Great thread. Learning a lot.

A pretty easy/novice question. I'm looking at buying a small block of apartments.

What sort of things should i ask the RE agent to enable me to evaluate the suitability of the property? Its not going to be easy for me to inspect the properties first, so i want to know the important things i can find out over the phone/through email.

1) REI club
2) direct mailings. I don't use this method, but I have an acquaintance that has a lot of success with it.
3) loopnet.com
4) MLS

Ask for the P&Ls and the rent rolls. Normally you'll get those upfront and get the property under contract. Then you start the due diligence and you can renegoiate the price based on what you find. It is very normal to get the property under contract for one price and then close at a much lower price based on issues you find during DD. So don't worry about that. Get it under contract for a number that works for you based on the information provided. Then start verifying everything.

First of all, super big thanks for all the effort you have put into this thread SpecX (and also thanks to those other knowledgable RE players who have chipped in as well). If any of you guys are ever in Birmingham, AL, I'll provide a free meal at Ruth Chris for ya!

I'm on the verge of my very first deal and I'm having that first-timers fright. I'm looking at two properties right now and I'm in a position financially to be able to take a 100% loss from them and be ok (that is obviously unreasonable as I could firesale them at auction, but just to make the point). I'm also willing to walk-away if I cannot negotiate a deal which gives me at least a 12% cap and 25% cocr (I wanted 12 instead of 10 as I may potentially work with some investment money instead of my own and I didn't want to sack my own profit in order to pay the 10% investment notes I'm offering). Let me give a brief synopsis of my analysis of the properties:

Property 1: low income area of town

pros:
decent area for low income jobs
good looking house for the block
near a strip mall, some fast food and a gas station, 4 mi from interstate
12% cap (currently attempting to negotiate at 15%)
27% cocr for 12% cap
currently holds a section 8 tenant
tenants have a 1998+ model Ford truck and seem to keep the lawn in good shape
can acquire property at least 33% under FMV, negotiations will probably push this to 42% in my estimation (bringing to 15% cap, but I'm calculating based on the 33%)
seller reportedly rehabbed property 30 months ago with new HVAC, electrical, paint, and roof as needed
cons:
tenant is paying month-to-month, lease is expired
our local laws allow the water board to place liens directly on the property (not the tenant) if the tenant doesnt pay the water/sewage bill
home was built in 1920
area is stagnant, no growth; current community members are financially tied to area and thus no real flight either

Property 2: low income area

pros:
decent area for low income jobs
average looking house for the block
2 mi from interstate
12% cap (currently attempting to negotiate at 15%)
26% cocr for 12% cap
currently holds a section 8 tenant
can acquire property at least 33% under FMV, negotiations will probably push this to 42% in my estimation (bringing to 15% cap, but I'm calculating based on the 33%)
seller reportedly rehabbed property 30 months ago with new HVAC, electrical, paint, and roof as needed
cons:
tenant's lease expires in 4 months
our local laws allow the water board to place liens directly on the property (not the tenant) if the tenant doesnt pay the water/sewage bill
home was built in 1930
area is stagnant, no growth; current community members are financially tied to area and thus no real flight either

These properties are coming from an out-of-state agent/investor who said he didn't want anything out of his home-town anymore and mentioned having a partner here. I'm not sure if I buy his statement or not, but the fact is that he has priced these in order to sell them in bulk (these are 2 of 15 properties he is trying to sell, 5 are already sold) so he's obviously allowed for the fact that another investor will be looking to buy them primarily and thus will be looking for positive cash-flow off the start.

Mathematically these look like solid deals to me considering the numbers you've outlined repeatedly in this thread. My father, who has been a residential RE rehabber for the last 20 years, heavily cautioned against such old properties though. I also have very little experience outside of renting rooms out of my house. If I were to have 3.5mo of vacancy a year on these properties (less than 70% vacancy), my profit would be reduced to break-even. I think that is probably normal, but I think it's my biggest risk especially considering my limited landlording experience.

I'm still waiting on getting the tax map number from the seller so I can look-up the tax accessment on the property. The offers I make will also be contingent on an appraisal of which I have a friend that can do that for me for free. Other than that, I feel like I've done decent due-diligence here. Is there anything that I'm missing?

I've been mentored through these early phases almost entirely through my father (who lives out-of-state so I've had to make judgments for myself), SpecX's posts, and a couple visits to my local REI club. If this works out, it will definitely be a tribute to those involved

edit: is it ok to ask for an appraisal when there is a tenant actually living at the place? it seems potentially invasive

This is going to be a bit cryptic d2k, but are these by any chance owned by a guy named "Victor"?

Sold.

Dude, if you can afford to take a 100% loss, you shouldn't be afraid. Personally, if you have the money to do one deal and take a 100% loss, you probably have the money to do both of these deals. This is exactly like playing a big pot in HE tourney - sometimes you might be scared to pull the trigger even though the numbers work. When the numbers work, they work.

These two are almost exactly the same IMO. The biggest problem with older houses is that they construction materials used at the time were not uniform like they are today. Like a 2x4 studs in 1910 were not all exactly 2x4 like they are now. They're all slightly different. Then they just use the lathe and plaster to make the finished walls straight. this is an enormous pain when you're trying to use modern materials on an old house like this.

But I'd say that if the major systems have been upgraded and there hasn't been a lot of shifting in the last 80 years, then the house is likely solid. IMO, if a structure has been standing solid for the last 80 years then its likely to continue standing solid for the next 80 years.



Yeah, its not problem at all. the landlord has the right to enter a property so long as he's given 24 hours notice (or whatever the law is there).

Personally, if the water board tried to attached a lien on my property for the actions of a tenant, they'd have to fight me in court. My name isn't on the water bill. Why should you be held accountable for a deadbeat tenant's bills? Should you have to pay your tenant's credit card bills and car payments too? Its not right, and most likely its never been challenged. So I wouldn't worry about it too much. If you're really concerned, make the tenants pay a little bigger deposit.

Month to month leases are meh. I use a lot of M to M leases. Frankly, a 12 month lease doesn't guarantee that anyone will stay 12 months anyway. But the 12 month lease looks better to the bank when you go to use that income to finance other properties.

These properties look like solid investments. One thing to be aware of is that when you buy SFH in low income areas you're buying cash flow more than unrealized gains. The properties don't appreciate fast. And they aren't worth that much to begin with so the mortgage paydown isn't a huge wealth creator. Just be aware of the fact that you're mostly buying a cash flow instrument here. Nothing at all wrong with it, I just want you to be aware.

Nope, but now I'm curious why you asked.

Yea I know this sounds shocking. Montgomery sued our state over this law and they won, but the state has this tied up in appealate court so it may stick around for years to come.

My idea was that Alabama doesn't have much volatility in prices for resi RE, so I was going at it from a cash flow approach through landlording. Our low income areas are not moving very much one way or another (the state is appreciating at around 1-2.5% still). As a pure cash flow strategy, I'm valuing the hopes straight up off of cap/cocr and then considering my other rehab costs to get the place to S8 compliance. Do you think there is a specific range under FMV I should look at when considering a property in this manner? Right now I'm looking at between 58-66% of FMV which I think is good, but I hear people finding stupid deals in these low income areas down to 10-20% of FMV on foreclosures and shorts.

The location description, presence of section 8 tenants, house descriptions, and especially the "all rehabbed in the past 30 months". All of these combined sound very much like properties in the area I invest and there is a individual in that area looking to unload several properties that sound very much like those you described. I am sure they sound very much like properties all over though.

And my area is nowhere near Alabama.

Not really a range. Mostly I'd look for positive cash flow. As long as you're getting positive cash flow you should be fine. But if you can get properties at 90% FMV and get positive cash flow in your area, then great. Some areas you'd have to get a property for 50% of FMV to get positive cash flow. It just depends on housing prices versus market rents in your area, so there is no generic standard that you can apply to everyone.

Spex,
I asked this in a pm but I think other people could benefit. When giving my first offer should I spell out my numbers and cap rate I am looking for? Or give a more ambiguous "low ball" offer and wait for a counter to bring out my hard numbers?
~Justin

This probably seems equally weird, but could you possibly PM me this person's last name.....I can explain more in pm

spex any knowledge or experience with coin-op laundry mats?

When you're negotiating you need to determine three numbers - an opening offer, a target price, and a bottom line. If your target is $100k, what I'd do is offer $88k, then $94k, then $97k, then $98.5, etc. Start out with a big concession and make progressively smaller ones. That makes your counterpart feel that they are really squeezing every dollar from you.

You don't need to really justify an offer. for the most part when you're buying commercial property the seller will understand that different people have different investing criteria. So just put out an offer and see what happens.

Once you start to get closer together, you can start trading price and terms. One way to do it is to offer a cash price and a much higher price with seller carryback. Present two offers simultaneously. this is what I do the most frequently.

Another thing.


Don't be afraid of making low offers in fear of "insulting" a seller.


You are trying to buy the property at the lowest price and the seller is trying to sell at the highest price. Everything in the middle is negotiation and in my oppinion, seller's don't "own" their equity until the property is SOLD. Speculation is all a bunch of crap anyways IMO. All these nimbwit sellers thinking their property was worth the moon 2 years ago are know finding it's worth less than dirt.


"Equity", meaning the difference between mortgage and what you buy it for, belongs to whomever negotiates it, not who owns the property.


Remember that when you make your offers. You don't owe it to anyone to pay near what they are asking. Be tough, be resilient, and don't give in easily.



I see all these noobsauce investors / agents so afraid of making lowball offers its sickening to my stomache. Real estate is business, and business is cutthroat. You can't be a weaksauce investor and expect to make any money in real estate. You need a tough alligator skin.

In support of Tien's post, I can mention 2 recent purchases:

Duplex listed at $43000, accepted at $23000 from a start of $18000 -- property in very bad shape, seller had been through 2 failed sales in the past year and they really, really wanted out. We have put in about $15000 in repairs in the past 3 weeks, pretty much replacing every wall, floor, door, cabinet -- but no wiring or real plumbing. We are planning to list it $80000 with an expected sale around $70000.

Duplex listed at $60000, accepted at $30000 on first offer; perhaps we could have gone lower but all the numbers were really good at $30k so we are happy. About $8000 in repairs expected and again listing around $80000 expecting to sell at about $70000. To be honest we didn't really expect the $30k to be accepted but we went ahead and made it.

I think western North Carolina is a good investment.......take a look.

Spex and others, do you guys ever just look over a couple pictures of a property and some provided numbers (things you can calc cap/cocr from), and then make your initial offer? I've been going around investigating every lead until I approached with my first offer but it has proved to be an extremely time-consuming process. It seems more efficient to offer something in the range of your target based on your initial information and as long as they seem willing to talk, then do more research.

I have thrown out a few blind offers and had it contingent on viewing. These were all low ball offers though, so I have no idea if you "should be" sending them before really checking out a property.

This is my preferred method. I only need some pictures and/or drive by. At the prices I'm buying at I don't mind ripping out the kitchen/bathroom(s), paint, carpet etc. I almost expect to do this on every property and this way I am only pleasantly surprised. I can make 10-12 offers a day to banks (the damn contracts and addendum's take so long to fill out) and about 30-40 offers to direct sellers like this. I only need a few home runs to make a living!!

40-50 offers per day??


I need to start hustling more. God damn.

Does this actually work? What is your sucess rate with this method? I just can't see this working where I am. Maybe I am going after the wrong properties...

Wow, 40-50 offers a day, that is crazy. Are most of the offers you are making on properties you find through your marketing? What type of contingencies do you put in your contracts? Also, are the offers you are making to banks short sales, where you found the property through direct marketing? Or REO's?

I have 2 assistants who answer calls, screen info. I use 4 programs to comp out properties. Three sales guys making offers/selling the properties. Everyone full time. Were hopefully going to transform into a small residential/commercial REIT.

95% of offers through marketing. No shorts sales, short sales are a waste of my time. other 5% are foreclosures.

grunch: so forgive me if this has been asked.

Would you recommend being an apprentice to an established REI? It seems that many investors are looking for apprentices to do research and other work for them but would I really learn everything I need to know to invest? And if this is something you would recommend, I would want to learn from someone who is good at what they do. How can I determine the investor's success/ skill level?