Theo provides an update on two Tampa apartment deals he is analyzing, which includes a tip for how to find new team members when looking into a new deal.
Joe provides strategies on how to fund the earnest deposit for an apartment deal in a hot market.
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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. We hate that fluffy stuff, so because of that, today we’re doing Follow Along Friday, where we’re talking about things we’ve learned, or questions that you Best Ever listeners have, and we are addressing those questions and the things we learned; we talked about what we learned, but then how that can be applied to what you’ve got going on… Because most importantly, we wanna make sure that we’re helping you out with whatever you’ve got going on.
Theo Hicks, how do we wanna do today’s call?
Theo Hicks: I’ll hop right into my updates. As I’ve mentioned last week, I am currently looking at two apartments in the Tampa Area. One I’ve already toured and I had underwritten it, and I mentioned last week that NOI that the broker mentioned and that’s on the T-12 were different, and I mentioned that I was going to reach out to a lender to get a quote for debt. Unfortunately, I do not see how I could purchase this property with this specific lender, because the lender said that based off of the NOI that they calculated, which was about $40,000 below what the OM states as the in-place NOI, and they’re only willing to lend up to 3.6 million dollars. So if I wanted to do 80% LTV loan, it’d be 4.25 million… And based on my underwriting, the most I would be willing to pay with these new debt terms would be 4.75 million.
The reason why that’s a problem is because I know that the owner wants 6.5 million. And it’s kind of funny, because when the deal first listed, I looked it up on LoopNet and it said 6.5 million, and then when I went back to look at the price again, it wasn’t there anymore… I asked the broker, I’m like “Was that a mistake, that it was listed? Was that the right price?” He goes, “Yeah, from my understanding I think it was a mistake of them putting it up there. They weren’t supposed to.” But the owner wants 6.5 million for that property. As of now, obviously, if I use the lender that quoted the 3.6 million, it’s gonna be around 55% LTV, and we have to raise 45% in addition to the actual renovation budget.
The broker mentioned that he knows a lender who has some other financing options that I can look at. I’d say right now I’m probably like 10% that we’ll submit an offer on this deal, but I did want to reach out to that mortgage broker and see what options he has… Number one, just to see if maybe he’s got some financing that can make the deal make sense, but also just another relationship to have in the Tampa Bay market, so for future deals, if we hit it off and it seems like he’s a good fit for our business plan, I can continue to reach out to him and get a quote from him, as well as a quote from my broker.
I guess the lesson is that when you’re working on a deal with a broker and you are interested in still continuing to build relationships or have backup team members, just ask them, “Do you know of a mortgage broker? Do you know of a property management company?” and attempt to get something out of the deal… Kind of going back to 50/50 goals – if I don’t end up buying this deal and my goal was just to buy deals, then I would be kind of upset about this process… But I’ve toured this property, I’ve basically formally underwritten the entire deal, with assumptions and renovation costs, I’ve been back and forth with this broker, and now I’ve got a new mortgage broker contact that I’m speaking with this afternoon.
Joe Fairless: What is the alleged reason why the owner is selling?
Theo Hicks: The alleged reason is that they are trying to focus on retail. This is the only apartment that they own.
Joe Fairless: The thriving world of retail, huh? Okay…
Theo Hicks: Yeah…
Joe Fairless: And [unintelligible [00:06:00].02] If it was posted on LoopNet, but then taken down and posted again… It seems like they’re trying to get as many people to be aware of it as possible, right?
Theo Hicks: Yeah.
Joe Fairless: And how long have they been marketing it?
Theo Hicks: For the past three weeks, I’d say.
Joe Fairless: Okay. Well, my guess is — this one, just give it time, and stay in touch with the broker. You know this, but… Stay in touch with the broker, have your price, and then tell them what your price is, and then just let the market show them that the value that they have in their head is not what they’re gonna get. It’s happened multiple times with us, where we have a deal that we’re shown, and in those cases it’s not on the market, and we say “No, thank you. Your price is crazy.” Then they go to the market, and the market knocks the price down, because the initial whisper price was way out of whack.
Theo Hicks: Yeah, that’s how I’m gonna approach it as well. I’ll just stay in touch with the broker, see what’s going on with the deal, [unintelligible [00:07:00].04] and if they sell it for 6.5 million, then maybe I could buy it and make that owner realize that that probably wasn’t the best idea… [laughter] So that’s that deal. I’ll give an update on how that conversation goes with the lender next Follow Along Friday.
The other deal that I mentioned briefly last week – I’ve got a little bit more information on that. It’s a 73-unit in St. Pete. It is the largest apartment building in regards to units on St. Pete Beach. I reached out to do a tour, and the broker responded and said that the owner wants to know if I’m able to pay the price that he wants before touring the property. He wants essentially about 230k-250k per unit for the property.
It’s gonna be a heavy value-add, because in order for the deal to make sense we’d have to probably spend about 10k-12k per unit in interior upgrades. So the plan for that one is I’m gonna underwrite it this weekend to see if we can even get close to 17 million, and then reach back out to the broker if we can be close to that number and tour it next week. If you remember, this is the one that the OM claims you can raise the rent by about $750.
Joe Fairless: Yeah. Well, hey, if you can, then those numbers might work.
Theo Hicks: Seriously, yeah. It’s a really neat property, too. The way that it’s built – I could tell that there’s not a lot of deferred maintenance, and the ongoing maintenance… It just seems like it’s a very solid property, that would be pretty inexpensive to operate. It’s just getting it at the right price, as always.
Those are the two deals I’m looking at, and those will probably be the last two deals that I look at for 2018, unless something else pops up… Because things have been a little slow lately; I haven’t seen a new deal for at least two weeks.
Joe Fairless: And real quick, how’s your Cincinnati portfolio performing? And remind us what you’ve got in Cincinnati.
Theo Hicks: I have 13 units. One is a single-family house that we used to live in, and then we’ve got three fourplexes, and I think we’ve probably turned about 5 or 6 units. On all of them except for one we were able to get higher rents than we were getting before. For one of them, it was vacant for about a month and no one wanted to rent it, and we ended up reducing the rate to below what it was before. But if you include the utility fee that we’re asking for, it’s still technically above what it was before, but the actual rent that’s listed is below what it was before. We’re attributing that to seasonality, because we’re not getting much traffic at all for that unit that was vacant.
And then something else interesting happened a few weeks ago… Do you remember that big ice storm that came through Cincinnati?
Joe Fairless: Big time, yeah.
Theo Hicks: It knocked down one of the trees, and the tree fell on top of the power line, so the power was out a few days at that property. We got a quote from a tree-trimming company to fix the trees at all three properties. Obviously, that was interesting, because I got a bunch of texts from the tenants, asking me what’s going on, so I called my property management company and he talked to every single tenant about it.
Luckily, everything worked out okay. Electricity is back on, he’s working fine… But that was an interesting dilemma, that my property management company solved pretty quickly, so I was pretty happy with how they handled it.
Joe Fairless: Good stuff. As far as my updates – I want to address a question that commonly comes up frequently… And that is “How do I do non-refundable earnest money if I don’t have that money?” This question is really related to how competitive it is in a lot of the markets that you might be looking at to purchase property, and due to that competition, there tends to be non-refundable earnest money day one offers that need to be placed in order to be in the running for a deal, let alone winning a deal.
There are a couple options here, and I’ll tell you how I did it at the beginning, my first deal, which was not non-refundable; it was refundable on my first deal. However, this same approach can be applied to non-refundable earnest money, because either way, refundable/non-refundable, you’ve gotta have the money.
I had spoken to a couple investors who were interested in partnering up with me — and this was before my first syndicated deal, but after I bought four single-family homes… And one of the investors who had expressed interest – I reached out to him and I said, “Well, I’ve got this deal, and it’s $50,000 refundable deposit. I’ve got 30 days before it becomes non-refundable. Will you put that up as the deposit?” He had said he was gonna invest $50,000, so I said then we can just roll that into the deal should we close, and if we don’t close, then he’ll get it right back.
He said, after thinking about it for a little while – and when I say “little while”, maybe a day or so – he said “Yeah, sure, but can you put something down in writing that says if this does become lost, for whatever reason, that you’ll pay me back?” I said, “Absolutely.” Because I’d mentioned I’d pay him back in the conversation… I said, “Yes, absolutely. I’ll put something down in writing.” In that case it was just an e-mail, where I promised to pay him back if I lost the $50,000.
Depending on your relationship with the investor, or how much they want to have it documented, you might need to do a promissory note, or something like that… But I just sent him an e-mail, and that was it. So he put up the 50k, and that allowed me to get the property in due diligence, and then I proceeded.
If it was non-refundable, then it’s the same conversation. You’re simply telling the investor it’s non-refundable day one, so when you put it up, you’ll be investing in the deal that amount. Maybe it’s not the same, but it’s a similar conversation, I should say. If they are wanting to invest in the deal, then that can simply be their investment. If they’re not wanting to invest in the deal and they loan you that money, then it’s basically a loan, and you’re going to need to have some sort of agreement drafted with them, and then they simply put it up and you pay a certain rate or a certain amount to compensate them.
If you end up closing on the deal, great; you can easily refund that money, plus interest. If you don’t, well then you’re in a tight spot… So borrower, beware here, because it’s non-refundable, you lose the money and you have to pay him back, plus interest, and you don’t have a property. So be careful, and proceed with caution if you do non-refundable day one and you work with someone who you’re borrowing that money from, because you could lose a lot of money… But on the flipside, there are solutions to address this challenge, and that is the solution that I did when I got going.
Theo Hicks: And if they’re going to be an investor in that deal and they put up the earnest money deposit, is there any sort of interest they earn on that, or is it just that rolls over into the deal and they’re like a regular investor?
Joe Fairless: In my case there was not, because I didn’t think of it and he didn’t ask… But if there is a scenario where they ask or you think of it, then yeah, you could pay whatever interest is being generated from the checking or savings account or escrow account that that’s in. We implemented a new policy effective this last deal that we closed, Northern Cross in Fort Worth, where if the investor funded 30 days or earlier than when we’re closing — so if we close on the 30th of January, then if they fund it by December 30th or earlier, then we would pay them interest on their dollars while they’re waiting for those dollars to be put to work in the deal… And it’s just whatever the bank interest is. What was it, 0.4%?
Theo Hicks: 4% annually, yeah.
Joe Fairless: 0.4%, right?
Theo Hicks: Yeah.
Joe Fairless: Yeah, so let’s put that into perspective here – if you invested $100,000, that was $40.
Theo Hicks: Yeah, $33,30 for 30 days.
Joe Fairless: $33,30 for 30 days. We’re not making any money on it really, except for that $33,30 cents, so we’re just passing it along to the investors. And then if any investor funded within that 30-day period where we’re about to close the deal, then we don’t pay interest on that, because ideally we have all the funds in 30 days prior, so we want to reward that for taking place.
Theo Hicks: Another interesting strategy about the earnest deposit that I saw on a Bigger Pockets thread by someone who had just done their first apartment deal – they wanted to make their offer competitive, but they didn’t wanna do the non-refundable earnest deposit from day one… So instead their terms were that it would go non-refundable once the due diligence period was over.
Joe Fairless: That’s pretty typical.
Theo Hicks: Oh, is it really?
Joe Fairless: Yeah.
Theo Hicks: Okay, I didn’t know that. Because I was like, “Well, I don’t wanna do it from day one, so I can just say after due diligence”, but okay, if that’s typical, then I guess it’s not gonna make your offer any more competitive.
Joe Fairless: Maybe… It will make it more competitive than if it wasn’t, but that’s pretty standard, if it’s not non-refundable day one to have it non-refundable after the due diligence period.
Theo Hicks: Okay. Any other updates?
Joe Fairless: Nope.
Theo Hicks: Alrighty. Moving on to the trivia question… The answer to last week’s questions, which — just as a reminder, the question was “What is the city with the highest total share of high-end apartment buildings?” That’s class B+ or higher, and that was per 2017 and the first half of 2018. The answer was Charlotte, North Carolina, with a proportion of 50%.
Joe Fairless: Wow. I would not have guessed that. Well, I knew the answer so I wouldn’t have guessed anyway, because we had it in the Word document, but I wouldn’t have guessed Charlotte.
Theo Hicks: And if you go to our blog and you read “The top 10 US cities with the largest proportion of high-end apartment buildings”, you can see what the top 10 cities are. There’s a link to the actual data and you can see the top 30 or 50 cities, if you’re interested.
This week’s question – and Joe does not have the answer to this one, so he gets to guess – is going to be “What state has the city with the lowest crime rate?” I didn’t wanna do the city, because that’s gonna be impossible to guess…
Joe Fairless: Is it a city of 500,000 or more?
Theo Hicks: No, no, no.
Joe Fairless: Oh, alright… I mean, come on. It’s tough. I’m gonna go with California.
Theo Hicks: Okay. So Joe guessed it’s California. If you comment on the YouTube below or send us an e-mail at info@JoeFairless.com with what state has the city with the lowest crime rate, you will win a signed copy of our first Best Ever book.
Joe Fairless: And let’s see… I’m just trying to determine the definition of a city, versus a town… The population of a city is between 100k and 300k, a large town is a town of 20k to 100k, according to Wikipedia, my quick search… So this city has at least 100,000 people?
Theo Hicks: Yes.
Joe Fairless: Okay, alright. Well, I’ll still say California.
Theo Hicks: Okay. Moving on, obviously the Best Ever Conference is going to happen in February, so we’re a few months away, and each week we’re going to discuss a speaker or a panelist discussion that will happen. This week we are gonna discuss two of your clients, actually, who did their first deals in 2018, their first syndicated deal, Bill Zahller and Kent Piotrkowski. They will be speaking about their first deal on a panel. I’m really looking forward to that one, obviously, because they’re about six months to a year ahead of me… So I’m looking forward to listening to that panel, as well as having a conversation with them after the panel.
Anyone who is interested in becoming an apartment syndicator and wants to know exactly how someone did their first deal, that will be a panel and those are two people you’ll definitely want to hook up with when you’re at the conference.
Go to BestEverConference.com to buy your ticket. Ticket prices go up each week.
Joe Fairless: And then there’s “TAKE5” for a 5% discount whenever you buy your ticket, so make sure to put that in and get your discount.
Theo Hicks: And then lastly, the review of the week for the Best Ever Apartment Syndication Book – if you leave a review on Amazon and send us a screenshot to email@example.com, we will send you the free apartment syndication documents.
This week’s review comes from ReadingFan, and they said:
“So if you bought a house or two as investments or as a flip, and are thinking about upping your game, you NEED to read this book. Chapter 5 will open your eyes as to how much money is on the table, and the rest of the book just takes your hand and walks you step-by-step through the process. I found a lot of material to dog-ear and come back to later (and there’s a picture of that in the review).
Am I confident that I can buy an apartment complex right now? No. I need to get a little more experience under my belt first, but now I feel like I know where I’m going, what I want to do when I get there, and the mysterious path from here to there is now eliminated. That is invaluable.”
Joe Fairless: What a wonderful review. Thank you so much. I’m glad you got the value out of the book and you’re continuing to propel yourself forward to getting a deal done. Thank you for that review. Who was it, what was their name?
Theo Hicks: ReadingFan.
Joe Fairless: Thank you, ReadingFan. Clearly, you’re into self-development based on your name, so I appreciate it. Best Ever listeners, I enjoyed our conversation, good catching up with you. I’m looking forward to talking to you again tomorrow, and between now and then, I hope you have a best ever day.