Owner carry options |
| Posted by: New development… Aug 26 2004, 04:20 PM |
| I know this will open up a lot of different options, but I was hoping for your review of a situation. I am a newbie with this post, but have received valuable insight before. Now, I’m ready to plunge in with my first investment property: I am considering a purchase of a building that has two lots (both developable) in a beachside urban area. There is a building on one lot that has an old apartment building that is currently uninhabitable (the city has issued a notice to comply). Its last rent income was over a year ago. The lot next to it is vacant, currently used for parking. And we are considering developing a duplex or our own SFR on it later. The cost of both lots (including the building) is around $1.3MM, and the projected income (using market comps) from the existing building is $120k annually after a planned renovation is complete. I am considering a 75% LTV from my current banker (Wells), and the owner has offered to carry back the remaining 25% for one year. Three questions (sorry!): What are my most likely rates on these two loans relative to your experience, or is there a better way to go? Also, what do I do when the owner’s carried loan comes due in 12 months? Finally, my wife and I are willing to invest the 200k (ballpark from three GCs) for renovation, but would love to get a financing option on that as well. Any suggestions? Sorry for the long post, and thank you for a great site. BTW, any chance of a commercial property acronym primer for newbies? It would be a great addition to the site. Thanks again. |
| Posted by: Commercial Lender Aug 26 2004, 05:55 PM |
| Get a contractors estimate after he does a walk thru. Some lenders will not lend if the renovation cost is above a certain amount and or percentage of property. Also find out what notice to comply exactly means i.e what citations are imposed and if the lender has any issues with them. This has the potential to become a hairy situation. What City/State is the building in? How many Units? You need to find out exactly why the building is uninhabitable! Were the steps from flights of stairs missing? Is there structural damage or worse is there some sort of health hazard i.e mold etc. Rennovations can turn into a nightmare. Contractor tells you one thing, when the take the walls down there may be bigger problems (Be sure to get a lien waiver from the contractor to avoid a mechanic’s lien). This is a tough deal…you may come out OK or loose your 200K. If you have 200K to invest, there are plenty of income producing properties in WA, GA, LA, OH and IL that are doable deals and these properties are appreciating annually. My advice….if you are a newbie, do not get involved with rennovations, rehabs or problem properties that may implode as an investment. |
| Posted by: Guest Aug 26 2004, 06:54 PM |
| Thanks for your response. Actually I may have described it too poorly. There are no structural or mold issues (walls were ripped down to check) and a foundation expert ok’d it. I also ran a sensitivity test on this using the calcs here, and it comes out to a 1.1 DSR. It’s just really in need of an exterior facelift and new drywall, floors, appliances updating. There are five units in the building. The real thing that strikes me about this deal is the fact that the other lot is available for development essentially for free at this point. And in SoCal where we are, this dirt alone is worth about 500k. It seems like we could build another 1.5MM building on that land and make out ok. Thoughts? |
| Posted by: loanuniverse Aug 26 2004, 07:29 PM |
| What are my most likely rates on these two loans relative to your experience, or is there a better way to go? I would think that if you can get a first mortgage {this is a big if}. You are looking at something around 6.5% with a five year balloon. The problem that I see is that it is a difficult deal to pull off. Also, what do I do when the owner’s carried loan comes due in 12 months? Good question, the lender is going to want to know too  As of right now, I can only think of the sale of the property as your only out.Finally, my wife and I are willing to invest the 200k (ballpark from three GCs) for renovation, but would love to get a financing option on that as well. Any suggestions? Sorry can’t help you here. Frankly, I am having trouble getting past the first part. ” This has the potential to become a hairy situation….. Rennovations can turn into a nightmare…..If you have 200K to invest, there are plenty of income producing properties….” I agree with the statements above. ” I also ran a sensitivity test on this using the calcs here, and it comes out to a 1.1 DSR.” I would be interested in finding out what kind of operating expenses and debt service where used. This building is not providing enough cash flow with $120,000 of rental income to service the debt, even if we are talking about a portion of it being “interest only”. You might want to take a look at the “income approach” of property valuation and run the NOI by the prevalent capitalization rate in the area. ” And in SoCal could build another 1.5MM building on that land and make out ok.” I don’t know if the building is worth $1.5MM. I think the true value is much lower. ” Thoughts?” I would stay away because of the refurbishment portion, but if that option is not available. -Get a list of comparables for both the building and the land. -Examine the municipality requirements to get a certificate of occupancy. -Get a list of my operating expenses -Run my own income approach valuation -Negotiate down the price -Negotiate the terms of the seller financing to get the loan a longer maturity. That would be to start, good luck |
| Posted by: Guest Aug 26 2004, 07:43 PM |
| QUOTE (loanuniverse @ Aug 26 2004, 07:29 PM)” Thoughts?” I would stay away because of the refurbishment portion, but if that option is not available. -Get a list of comparables for both the building and the land. -Examine the municipality requirements to get a certificate of occupancy. -Get a list of my operating expenses -Run my own income approach valuation -Negotiate down the price -Negotiate the terms of the seller financing to get the loan a longer maturity. That would be to start, good luck Thanks very much for your responses. The comps in the neighborhood are about 1.25 to 1.5 MM tear downs. The second lot alone (just dirt) comps out at 650k. It has a certificate of occupancy right now, but there is a concern that the back ingress/egress steps have to be replaced (nominal). I charted agains current operating expenses, and modifed amortization to 25, with a 5.5% (Wells) loan. We have FICO at 795, and a great relationship with our bank. I plan to negotiate the terms down somewhat as you suggested. That said, would you still stay away? Thanks again, and I’m done. |
| Posted by: loanuniverse Aug 26 2004, 07:51 PM |
| ” would you still stay away?” Hehehehe, if you were taking this to my employer, I would not be the one that you need to convince…. It would be someone two levels up in the command chain. Lets say that you get past the Executive Vice President, this would land in my desk and I can already see four weaknesses with the credit. 1- Property is vacant and not available for immediate occupancy. 2- My debt service is coming from projections. 3- Inexperienced borrowers {this is not much of a problem for being a landlord, but it is for dealing with contractors and refurbishments} 4- How are you going to pay the seller a year from now? This is without me going over the numbers and the situation in detail. Whatever you do, make all offers contingent on satisfactory financing. Talk to an attorney about possible outs. |
| Posted by: Commercial Lender Aug 27 2004, 08:59 AM |
| First thing any lender will ask is WHY the building is not habitable and what do you need to make this habitable aka the cost associated with that alone? You will def face the obvious question…are the walls and floors so badly damaged that no one can live there? |
