’s.
At $700 a month per unit the gross rents are approximently $134.4k.
16 operating unit’s @$700 per unit.
Gross income $11,200 month - $134,400 gross
Vacancy Factor 5% - $ 6,720
Expenses 50% - $ 63,840
NOI - $ 63,840
$360k @8% - $ 39,600 (Estimated existing loan & Rate)
Yearly cash Flow - $ 24,240 POSITIVE
In this scenerio you have $2k per unit cash to remodel the other twelve unit’s in the first year (Roughly).
When the property is abused, miss-managed and deteriorating it has no equity that is quantative when it’s in foreclosure.
This is why it is important to know what and how to plan and calculate your project, make real world projections and be confident you have the answers!
Real numbers would be nice, but this gives you enough to give you the idea.
Good Luck,
GR
Thank you so much for your input guys. I have a 28 unit place 3 miles from this property, all 2 bedrooms, and they rent for 495 a month. Remember every area of the country is different.
Also, I have not had a problem getting insurance, right now I have Travelers.
This 16 unit property is NOT for sale and most likely will be foreclosed in a few months. I know there is no positive cash flow now. That is why I want to get it for a deal so I can rehab the rest of it and get it rented and make it positive.
By the way I am still seeing 20yr am, 3-5yr fixed rates around 5.5 to 6.5% if I had to buy it from the bank as a short sale.
I have a great management company in place at my property there and he was contracted 6 months ago to take this bad property on but the owner could not refi and then could not afford all the expenses so the manager called me to see if I wanted to make a deal with her because he knows I am buying properties in the area. He quoted me $30k to fix up the place.
Where or what in the h_ _ _ is a $100 a door deal, gotta be some guru somewhere, well let me tell you from experience, in the actual investment I had better dam sure make a h _ _ _ of a lot more than $100 a door or I surely won’t make money in real estate.
Cash flow $100 per door would be equivalent to a 15% capitalization rate or higher. And you get CAP rates significantly higher than that, huh?
Bring your numbers. Exactly how many units need work and how many can be rented and for how much
Update:
The owner’s mortgage is NOT assumable. My options now are to make her an offer or wait until the bank takes it, and the deferred maintenance will not get any better.
Any opinions on what kind of offer I should make her or the bank when they take it?
Current stats:
16 units - 11 rented - $4615 a month
5 vacant - 4 unrentable as is and in need of rehab.
In this area, similar units rent for almost $500 a month.
What kind of area? Low Income, Middle Class?
Low Income Hooch method starts at Rent X 30 minus repairs. Maximum offer Rent X 35 minus repairs
Middle class 2% rule Rent X 50 minus repairs
Know for a fact the exact rent on each unit. Not a guess. This will allow you to know what the other 4 unrentable ones will rent for. Determine how much it will take to bring each of these 4 up to par.
Once you have determined if you need to use the Hooch Method or the 2% rule, do this simple math. Both will cash flow. If you want someone to tell you exactly how much to offer you have to say if it is low income or middle class. You also need to tell an estimated cost of repairs on the 4 unrentables and what each of them will rent for.
Ok thanks. Repairs are $30k, and the units are at $419 a month C class. After repairs and new ownership, C+ class at $495 a month.