Here’s a great new article from apartment foreclosure investor, Michal Ballard who is now up to 1800 multi-family units nationwide and growing. He recently shared in his last apartment investing webinar this story, plus had a new client share their first deal success as well. If you missed that call, you can see the free video replay here.
In my last blog about Apartment Foreclosure Investors, I outlined the macro situation for C to B class apartments facing re-finance risk, what the size of the market for these assets appears to be, and what kind of potential these deals have over a 3 to 10 year investment horizon.
This month I want to feature an individual project of which I am intimately aware as it is a deal one of my students has been working on.
In the interest of anonymity I will keep the market and names out of this article, but I will outline the actual statistics of the deal and the trends that this project has enjoyed. This should help paint the picture of WHY we are jumping into the apartment foreclosure market with both feet right now.
This particular project first got our attention when it was priced at $1,100,000 for 92 units. At the time $12,000 per unit for units attracting around $5,000 per year of rent or a 2.4 GRM seemed very attractive. We had a project that passed our first cut, now we had to find out the story.
As it turned out the project was on very hard times, while it had been been purchased a few years earlier for $1,800,000 the owner had pretty much given up on the property and occupancy had fallen to under 30% with many of those residents not paying any rent at all. There were at least 60 down units and the property had a very bad reputation. The good news was that there was a project adjacent to this one that was very similar (same number of units, contemporary construction, same rents) that was fully occupied (92%) and had sold about a year earlier for $1,800,000. This gave us hope that the issue was one of management not of the overall market.
We tendered and offer of around $900,000 but found out that the project was already under contract… Strike one. We set about to looking at other projects but kept this on the back burner.
A few months later we received a call that the project had fallen out of escrow and were we interested in putting in another offer. We were and we put in a very low offer of $699,000 all cash offer no financing contingency, we also put a few other magic words in that would help us a lot later. After a lot of back and forth our offer was accepted…..now we had to locate the money.
After a trip to the project to survey the actual neighborhood and general condition of the project we performed an exhaustive due diligence analysis and developed a multi-pronged plan of attack for the property.
Over a frantic 3 month period we accumulated the required cash and due to some of our magic LOI clauses we were able to convince the seller to carry $200,000 himself making the money raise much less stressful.
The project closed and we were ready to put the plan to work. Units were prioritized into 3 types of conditions; soft, medium & hard down. We set about to bring the units up in a general reverse order bringing the softs up first the mediums next and then the hard down units. We also embarked on a concurrent curb appeal, law and order, and safety rehab.
Surveillance systems were installed a courtesy officer was hired, we made several trips to the local precinct to outline and reiterate our commitment to zero tolerance for any type of lawlessness on our property.
Landscaping projects were embarked upon, exteriors or buildings were cleaned and shined, as units were brought up to rent ready.
Non-paying residents were given one warning to catch up on their rent or vacate and by the time all the dust settled we had about 22 paying residents for a grand total of about $7,000 a month of collections in August and September……then the upgraded units started to come online.
The project has quickly gone from 22 paying units to 65 units leased, which will generate around $25,000 of collections against roughly $15,000 of expenses. The only thing that is holding back the occupancy is the speed at which we can get units renovated and within 2 months.
Just a little shy of one year after purchase, this property will fulfill the definition of stabilized and long term institutional financing can be place on the property. Virtually all of the debt and equity will be repaid and the equity holders will enjoy quarterly distributions on this project while they can put their money to use in another project that my student already has in his sights.
How did he know this would work?
What did he put in his LOI that made the seller help him with financing?
How come I would recommend that he take the plunge on this property while telling him not to on several others?
Well that’s about a two day long discussion next month with only 18 investor clients. (Details on this one time only special event here.)
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