Should we do this?

General Real Estate Investing
1

Same building as previos post.

I have been corresponding with the seller’s agent for about 2 weeks on this building and he has been most helpful in answering questions and running down info for us.

Since I have no experience with the town at all other than what we have been able to turn up with internet searches, I was thinking that it might not be a bad idea to contact the other agency in the town and see about getting them on board as a buyers agent to represent us with the hope that they would offer maybe a more objective evaluation of both the property and the city.

Question is…is it too late in the process to drop a buyers agent on the listing agent? I know all is fair in war and real estate, but the listing guy has been exceedingly helpful and I don’t want to bust his chops.

Do you think he would be more willing to “mediate” between the seller and us, if he knew he was getting the whole commission? Obviously, that’s his job, but you know what I mean. Our offer is going to be pushing the envelope a bit (asking for the seller to finance the whole thing) so I could really use having the listing agent being in a good mood!

Thanks, Kip

2

I think it is absolutely in your best interest to get a buyers agent involved with the deal if you are not familiar with the area. They can supply you with honest information that the sellers agent may be reluctant to tell you even if he has to by law. Asking for 100% financing from the seller is going to be very hard to achieve in any situation regardless.

3

gotcha, thanks again Sean.

4
I was thinking that it might not be a bad idea to contact the other agency in the town and see about getting them on board as a buyers agent to represent us with the hope that they would offer maybe a more objective evaluation of both the property and the city.
Also, consider just how objective the buyers agent will be.....the more they fluff the property and building the more you're likely to buy. Purchase = commission for them.
5

Kip,

Personally, I would not bring in a buyer’s agent at this late date. The seller’s agent will be upset about potentially losing half of her commission and may sabotage the deal or at least sabotage any lowering of the purchase price. Also, realtors generally know very little about investment properties and whether a deal is a good deal or not. Additionally, a buyer’s agent still has HER OWN welfare at heart. She will be as anxious for you to buy as the seller’s agent - after all, that’s where her commission comes from.

If you’re still interested in this deal, you need to work the numbers. That should start with getting copies of all the leases (or at least viewing them). What anyone (especially the seller) tells you is just about worthless. You must VERIFY EVERYTHING, from the gross rents to the value of the property to the condition of the buildings. Obviously, a trip or two to the building is mandatory! I would not only visit the building, but talk to some of the neighbors and visit the police. Ask about the neighborhood, crime situation, jobs coming into or out of the area, etc.

If you’ve got the numbers, why not post them on the forum and we can all take a stab at them. Remember, operating rentals is ALL ABOUT THE MONEY and therefore ALL ABOUT THE NUMBERS.

Good Luck,

Mike

6

Hey Mike…

I was thinking the same thing about the B/A not being objective. Thanks.

I posted the info in another thread, but here it is again:

ok… here is the deal…

The building is in a small college town. The gross population has been declining since 1995, but the city has recently established a re-vitalization commission and they are actively recussitating the downtown. And there is a growing resort at a lake about 10 miles away. (And there is a Home Depot in the town, so it can’t be THAT bad!) The rents and the FMV of SFHs in the area are both way below what I’m used to. The current owner has owned this and 3-4 other rental properties for about 10 years and self managed. But his real buisness has really taken off and he has placed all the properties on the market. Building is 1920s, 12,000SF, 12-units, 3-story all brick, very good condition, all units above average condition for area. All have individual E & G meters, gas furnaces, and HWH. Newer rubber flat roof. Average of all 12 unit’s rent about 35-40% below current local average because for past few years the owner apparently has just done the properties as a hobby.

Asking price: $300,000
Current gross rcpts: $44, 850
expenses: $15,000
NOI: $27,100
Cash flow before taxes: $3060/mo

The plan would be to get the building and raise the rents to MV which would result in gross of $60,000. We’ve been told the current leases provide for an immediate bump. We’d hold the building for 3-4 years and sell it for 1031 exchange to bigger building. Been told that local appreciation rate for building is about 3%, but this one is nicer than most, so maybe a little higher. Local annual rent app of 5% is norm.

Current owner is motivated to get out of the building. He has successful business and probably doesn’t need the cash immediately.

We would like for him to carry 100% financing for the entire 3-4 years with no interest until balloon payment at the end or maybe interest only. Or maybe hold the note for 2 years with little or no payments to give us time to rehab the MV and refi to cash him out. In 2 years we could increase the FMV of the building about 50%.

We have nothing significant for a downpayment, but could probably srounge 5-10% up if we absolutely had to, but we really don’t want to for a few reasons.

Can you guys give us specific offers and terms to propose to the owner? The owner is a pretty sharp guy. He would understand creativity.

7

Kip,

Let’s look at the numbers assuming everything is as you were told by the seller (I doubt it).

After improvements and raising rents, gross rents are $60,000/year or $5,000/month.

Operating expenses would be $2,500 per month with paid management and maintenance.

If you got an interest only loan at 8%, then the interest payment would be $2,000 per month, leaving a positive cash flow of $500 per month which is terrible for a 12 unit building.

You should keep in mind that apartment buildings are not as easy to sell as SFHs. Even if you raise the rents, you still may have a difficult time selling the building at a profit. In the real world, successful investors will only buy at a discount and most investors would not buy a property even at $300,000 if they were only going to get $500 per month on a 12 unit building. Cash flow is KING with investment properties! Personally, I would not do this deal.

I like to get 2% of the cost of the deal (purchase price + rehab & other costs) per month in gross rents. With this formula, the max I would CONSIDER paying is $5,000 / .02 = $250,000. At this price, the fully amortized mortgage would be $1,834 per month, or $666 per month - AGAIN NOT ENOUGH TO MAKE THIS DEAL WORTHWHILE. (This deal would work for me, because I would be doing the maintenance and management). I wouldn’t do it for only $666 per month.

You can see how hard it is to make a reasonable return when you use paid management and paid maintenance.

Good Luck,

Mike

8

I see what you mean, Mike.

I really wish this building were closer so I could do it myself.

The area we’re in (south central PA) is really pretty rural, with not too many apt. buildings to choose from. So, if I’m going to have this “genre” as my target, I’m probably going to have to look beyond the geographical radius that would allow me to manage them myself. That will mean a PM and that will mean that I will have to find buildings that will support professional mgmnt.

What is the best way to find them? I already look on LoopNet 2-3 times a week, but I have been looking around us. Should I broaden my search to other parts of the country, Texas, for example, where there seem to be more “bargins” available? I mean if I have to resign myself to using a PM, I guess it really doesn’t matter where in the country that is…in a cosmic sort of way.

I really want to get going though.

Kip

9

Unless the seller’s agent agrees in writing to give up half their fee, you’d just tack on your buyer agent’s fee to the price. Even when dealing directly with sellers, my investors just calculate my fee into the offer.

It happens all of the time and isn’t a huge issue.

10

Kip,

I’m here in Ohio and it sounds like I live in an area similar to you. You don’t need to live in a big city to be successful with apartment buildings. Surely there is a small city close to you that has apartment buildings.

There is no “best way” to find deals. In fact, trying to use any single method will almost certainly guarantee failure - ESPECIALLY IN A SMALLER CITY OR TOWN. You should be using multiple methods: checking ads in the local newspaper every day, place an ad of your own, meet the other successful investors in your area, join your local REIA (or start one if it doesn’t exist), look for REOs using a HUNGRY realtor, go to auctions, sheriff sales (not usually for beginners), etc, etc, etc.

I would not look beyond your local area. The grass is NOT greener on the other side.

Good luck,

Mike

11

As a commercial broker, I personally wouldn’t have any problem with this.

12

Hey A.V. …

You wouldn’t have a problem with what, bringing in a B/A in the “final” stages of a deal?

Can you “splain” why?

Kip

13

From what I can tell, you’re only in the “final stages” of putting in an offer and that’s really the beginning of the process. I’ve had principals approach me initially for information only to bring their own broker in later on. If you signed an exclusive rep agreement with the agent, that’s one thing. Did the agent ask you to sign one of these? If not, your business is up for grabs IMO. Is this building listed by the agent in question? If not, then that’s a whole other can of worms.

It’s understandable that, because of your geography, you may need an unbiased viewpoint. What I would ask for is possibly a broker’s opinion of value (BOV) from another agent in town. This is usually done for a flat fee ($150-$300, depending where you are). A good broker will be able to do this and give you an objective analysis. I do them all the time for out of state interests.

Good luck.