Common mistakes novice Multi-family investors make!

Since my live training event (Multi-family Investing Blueprint) held in Edmonton this past May, I’m very happy to report that a couple of my graduate students have been taking action and have put offers on apartment buildings. One of them even closed on a deal a few weeks ago. After the live event, I always provide one on one coaching to graduates when they take action and as such I saw a common mistake novice investors make which I want to share with you in this blog post.

Working with non-specialized multi-family (MF) team members

If you’ve seen me speak on stage or read some of my previous blog posts, you’ve probably heard that I always stress the fact the multi-family investing world is a VERY, VERY SMALL WORLD with very few players in it. MF investing is a highly specialized realm. Accordingly, it’s critical that you protect your reputation at all costs as there’s little margin for error. So whether it’s your realtor, mortgage broker or lender, your property manager, building inspector, etc.,

YOU SHOULD ONLY WORK WITH PEOPLE WHO HAVE

EXPERIENCE IN MULTI-FAMILY INVESTING!’

Believe me, working with experienced MF specialists will significantly reduce your stress level going into the deal and help you look better with the mortgage lender, hence raise your credibility and build your reputation.  The experience of buying your first apartment building will be very stressful, regardless. If MF investing were easy, everybody would be doing it. But it’s not! So knowing it’s going to be challenging you want to put all the chances on your side upfront by only working with specialist who can guide you through the process.

Despite my advice, here are a few mistakes my students have recently made:

One of my students, who closed on his deal a few months ago, ended up working with a mortgage broker who does very few MF deals every year. When I found out who the broker was, I immediately remembered him in a negative way from my days as a multi-family underwriter at Canada Mortgage and Housing Corporation (CMHC).  His financing application packages were always incomplete when they got to CMHC and his files sat on underwriters’ desks for a long time waiting until all required information was supplied to us so we could begin the risk analysis of the deal.  I can only imagine the stress the investor (purchaser) endured as financing approval was delayed due to incompleteness of the application and he had to ask for time extensions to remove conditions in order to keep the deal alive. If the purchaser ever refuses time extensions, the deal dies right there and then.

You see, unprofessional brokers will be quick to get a ‘commitment fee’ from the investor to ensure they get paid for the work they do and to ‘HOOK’ you as a client. Once you’ve committed to a broker, it’s harder to switch to another one when you’re dissatisfied with them because you’ve already given that broker all your financial details and supporting documents. You’ve already spent a fair bit of time working with this broker. In this particular case, my student (the ‘managing partner’) had raised funds from about 9 investors to complete the purchase. However, the broker offered to the lender that all 10 investors be on title and provide their personal guarantees on the loan. My student is a highly paid doctor with high net worth sufficient to qualify alone for the loan without additional personal guarantees. But once 9 additional guarantees had been offered, there was no taking them back.  As a result, the managing partner had to go back to his investors and ask for their personal guarantees, which he had not anticipated. Then, one of his 9 investors dropped out completely.

In the end, my student found a new investor and closed on the deal and he’s happy with the property despite the huge stress he went through.

Another student of mine chose to work with a realtor that had no prior experience with multi-family properties. When he contacted me he had put an offer on a property 3 or 4 weeks before and the timelines for the offer were very wrong and the realtor did not appear to be very responsive in keeping his client up to date and proactive about obtaining required due diligence documents from the vendor.

The conditions in the offer were as follows:

  • 45 days from acceptance of the offer to do a physical inspection and complete due diligence process based documents provided by the vendor
  • Closing date within 90 days of acceptance of offer

Essentially, all conditions had been collapsed into one big condition to be waived within 45 days acceptance. This was not right!

Keep in mind, the offer structure is always subject to negotiations and the vendor and purchaser may agree to whatever is mutually satisfactory to both parties.  The offer structure may also vary based on market conditions and how long it takes to obtain financing and engineering reports, etc.. However, in the industry offers are generally  structured as follows:

  • 5 to 7 business days from acceptance of the offer for satisfactory inspection (‘walkthrough’) by the purchaser;
  • 10 business days from receipt of due diligence documents from vendor***
  • 30 business days from acceptance of offer to obtain financing, satisfactory engineering, environmental, property condition report, appraisal and other searches;
  • Closing within 90 days of acceptance

Again, the above structure is not cast in stone but conditions should be sequential by priority. For example, the inspection, or walkthrough, should always be the first condition. Basically, an investor must first be satisfied with the physical inspection of the property before asking for due diligence documents from the vendor or seeking financing. If property condition is unsatisfactory to the purchaser, then he or she can either negotiate the price down or walk away from the deal. There is no need to waste anybody’s time if you’re not happy with the property…

In the case of my student’s deal, his offer had been accepted 3 weeks prior and he was waiting for due diligence documents from the vendor without having even seen the property and without knowing what condition it was in. In addition, he had not received any documents from the vendor to verify the income and expenses and his realtor was not keeping him up to speed as to when he’d be getting the documents. The realtor had not called or anything. It’s the realtor’s job to keep his client informed, lead him through the offer process and push to get documents from the vendor. That’s how they earn their commission.

As you can see, working with non-professional of the multi-family business can make your investing experience extremely unpleasant and could cost you a lot of money. It’s very simple to ascertain whether someone has sufficient experience: simply ask them how multi-family deals have they done in the last year. If the answer is not many, then you need to look for someone else to work with.

To your success in all areas of your life.

 

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