Chronicles of a multi-family deal. Chronicle # 1

Happy New Year!

I sincerely wish for you that 2013 will be the best year ever in your life with health and much joy and great times with the people that matter to you.

2013 is certainly starting with a ‘big bang’ for me as I have a property under contract, a 15-unit building, for which I’m completing my due diligence right now. That’s pretty cool because that means I’ll be going on vacation with my wife and and three kids as we have an agreement that for every property we buy we celebrate by taking a trip. It looks like it will be San Diego and Disneyland. Yahoooo!

Plus, as you may remember, I’m also developing an ONLINE COURSE FOR MULTI-FAMILY INVESTORS online course for multi-family investors to be launched on January 31 and I hooked up with an internationally renown internet expert that’s helping me create a fantastic user-friendly platform for the course. It’s by sheer coincidence that he’s accepted to work with me and I feel privileged to have this opportunity. It’s a tremendous learning experience, which has me quite excited. More on this later.

Today, I’d like to focus on the deal I’m working on. Basically, over the next few weeks, I’ll write the CHRONICLES of this LIVE DEAL  for your benefit and share real life tips, including some big money-saving ones. You’ll get a pretty good idea of how I prepare for purchasing apartment buildings and handle the entire process.

This deal came to me just before Christmas as the previous offer fell through after the buyer had worked on the deal for four months. My realtor sent the listing to me just before the project was to be put back on MLS and I had to act fast and he and the vendor’s realtor had plenty of interested buyers lined up. So I did! I wrote my offer the same day I received the listing. The Edmonton multi-family market is on fire right now and during the fall I lost 3 projects in bidding war circumstances. The project is at the low end in terms of size I generally look for. I usually like projects in the 18 to 25 units range. However, from looking at the picture on the listing the project had good curb appeal and looked well maintained and was located in a good market area with historically low vacancy rates with good access to lots of amenities. The other thing I did not like is that it had too many bachelor suites. Most of us prefer a balanced mix of one and two bedroom suites. But I had been told that the bachelors were very large and there was potential to convert three of them into 1-bedroom suites. Plus, there was a significant up side as current rents were on average about 13% below market average rents. Remember, the value of multi-family properties is directly derived from the income they generate. If you can increase the income you instantaneously increase value – read immediate capital appreciation $$$$. So I kept an open mind about it and we scheduled a viewing of the property within two days. No time to waste…

One thing I want to stress here is that I was utterly ready to move fast. I knew how much capital I had at my disposal and was clear about my business parameters, which enabled me to move fast. I also had already done as much preparation on my financing application package to the extent I could up to that point. I suggest you do the same.

I have fantastic relationships with my real estate team members, most of whom participate in my live experiential multi-family training event ( including my property manager. Accordingly, I asked him to come along to do the site inspection and give me his take on the feasibility of the bachelor conversion into one-bedroom suites and on the overall property condition. I have the utmost trust in him because he’s been in the multi-family business in excess of 30 years, both as a professional property manager and as a property owner himself. Plus, I know how well maintained his properties are since I underwrote many of them while I was an underwriter at CMHC. So by conducting a site inspection with someone like this, you get a very accurate picture with some good initial cost estimates for repairs to help you start running some initial numbers.

The conclusions of the site inspection were indeed positive. The roof had been replaced four years ago and so had the boiler and hot water tank. The boiler room was spotless with floors painted white and a big window. Most boiler rooms look like dungeons… That’s too bad because literally the boiler room is the heart of the building and should always be well maintained. The balconies had also been resurfaced in recent years with ‘Duradek’ and railings were in conformance to Health and Safety Code in terms of their height. The corridors were wide. Bottom line, it’s a well-maintained building. So I removed physical inspection condition.

NOW here is a tip for you. Whenever I can, I take a camcorder and film the entire inspection and I literally record my observations and suite descriptions and condition on tape. Just be aware that sometimes you may not be allowed to film or take pictures because of Privacy Act concerns, but generally it’s not a problem. In this case, I was able to film the entire inspection. On my camera, the film can be converted into pictures which I can include in your financing application to document the property’s condition. Another tip: don’t turn off the camera at all during the inspection. Let it roll the entire time. The reason for this is because it’s easier for editing the video, especially if you use IMovie application on a Mac computer like I do. But more importantly, you capture all the conversations during the inspection. In this case, I not only captured my property manager’s sound advice throughout the entire site visit, but also the owner/vendor’s comments as well. Yes indeed, it was actually the owner showing us around his property, which is highly unusual. He let slip who the previous buyer was whose offer had just fallen through… This proved to be a valuable piece of information for me, as you’ll see below.

Within days I received the vendor’s documents and so began the due diligence process. His document package actually was forwarded quickly to me and so during the Christmas holiday I reviewed them. Suffices to say timing was not all that great when the kids are off school and many of my real estate team members gone for the holiday including my lender, but the job got done and I started assembling my financing application together.

Among the reports you going to need to obtain financing for multi-family properties are the following:

• Phase I Environmental Site Assessment (ESA) – estimated cost = $2 500 to $ 3 000;
• Property Assessment Condition – estimated cost = $2 000 to $2 500;
• Appraisal (if seeking conventional financing, i.e. non CMHC-insured) – $2 500 – $3 000

TIP: Now, because the vendor slipped up and mentioned the name of the previous buyer during the inspection, which I recorded on film, and which happened to be a well known organization, I contacted them to offer to buy the above reports for which they no longer have a use for since their deal was now dead, for HALF PRICE!!! Talk about significant savings. In order to be able to use these reports you need to obtain from whomever produced the reports, usually engineers, a ‘letter of transmittal’ preferably addressed to your lender to allow the latter to legally rely on the content of these reports. The previous buyer has to give their authorization to permit the engineers to write the letter of transmittal. So always look for such opportunities for savings on costs.

The vendor’s documents also included a two-year warranty from the roofing company that had expired. I knew from experience that this particular roofing system had an economic life expectancy of 20 to 25 years. So I contacted the roofing company to ask if they would give me a letter stating that the remaining economic life (REL) of the roof was at least 20 years, which they did.

So it is that a few days ago I dropped off my financing application at my lender’s office after stopping at the wine store to pick up a nice bottle of French wine for him as a New Year’s present and to show my appreciation.

As you would expect, my financing application package was neatly organized in a binder with tabs and pictures of the property and the letter from the roofing company and so on. As I walked my lender through the content of my binder his reaction was:

“Wow! You’re really making my job easy!”

Well that’s just it, ain’t it? THAT’S THE POINT! You want to make a good impression on your banker and make sure you keep your reputation at a high level to ensure your deals flow smoothly and he likes working with you. No the bottle of wine was not a bribe! I always got along well with this particular lender. But you know, when I was a CMHC underwriter I used to tell this lender what we needed to get deals insured. Ask anyone in the business, CMHC has the highest standards and is the most demanding.

If 2013 is the year you’ve decided to jump into investing in apartment buildings and you’d like to cut your learning curve by years and save yourself much grief and stress and look like a pro from the get-go, I invite you to consider signing up for either my online course or my live experiential training event in May in Edmonton. In my training programs I give simple straightforward systems to analyze your deals and ‘CHECKLISTS GALORE’ to ensure you don’t skip any steps.

And right now, I’m giving you EARLY BIRD DISCOUNTS on both training programs. You get 25% discount on the online training if you sign up before the launch date of January 31, and 35% on the live event. Both program come with 100% money back guarantees. I can assure there are no other training programs like this for multi-family investors in Canada.

Check out these training programs by clicking on the links below:

On-line Course

Live Experiential Event

In next blog post, I’ll tell you more about my conversation with my banker and what my financing application contained and the strategy I’m using to fit the particular circumstances of this deal.


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