Apartment Quest

Yep. After all the drama. All the back and forth. All the ups and downs.

My first apartment deal is DEAD.

Call it doctor: time of death Thursday July 10, 5pm eastern.

The cause of death is what’s ridiculous. Again, to recap (please indulge me if you’ve seen this before) Mr Seller and I agreed to terms last April 15th. He produced all of the required due diligence documents up front, except for his 2007 Tax Returns and a year-to-date income or operating statement, which he committed to getting me during the first week of May. (These two items, by the way, are required by every commercial lender and were required if I wanted to get financed, which I did)

So I’ve been waiting for two months. Ready to proceed at a moment’s notice, if he would simply provide – literally – 2 pages of information.

And so I waited. And waited. And waited.

Until last Thursday. After trying to light a fire under him as I discussed in a prior post, I received a call from the selling broker. Apparently Mr Seller had had a brain fart and had thought up one whopper of an additional condition that he wanted to impose.

Mr Seller wanted an additional $10,000, non-refundable, earnest money deposit before he would release any more information, particularly the tax returns.

Huh?? But I’m not the one holding up the deal Sherlock.

So I gave Mr Seller until 5pm Thursday to pull his head out, or else the deal would die.

He didn’t. It did.

Do you know what the funny thing is? This was property named as part of a 1031 exchange for the seller. And in addition, Mr Seller, aka Mr Einstein, refinanced this property at the beginning of May in order to pull all of his cash out – in the middle of selling it!

Why do I call him Mr Einstein? Because he took on an adjustable-rate mortgage. But that’s not all – the genius took on a mortgage where the rate adjusts monthly! It was like he simply asked for the lowest closing cost commercial mortgage and signed whatever they put in front of him.

So not only is he losing out on his 1031 exchange, but his interest rate will move against him such that in October or November of this year he’ll be upside down on his payment.

Couldn’t happen to a nicer guy.

Off to continue my Apartment Quest!

GREAT.

I wrote a blog post a couple of days ago about Indymac shutting down it’s lending operations. Something about a Pig Through a Snake. Perhaps you read it – about capitalization issues taking down another lender – blah blah blah blah. It was mildly interesting but not earth shattering because, hey, it didn’t affect me!

Then late yesterday afternoon I finally received a call back from my intrepid commercial mortgage broker. I had called him to talk about changes in rates since we talked last week and also to discuss firming up the other terms since the balance of the due diligence was due from Mr Seller at 5pm yesterday.

What does he tell me? That oh by the way – that even through they had told me from the start that they were a direct lender, they had planned to use Indymac to fund my loan all along. And because Indy was basically out of business now we would have to start the process all over – from scratch. 

With a Fannie Mae loan. 

I looked for a window to leap from but I was on the first floor. Another three months of back-and-forth?? And that wasn’t all of it.

“Excuse me?” I asked him. “Didn’t you tell me that when we first started this odyssey that Fannie Mae loans were WAY more expensive in terms of costs and fees??” 

“Um, yes”, he tells me. “About $6,000 more than what you would have spent with Indymac”.

“Six THOUSAND more??  All because Mr Seller dragged his feet on the due diligence??”

No way, I said to myself. This has just become the seller’s problem. 

So I called the selling broker and countered for this and a couple of other expense items that were less than accurate. I gave him an additional 24 hours to sort it all out. (I may get my 11 cap rate after all!)

So this is finally going to come to a head later today. I never dreamed that it would be so difficult to spend a million dollars.

So again, stay tuned. 

It’s been a while since I’ve posted an update to my Apartment Quest series.

It hasn’t been due to any lack of motivation or activity on my part. Nope. Our lack of progress has been due to Mr. Seller. It seems that he’s been hitting the crack pipe lately – hard!

He somehow got the idea that he can call all the shots and sell a $1 million building on his own terms and that everyone – the lender, the appraiser, the broker, and me, should just bow down to his demands and thank him for putting his building in play.

Guess what? Nobody’s buying it.

To bring you up to speed, interest rates have moderated a bit, and I recently injected some serious commercial mortgage broker competition into the mix and (almost) have a really good financing package put together (we’re about 0.15% apart). We flirted briefly with a land contract sale – but you would have busted a gut laughing at the terms that Mr Seller gave me – with a totally straight face to boot.

And he’s STILL dragging his feet on getting me the last due diligence items.

So last week we signed a two week extension to the purchase agreement, and I told him that this was the last one that was free. Each additional extension will now cost him $25,000 in price. IT’S TIME TO DECIDE!

He was shocked, but I got his attention. Will he act? Who knows. I may end up with an 11 cap rate on this building if it finally closes. My broker assures me that he’s serious to sell, because it’s part of a 1031 exchange. But at this point I can take it or leave it, because there are several other properties that I’m tracking that are at least as profitable.

So – it’s time to get down to brass tacks and decide. Stay tuned.

In the seemingly never ending interim time between the beginning and the end of the commitment letter process, the owner of the building and I finally agreed that it was time for me to do my physical inspection. It would be swinging without a net a bit for me, since I had neither the financing lined up nor the due diligence finished, but based on both the seller’s motivation and what I had seen already in the documentation I was confident that we would ultimately put something together.

So we booked the inspection. The Friday before Memorial Day, so I could take the whole day off and focus. We were set.

Before I tell you about the actual inspection, I need to give you some background on my inspector. First – he’s the best and does all of my single family home inspections.

Second – the inspections take forever because he’s so detailed. That’s why he’s the best. To put it in perspective, an inspection on a typical 1000 square foot, 3 bedroom rental usually takes between 3 – 4 hours. Sometimes longer. The great thing is, though, that he does my single family inspections without me being there, then gives me a detailed written report and a CD filled with pictures. VERY cool.

And third – he’s reasonable bordering on cheap. (This inspection was under $1,000)

And no, I won’t tell you his name. At least not yet.

To refresh your memory about the building, it’s an all brick, 2 story garden apartment building with 24 units (see the video in a prior post below). Structurally it was built as six buildings attached together, each of which has four apartment units. Each building also has two separate basements, with each basement shared by two apartments. It has separate utilities for each unit, which means that each of the 12 basements has two furnaces, two electrical panels, and two water heaters.

So – for the inspection we needed to look at the exterior walls, the roof, the inside of each unit, and the 24 sets of mechanicals in 12 different basements.

Suffice it to say that I had planned for it to be a very long day. Especially since this was my first inspection on my first building. But I was way off on my estimate of 6-7 hours.

So we meet at the building at 9am on Friday. Me, my inspector, the selling broker, and the seller. I was surprised that the seller was there, because he had complained that he wanted to get going on his long weekend. But he was there nonetheless, and he gave me the impression that he was going to escort us through each of the units. And indeed he started to.

In terms of the interiors I would say that probably 19 or 20 of the 24 units were completely uneventful. Some minor plumbing leaks, some sticking windows, some faucets with the hot and cold reversed, and a couple of non-disclosed cats. Nothing material.

The rest were interesting. One had a bathroom with a very leaky toilet, to the extent that if we had walked to the middle of the bathroom floor I’m convinced that it would have collapsed from rot and we would have fallen through to the basement. It was THAT bad. This was a 1 bedroom that had a mom, dad, a toddler, and infant all squeezed into it.

The second interesting one was that of a smoker. It was odd because it had medium brown walls and all the rest of the units were painted off-white. It was odd until I looked behind a picture on the wall. The walls once WERE white – the brown was from all the smoking with the windows closed. I had never seen it that bad before. Oh and by the way, the seller says, the tenant died two weeks ago from emphysema (big surprise there) in the hospital (thank goodness not in the apartment) – BUT the relatives are still paying rent. At least he has his priorities straight!

In another apartment, the only furniture that was in the entire 1 bedroom apartment was a bed, a sofa, and a 60 inch top of the line HDTV. Out of curiosity I asked the seller if the folks were just moving in, and he said no – they had lived there for at least six months.

And there was one apartment  that we couldn’t even get into because the tenant changed the lock. Devilishly clever.

I give the seller credit – he hung with us for almost two hours then gave the keys to us and told the selling broker to supervise. Still, it took almost 7 hours to get through the 23 units that we could get into.

And that was just the inside.

We took a break for a late lunch/dinner, then my inspector hit the roof. Normally a fairly quick inspection, it turns out that the guys that did the roof, which was only three years old, would have made great lumberjacks. Lots and lots of mistakes, including every one of the 54 pot vents installed incorrectly.

We finished the roof then it was straight into the basements. Testing every furnace (8 out of 24 were bad), all the water heaters (1 bad unit) and all of the electrical panels (four bad ones).

All in all we finished at 10pm – it took 13 hours to get through this inspection. The selling broker said it was the longest inspection that he had ever seen on a building of this size.

But for $1.1. million dollars? I think it was just right.

And do you know what? I had a blast and can’t wait for the next one. This is a great business.

Stay tuned for the next installment of my Apartment Quest Series: Rates are Rising – We Either Renegotiate or Kill the Deal.

I know that this post is long overdue. As the next step in my Apartment Quest series I’ll tell you about the building that I’ve been “buying” since the middle of April. I had heard that this was a long process, and I had heard that it was filled with capital “D” Drama, and so far the experience and process has lived up to it’s billing.

I finally hooked up with a great commercial real estate broker (more on this later). We settled on one building in particular that looked like a good prospect for a first buy. It was all brick, had a pitched roof, heat and electric were separately billed, and it had a “helper” on site who would show apartments. And it was priced decent at the list price.

We danced a bit on the Letter of Intent, came to terms, then spent ten days hammering out a full purchase agreement. The amazing thing was that this PA was shorter than the single family residential version that I use, because a lot of the disclosures that are required in residential real estate are not in commercial. This is probably because most of the people playing in the commercial game are big boys and girls not prone to blaming others for their mistakes or seeking help from the government when they sign something that they either don’t understand or haven’t read.

Case in point – there is no “right of rescission” in commercial real estate like there is in residential. Nope – when you buy it, you buy it.

Anyway, once we had the PA signed the due diligence period started. Again, my commercial broker out-did himself and had the three-inch high stack of documents put together in a couple of short days. I had always heard that ALL sellers of commercial property lied about their buildings, so I was prepared to dig and claw to get to the truth.

What I came to find out though, was that one of the items that’s required in order to get commercial financing was tax returns. Not only mine, but the seller’s as well for the last three years. Now I’ve been a finance guy for 20 years, and I now that the “tax books” that every company keeps represent the worst case scenario, because companies always strive to minimize their tax liability (within the limits of the law, of course) by minimizing revenue and maximizing expenses. So I was very interested to see if what the seller had said in his listing matched the actual numbers that he had submitted to the IRS.

To my shock – they matched pretty much exactly. In addition, all the supporting information matched as well, rent receipts, tax bills, insurance bills, utilities, repairs, everything. Everything except the his 2007 tax returns. Which I’m still waiting for. And waiting. And waiting. And waiting.

Check back in a couple of days for the next installment: “The Building – Part II”