Mortgage Mortgage

Don't listen to your realtor, they don't know. Neither does your loan officer. All they want to do is sell you something.

I'm writing this not to get your business but for the clients that already use us so they can come here to have a virtual checklist. But you, the internet voyager, will benefit by this to. First, NO ONE is going to represent you. They will go through the motions and on residential real estate thats OK but it can cost you thousands on an investment property. They will tell they now how to sell or lend investment property but basically they will be finding out for themsevles as they use YOU as the guinea pig and come back with the standard answers "need 25% down and more of your personal financial information", which if you follow or suggestion you will see that isn't the case.

First, most realtors and loan officers say they know how to do multifamily deals but they don't. Ask them to list the last 3 they did and get their numbers to call to verify. If you have a realtor and lender that pass the test then its time to learn the other rule;you may have pros that represent you but YOU are ultimately responsible so question everything you don't understand. This is real estate not physics or rocket science; the negotiation should make sense and if it doesn't you need to stop and have them explain till you do. Lenders and realtors want to help but they are there to sell and human nature in this business is to get you down the road so they can get to the next one. I don't care what their card says or you hear on commercials, there is a line between service and their bank account.

So....enough said...let's get to good stuff on how to approach this. Remember this is our opinion and there are many ways to do this so i fthis makes sense then use it, if not then keep cyber surfing.

Buying investment property apartments, multi family, multi units is in the offer. How you get to writing the perfect offer takes some work on your part out side of what your realtor says.  First inspection, This is somewhat crucial on a home but its what most people over look on apartments/multi units that drastically change the value of the property. The reason is that owners of mulit units usually don't live there so they never know of leaky roofs unless it directly affects tenants. Termites, leaky basement plumbing, water heater, etc. go unnoticed. So 2 properties that look the same on paper and in photos could be completely different if one has its water heater on its last leg and termites and a roof that needs help.

So step 1 know what is average for rents in the area you are buying.

OK This step you can start to work on now but you wont be able to use till you go through the other steps. If someone is trying to sell a 5 unit property for $800,000 but each unit can only rent for $300 a piece then the income it produces ($1500) will not support the loan it will take to acquire it ($4200 plus taxes and insurance). After going through a few properties using the steps below you will have numbers in your head when looking at a sales price. Through usig all the steps below and running examples out on paper you will create an insticnt if a deal is close just by looking at the sales price and monthly rents. But you have to use ALL of the next steps.

Step 2 Inspection

You can do a general walk through and with our do it your self home inspection checklist   you can weed out the really bad deals. In the end though we recommend a Licensed professional property inspector once the property is down to the final phases of  deciding, they are not that expensive and put part of the liability on them if they miss something. What can you do initially? Seeing you are not a professional you are only looking to find the obvious. If you find allot wrong its safe to say ther are more things beneath those problems that the professional would find and maybe what you just found out will make the property not desireable. If there are no visible problems you would then hire a licsensed property inspector. But first the key areas that you can inspect would be, but not limited to, obvious problems with a furnace, plumbing, air conditioning, electrical and unusual cracks on walls, cielings or floors. Be sure you check every unit before you close escrow but try to see a few before you go further.

If it looks OK to you. then do the other steps below and come back to hiring a professional inspector when the other steps below lead you to think its a property you want to make an offer on . When you write the contract ALWAYS make one of the conditions of the sale is a satisfactory inspection. If some things come up its not the end of a deal. Some things the owners ddidn't know about (remember they usually dont live there)that come up in inspection are things the next buyer will ask about so rather than put it back on the market they migh tbe willing to work it out in escrow. You two would come to a resolve (them paying you through escrow what it would cost to fix) and amend the contract to account for the things you both decide should be included from what a professional inspector finds. Some things the appraiser finds may affect you getting insurance on the property so when you hire an inspector, on the estimate you sign with hm be sure to write on it "please highlight,docment and bring to my attention all findings that might affect obtaining insurance on this property and get my initials of acknowledgement of each item" They may not understand what you did but it creates liability. If they dont have your initials on items that were crucial then you can sue them for damages. This is because even though you may get a licensed inspector each has their own approach so its best to write this clause to make sure you dont have  a problem with insurance or finding problems right after sale.

Then step 3 disclosures, certifications, warranties and financials

Get as much information as you can. Why are they selling, what do they owe on the property (this is key for getting a great deal), is there any damage that severly hinders the value of the property Here is a what to ask a seller checklist . The next of important facts you need is the performance history of the property. Next is getting a rent roll , copy of all lease agreements with renters, financials and current financial "sanpshot" of how the property is performing right now. See this report on what is a rent roll   but basically it lists where each renters' relationship stands with the property. Reviewing the actual signed leases gives credibility to the rent roll and all the other financial information they have to provide you. The next piece is getting the last 2 years of income and expenses. Note if the property owner only owned the property for one year they cna still provide the previous owners financial seeing thet had to have it when they boought it. Another piece is getting the Schedule E of their tax returns for the past 2 years. They may overstate it some for tax write offs but usually its pretty accurate and it will never be understated because it benefits them tax wise to claim as much as possible.

You also need to get the current Year to Date financials and they should be authenticated by their CPA. This makes sure you are covered because the CPA is bound to report truthfully or face legal action by the state and be barred from practicing accounting. Now if this sounds like blah blah blah......dont glaze over. We will make it easy, just stick with us here.

You take all this and make a "money in- money out" sheet. First you take the rent roll and match up the lease agreements, do the nuumbers (rent and security deposit) match? Then make sure they match the financials. If the rent roll shows you are only getting in $3500 a month but for revenue it shows $70,000 then something is missing or they over stated the income.

Look for "omissions" If the financials dont show an expense for insurance then they forgot to put it in and it will affect what the true net income is. Getting certification on when the roof was done, appliances put in and other items repaired will also tell you teh date of the repairs. You need to cross check it with the financials. If you ahve reciepts that the furnace was replace this year but you cant find it under the costs then they are over stating profits.

Warranties too. They tell you when things were bought so make sure that expense is there in the financials.

After this, you should have a pretty good Idea of what the property brings in after everyone is paid.

Step 4 Cash Flow Analysis

OK you put everthing together, so what? Well now comes in some industry averages that lenders put in to get the true value of the property. First is average rents in the area. The next is vacancy rate. The acceptable vacany rate is between 5-10% but its totally up to the lender and home many units are in the property you are buying. The more units the lower the vacany rate. A 4unit they might give a 20% where a 6 unit they might give 5%.  What does this mean? well they take your proposed income if your property was fully rented and take off 5%. and the net is what to expect. The reason is that thorugh the years people leave or you evict them adn the place will be vacant a month or two so in order to show what it really makes you have to subtract the industry average of how much is lost due to terminations.

Ok so you have what it makes after all is added and subtracted, is it enough? Well that for you to decide. Some feel the property is a go even if it just mkaes a little over as long as they can live in one unit for free. Others want it to make considerablly more. you also need to compare current rents to rents in the area. Sometimes a place rents for $425 when the market will bring $600. You have to redo the numbers and look at that way too(always include a comfortable vacancy rate-never work on numbers assuming they will always be rented).

The thigns that you need to put together to see what the true cashflow is on the property are the follwing:

•    Annual Gross Income (rents for the year)
•    Other Income (defaulted security deposits,, laundry services,etc.)
•    Expense Breakdown (best found on their Schedule E of their last 2 years tax return)
         Taxes
          Insurance
          Water/Sewage/Trash
          Elictricity/heating oil/cable
          Licenses
         Advertising
         Supplies
         Maintenance
         Snow removal (some cities automatically charge your property)
         Landscaping
         Pest Control
         Accounting & Legal
         Management
•    Expected future maintenance and repairs-from reciepts-is there any big items (roof, furnace, plumbing) that hasnt been replaced in a long time that may need to be replace in the next 18 months? put it in and divide by 18 and make it a monthly expense.
•    Calculate the Mortgage payments that you will have to pay on the new loan you will be getting .(dont forget to assume you will have to put down 20%

After taking the cash you are getting in and subtracting the money you have to pay out, including the new mortgage and expected repairs and maintenance items, you hopefully have come up with a positive number that is very big. If its just enough for you then thats ok too.....cause hey it's you rmoney right?  But if the numbers arent working out, don't fudge them to make them work. In the end it will cost you. Don't ptich the deal either because you can go back to the seller and show them that its not worth it. They may work something out if its been on the market, or in probate where time is on your side. The other weapon to bring to their attention is that the appraisal wont support their price. Appraisals on this type of property is based on how profitable the property is NOT solely on comps.                          

Lenders look at the appraisal and the appraisal is based on current rents AND what the average is in the area. Now be sure to watch that too because sometimes they may put lower rents than what you can really get. If that is the case you need to contact some property managers that would fax letters of support for the higher rents and get the appraiser to revise his rport if its necessary. 

Step 5 Construct your offer- phase 1

You have an idea of how it performs and you have in mind what you want to pay "price wise." Thats the start and the more deals you do you will see it will the lest important thing; the payment and down will be the more important factors......."wax on wax off"-Karate Kid.

In every deal you are required to put money down and after you buy everyone finds out they need to put more money into the property so the key is to include as much as you can into the price. Here is an example:

If you are buying a property for $400,000 you will hve to put down $60K. Then after.... you may have to replace a heater, repair the roof, etc. so your real out of pocket is the $65k plus the extras. So lets say the extras would be $20K.....then that means in the first year you put out over 80K, NOT SMART!  But if you raise the offer  over the asking price(which is a common practice) to $440,000 you would have to come up with $66,000 BUT you would get back $40,000 at closing or get most of the work done before close. This way you only came up with $24,000 not $80,000. Its all in the way you structure your deal.......WARNING!!!! your realtor or lender may not know how to do this....some lender think they can't tell you.......many are going through the motions and just take the easy deals but if it were their money? you bet they'd use this.

So you need to structure your deal by offering a price that is higher than where you want to pay for the property but get cash back at closing for items that you would have to pay later on. that is calculated by the following: #1. the net price you want to pay, plus #2. the upgraded "full coverage" one year warranty (seller must provide a basic warranty but usualy they are limited)....plus #3 the cost of any immediate replacement or repair items that you know will be coming in the next 12 months....

First you need to know about contingencies.   They are conditions that let you back out with your deposit money. If you dont have them in the  seller cna take your deposit and accept another offer or even sue you for the full amout of the deal so make sure you there are as many in as you can. Remember this is your money so you need to go into this with full protection and negotiating items that you can throw of of the deal to make it look like you are compromising while keeping the main concerns in the deal.

Step 6 -What every offer should include

EVERY offer you submit should have the seller provide a one year full coverage warranty