October 27, 2018

JF1516: Getting Creative Financing On Large Apartment Buildings

Todd has been on before and is back with very valuable information to share with us. Todd has recently closed some large deals (120 unit most recently) using owner financing. Sometimes we may not be able to get traditional financing, in those instances we have to get creative and resourceful. But even then, we must know good techniques and strategies, Todd has some tips for us today. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!


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Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff.

First off, I hope you’re having a best ever weekend. Because today is Saturday, we’ve got a special segment for you called Situation Saturday. Usually, when we do Situation Saturday, as is the case today, we talk about a situation that you might come across, you might find yourself in, and if you do, then the purpose of our conversation today is to give you a playbook for how to handle that situation.

Today the situation is you come across a large apartment community and you want to finance it creatively. How do you do that? We’ve got someone who not only knows how to do that, but he actually did it. How are you doing, Todd Dexheimer?

Todd Dexheimer: I’m doing well, Joe. Thanks for having me. I’m excited to talk about it.

Joe Fairless: Yeah, my pleasure. Nice to have you back on the show. If you recognize Todd’s name, you’re a loyal Best Ever listeners, so props to you. Episode 1015, titled “How he bought over 100 units in nine months, with Todd Dexheimer.” You can go back to that episode and listen to his best ever advice and listen to how he did that. We won’t get into his back-story now, we’ll specifically talk about the deal.

A little bit more about Todd – he is the CEO of… Well, so I will get into his background a little bit, but we won’t spend a whole lot of time on it. Just as a refresher, he is the CEO of Venture D Properties. He started investing in 2008, buying homes and apartments. Currently, his company owns 350 units in four states, and has done creative financing apartment buildings on his three recent purchases. Based in Minneapolis, Minnesota. There is a storm rolling through right now where he’s at, so we might hear some thunder in the background. I told him to ideally time his comments where they’re really  dramatic with the thunder, to add to the effect. We’ll see if he can do that…

With that being said, Todd, set the stage for us please on the deal, and we’ll go from there.

Todd Dexheimer: The latest deal I did, which I think we can spend the most time on, was I bought a 120-unit apartment complex, and I put it under contract with the intention to just get regular financing on it. Well, I shouldn’t say “regular financing.” The property was 78% occupied, so there was low occupancy, and it needed some work. 60 of the units had been renovated to a pretty good standard, but basically the rest of the units needed a pretty substantial renovation. I need to get either a bridge loan, a local bank loan, or seller financing.

As I went through this deal, I just didn’t wanna use a bridge loan, because they’re expensive. Anybody who’s used one, any of your Best Ever listeners who have done a bridge loan, understand the expenses. So I didn’t wanna go that route; I was trying to get local bank financing, but I had kind of three strikes against me. There it is – do you hear the lightning?

Joe Fairless: And you timed it when you said “I had three strikes against me.” Nice job! You’re a talented man.

Todd Dexheimer: [laughs] So the first one was I’m out of state. The second one is I’m syndicating the deal, and the third one was the deal wasn’t stabilized. It was 78% occupied. So three strikes against me. The local banks were very hesitant; I did have one local bank that was semi-interested, but we were running out of time. My earnest money was going to become hard, so I said “Look, let’s do seller finance.” I approached it at that level, and we ended up working out a deal. I’ll let you ask more questions about it if you want.

Joe Fairless: Alright, yeah. Please do. Let’s take a step back a little bit – what were some of the terms that you initially agreed to? Did you agree to terms with the seller and then you were like “Oh wait, this financing route’s not working. I need to update the terms”, or did that happen simultaneously where you were negotiating and you figured out you had different terms, so then before anything was signed, you went with the terms that you ended with?

Todd Dexheimer: Yes, on this particular deal. Now, normally you’d like to have this all upfront, but on this particular deal I had it under contract, we were gonna go with financing from a third-party, from a lender. We got through some of the due diligence period, and the due diligence was actually coming close to an end, and I basically said “Look, here’s the options – you either finance it for me, do seller financing, or you drop the price and I can pay less, or we can just walk away and call it a day.”

We negotiated back and forth for actually quite some time on the seller financing terms, and finally came up with an agreement. The property was already under contract.

Joe Fairless: So you didn’t have any earnest money hard on this.

Todd Dexheimer: Nope. I had 60k earnest money out, but it was not hard; it was gonna become hard. But at that time, when we started the talks on the seller financing, it was not hard.

Joe Fairless: What was the purchase price?

Todd Dexheimer: The purchase price was 4,17 million.

Joe Fairless: Okay. And with your investors, that 4,71 million – what was the raise? A little less than two, or something like that?

Todd Dexheimer: So 4,17 million.

Joe Fairless: Sorry, yeah. That’s what I meant. I wrote it down, but said it wrong. 4,17 million.

Todd Dexheimer: Yeah. So the total raise was 1,4 million.

Joe Fairless: Okay, 1, 4 million total raise. What were your thoughts with your investors on their appetite for if you had a creatively-financed deal, versus a traditionally-financed deal?

Todd Dexheimer: What were their apprehensions, or…?

Joe Fairless: Well, did you think they would have an apprehension to a creatively-financed deal versus a traditionally-financed deal?

Todd Dexheimer: Yeah, I knew that some definitely would. I knew that others would probably actually be kind of excited for it because of the type of terms that we set up. We set up (I think) really favorable terms. I’m sure we’ll go over… But yeah, some of them definitely said “Well, we would like something long-term”, because essentially we set it up as a bridge loan, without the expense of a bridge loan.

Some of them definitely want that Fannie Mae, Freddie Mac, or HUD, long-term fixed financing for apartment buildings. I completely get that, and that’s preferable, definitely, in most cases.

Joe Fairless: Before we get into the terms that you agreed upon with the seller, let’s learn a little bit more about the seller, because they’ve got about a 120-unit apartment community, 78% occupied, so no major distress, but there’s some cracks beginning to show — well, no, cracks have shown and they’re getting larger… And 50% of the units have been renovated, which is interesting to me. I haven’t come across a 78% occupied property, but they’ve taken the time and the capital to renovate 50%… So my guess is that they had a business plan to begin with, and they’re in the middle of it, and for whatever reason, they just decided “I wanna sell.” Either they had a life circumstance happen, or they saw that they could sell at a better price or at a good price, so they might as well just not do the work. What was the reason why?

Todd Dexheimer: Very good question. Yeah, there was definitely motivations there. This particular property – they bought it in 2015, with the intention of doing a full renovation to it. The major thing they ran into is they definitely under-budgeted. The story is that they planned on putting (I think it was) $800,000 into the whole project, and they were already $800,000 into it and they had merely $800,000 left to put into it.

They also were hiring maintenance guys to do the renovation and the maintenance at the same time. So the renovation was taking a long time. It had already been 3,5 years and they only renovated half of the property, and the other units that needed to be renovated – they were in very bad condition. Some of them, they had an entire building, which comprised of 12 units, that was completely down. Nobody could live in it, because it was in very poor condition.

So that’s the occupancy struggle – the units that were renovated were completely full. The units that weren’t renovated, they had a struggle getting tenants into it.

Joe Fairless: How did you find this property?

Todd Dexheimer: Off-market, broker relationship. It was actually near another property I purchased, and I basically reached out to the broker and said “Hey, I want something close by.”

Joe Fairless: Did he or she then proactively do outreach on your behalf, or did they just happen to come across a deal through their normal business?

Todd Dexheimer: I’m not quite sure on that. I actually do know they had a previous relationship with this particular property owner.

Joe Fairless: Was it a group or an individual?

Todd Dexheimer: It was a group. I think there was three owners total.

Joe Fairless: Okay. What were the terms that you ended up getting agreed to?

Todd Dexheimer: We set this up as an interest-only loan for up to three years, 5% interest only year one, and then it goes up to 6% year two. We did a down payment… Let me make sure I get these numbers right. We did a down payment of $350,000, I believe, and then what I did is I put the rest of the amount into an escrow account. That escrow account could be accessed by the seller, or it could be accessed by me as we complete construction; so we used it for construction draws. So we gave him a total down payment of about $900,000.

Joe Fairless: How much was in the escrow account?

Todd Dexheimer: $600,000.

Joe Fairless: When you say it can be accessed by both of you, what’s to stop them from saying “Oh, I’ll access all of that?”

Todd Dexheimer: [laughs] “I want that money…” First of all, [unintelligible [00:13:13].29] by my attorney, and second of all, I have to default in order for them to access it.

Joe Fairless: Okay. What are the loan covenants that you have to adhere to?

Todd Dexheimer: Essentially, I have to make the mortgage payments to him, and I have to do that — I think I’ve got a 15-day grace period, and then he has to start the proceedings and all that kind of stuff. So it would take a while for him to foreclose on us. It’s non-recourse, of course, and it would take a while for him to foreclose on us. We’d [unintelligible [00:13:43].29]

Joe Fairless: What did they do with the existing loan?

Todd Dexheimer: That’s been paid off.

Joe Fairless: Okay, so that was paid off. They paid it off prior to you entering into the transaction with them?

Todd Dexheimer: Right.

Joe Fairless: Okay, that’s all I was asking. Okay. So it was debt-free, there was no financing in place.

Todd Dexheimer: Yeah. So now we have the 3,85 million, approximately. I think that’s what it was.

Joe Fairless: And it’s interest-only for all three years?

Todd Dexheimer: Right.

Joe Fairless: That sounds really favorable, and that sounds like a wonderful bridge loan. Did they get any points at closing, or anything like that?

Todd Dexheimer: No points at closing.

Joe Fairless: Yeah, so there’s your savings from the alternative route, right?

Todd Dexheimer: Yeah, because a bridge loan is gonna cost points at closing, they’re got their attorney fees that they’re gonna charge you for, and they’ve got all kinds of fees. And then most bridge loans also have a disposition fee, often times 1% or greater.

Then, most bridge loans for that size of loan are charging anywhere between 6%-8%, so we definitely got much better terms, for sure saving — I figured about a 7%-7,5% loan, which was kind of the quota I was getting. I figured I saved about $300,000-$350,000 by doing it this way.

Joe Fairless: And how long ago did you close?

Todd Dexheimer: About a month ago.

Joe Fairless: About a month ago, alright. Congrats on that! I know the first three months are just solidifying team members and getting vendors in there, but what’s the latest on the property, the 30 days that you’ve had it?

Todd Dexheimer: We’ve been doing renovations on the units, there were several units that were pretty easy, quick turns that were getting done; those are essentially done now. We’ve got four actually that will be delivered today, and then we’ve got several more that were delivered for the 1st of October, and just continuing to work on — that down building is being worked on as we speak, along with some other units… So just working on getting the property back to stabilized, which of course it sounds super-easy when you just say it, but it takes time, and some tenants will leave because of the changes and all that, but… I’m very optimistic that this will be a really good project, and I think the renovation will go fairly quickly, because the units that were vacant were the units that needed to be renovated.

Joe Fairless: The seller financing – when you proposed to them, did you propose the terms to them that were agreed upon, or were they upgraded?

Todd Dexheimer: They were changed slightly, but for the most part —

Joe Fairless: What did you initially propose?

Todd Dexheimer: Just 5% interest rates. We changed that to 6%.

Joe Fairless: But it’s still 5% in year one, it just goes up year two and three at 6%, right?

Todd Dexheimer: Yeah, and then I wanted four years, and he said no. [unintelligible [00:16:33].08] He said “If you can’t get this done in three years, then you’re no good and I don’t want you to…”

Joe Fairless: You’re like, “Yeah, I agree… You’re right.” [laughs]

Todd Dexheimer: Well, and it’s true… If it takes me three years, I’ve done a terrible job.

Joe Fairless: Yeah… What influence did this have, compared to if you were to do a bridge loan on the returns? And just looking for some specifics in terms of “Hey, we’re projecting this much now on the project, versus if I had done a bridge loan, this is what the projected profits would be”?

Todd Dexheimer: I don’t have those numbers exactly in front of me, Joe, but they definitely drastically changed. If we would have done a bridge loan product down there, it would have been a tight deal for the type of deal we’re doing. If this was a stabilized asset, I would have brought it to my real estate investors and been fine with it, but for being a non-stabilized asset, there’s some risk involved and you wanna be able to give your investors a better return on their capital for that type of risk that everybody’s undertaking. With that, it definitely changed the IRR by maybe 3%. The bridge loan amount would have been definitely much less attractive.

Joe Fairless: And changed the IRR by approximately 3% on how long of a hold period?

Todd Dexheimer: Based on a  five-year hold.

Joe Fairless: Five-year hold. Yeah, it’s substantial.

Todd Dexheimer: Again, I don’t have the numbers directly, but…

Joe Fairless: Right, I get it. Yeah.

Todd Dexheimer: …there was a substantial difference.

Joe Fairless: So you’re saying exactly 3,0%? [laughs] Well, anything else that we should talk about as it relates to getting seller financing on a large apartment community that we haven’t discussed?

Todd Dexheimer: I think the most important thing is you’ve gotta decide — if it’s a deal you wanna do, you have to be creative and figure out how to do it, and how does it work the best for you with also working with the seller? That’s really important – when I’m looking at deals, and the other ones I’ve done in the past as well, you’ve gotta look at what works for the seller and what works best for you.

Another deal that I did, the seller actually did not wanna sell it for the price I offered until I offered them seller financing, and he saw the amount of money he would make during that time with a mortgage. Then he wanted to do it for my price. So everybody’s got different motivations. And that was just a 22-unit. The 22-unit guy – he liked the idea of getting monthly payments. He was making no money on this property, and all of a sudden I’m willing to pay him $2,300/month, plus give him a decent price. He liked that.

Everybody’s got different motivations, so be creative… And then the other thing is ask. I think people just don’t ask. They just assume it’s a hot market. Anybody who’s buying right now – Joe, you know – it’s a hot market, and everybody thinks “Well, it’s a hot market; why would a seller wanna do something like that?” But everybody’s got different motivations, everybody’s property is in different condition, and some people don’t need the capital right up front.

Joe Fairless: And I’m gonna ask you a dumb question, so feel free to give me the answer that — I’ll just ask you the question… How do you position that to them to determine if they wanna do seller financing?

Todd Dexheimer: Well, first of all, why do YOU wanna do seller financing? That’s gotta be really the question you’ve gotta ask. What reason do you wanna do seller financing, and then you tell them why seller financing will work for them… And then finding a little bit about them, right? Both cases, these guys bought the property because they wanted cashflow. They thought real estate was the answer, cashflow was gonna be good, that’s what they want; well, I can now provide that for them. The 22-unit guy – he was retiring; he wanted to spend time with his grandkids. Easy sell. He wants the cashflow, he just doesn’t want the property.

This other guy, he bought this to do a value-add and  to make money on it. Well, no longer does he wanna do this value-add because he sees how much money he’s gonna have to spend in it, take out of his pocket that he doesn’t want to… But he still wants that cashflow. So what’s their motivation? I think you’ve gotta learn a little bit about their story. It’s not gonna work for everybody. Seller financing an apartment building is gonna probably not work the majority of the time, but if you don’t ask, you don’t know.

Joe Fairless: Thank you for answering that in a longer version than just saying, “Well, dummy, you just say ‘Do you wanna do seller financing?” [laughter] I was just waiting for you to just say “Joe, um…” [laughter] I appreciate that. Informative and real. This happened over the last six months that you were negotiating with them, and you just closed a month ago. This is over 120-unit property, and over four million dollars purchase price, so… There you go, this is how you do it, Best Ever listeners.

How can the Best Ever listeners learn more about what you’re doing and get in touch with you?

Todd Dexheimer: They can go to my website – VentureDproperties.com. And can I promote my podcast?

Joe Fairless: Yeah, of course. Absolutely.

Todd Dexheimer: [laughs] I’ve got a podcast as well – Pillars of Wealth Creation. So they can go to PillarsOfWealthCreation.com as well.

Joe Fairless: Cool. Well, we live in a world of abundance, so you talk away about your podcast. I haven’t had a chance to check it out, but I know a lot of people who have, and they have good things to say… So thank you so much for being on the show, Todd, and talking about the case study of how you did seller financing with this property, the ins and outs of the structure of the loan – interest-only for three years at 5%, then it increases to 6% in years two and three, down payment of $350,000, the purchase price remained the same at 4,17 million, and you put 600k in escrow, where once you show that you did the work, you’re able to be reimbursed.

Quick question on the reimbursement – what do you have to do to show that you did the work in order to be reimbursed?

Todd Dexheimer: Just like you do in a construction draw. I can actually take draws as I do the work. I can show receipts… It has to be — I think the loan docs say a minimum of 50k to draw, so I can show receipts from contractors, and then he does inspections however he wants to… I shouldn’t say that; he can send a third-party inspector that we’ve approved, or he can just approve it without an inspector if he wants to save the cost. At least if it was me, I would send the inspector, to make sure… And then we get the draw. Like I said, it’s held by my attorney, which is good; I have a little bit of control. Obviously, my attorney is gonna do everything above board, but… We can take draws as we need, and the good thing too is the $600,000 that I put in this escrow – the budget is actually more for this project; we’re planning to spend about $725,000 on it… So I actually raised quite a bit of extra money that we can use to pay contractors instead of relying on these draws and getting upside down.

Joe Fairless: Thanks for being on the show. I hope you have a best ever day, Todd, and we’ll talk to you soon.

Todd Dexheimer: Thanks, Joe.

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