Welcome to the Fearless Innovator Podcast, my name is Mechiel Kopaska and I am your host.
This week’s topic: My first multifamily purchase!
After taking a 6-month class from Robert Kiyosaki in 2017, I had learned what I thought was enough information to evaluate properties and make good decisions on buying investing properties.
I had started working with a new real estate agent and we had already completed one single family home transaction, when he said to me. “Mechiel what are your real goals?” I told him I wanted to buy commercial property simply because it had been on my goals list for several years. Clearly not the right motivation to buy my first commercial property! I couldn’t wait to place a check mark next to Commercial Property.
He asked me if I would consider buying an off-market 8-unit apartment complex. I said, “sure” and we scheduled a meeting with the broker and the husband/wife sellers.
When I first arrived, I met with the sellers. Nice couple from Greece The sellers took me on a tour of the property. I was granted access to enter each apartment. We went out back and walked along the seawall. The property was located on a canal that lead to the Gulf of Mexico – it was beautiful. On the tour, the owner had explained all the updates that he had completed. The 4 upstairs patios had been upgraded and made a nice deck to watch boats or sunbathe.
Then we toured a 9th room that we’ll call the maintenance/supply room. When you first walked in you could visibly see that the owner was attempting to create a 9th unit as the framing with the 2 x 4’s were up. He had explained that he was either going to make it into another unit or it could be converted to a laundry room with storage. As we went to the back of this unit, you could clearly see that the walls had gaping cracks in it, and the floor was no longer level. The owner explained that there had been a seawall issue and water had intruded under this floor and washed away the soil from behind the seawall but indicated that he had received 2 quotes to fix it and later he would pass that information along to me.
I sat down with the sellers in their Unit D and I was able to ask them all the qualifying questions that I had learned from my training. They had a sheet prepared for me by unit that described the upgrades they had done, the rental amounts they collect per unit. Basically, any questions I had they answered. I knew the asking price and I had the rental income and a good idea of the monthly expenses that included some electric, including the whole water bill with sewage and trash and a high Flood insurance policy along with Liability. He had explained that they had no way to measure the individual water bills per unit but that would be something for me to investigate doing so I could pass that expense on to the renters.
After 2 hours, I felt I had enough information to take back to my desk to perform a complete evaluation. I thanked them for their time and told the broker I would be in touch.
Upon completion of my analysis, I had determined that the asking price didn’t line up or make sense. The income vs. expenses weren’t lining up, so I called the broker and declined to make an offer.
I didn’t think any more about this deal until a month later, I got a call from the agent and he called with great news, the price had dropped $100,000.
I thought $100,000 was a significant difference, so I evaluated the numbers again, it still didn’t work, and I declined to make an offer a second time.
Then within a few days, the agent called to let me know they had dropped the price another $10k. Again, I declined but this time, they said please just make an offer. The sellers were motivated because they needed to leave the country for a family emergency. I looked at the numbers again and made an offer where I knew I could get the formula to work.
To my surprise, in Aug of 2018, the offer was accepted!
Now, keep in mind I had never purchased commercial property before, so this process was entirely new on the learning curve. However, my residential agent completely helped me throughout the process.
First challenge was, per the contract, I had 5 hours to find a lender – not just any lender a commercial lender that would believe in me enough to write an approval letter. I had no idea what I was doing or who I would contact, so with the help of my agent, he gave me a couple of names to call and after that I hit the internet, I was talking to anyone that would listen to me, my story and my vision for the 8-unit apartment complex.
Luck was on my side, I found a lender that did just that, she believed in me and 3 hours later, I had an approval letter in hand.
I called my agent and he was in complete shock that I delivered the letter to him in record time.
I’m starting to add things up in my head, this process has been really super easy. Why is this commercial deal going so smoothly, I kept saying to myself… I had always heard that commercial is a different animal but this one was clearly not. Hmmm?
The letter was delivered, and the next step was to complete a 4-point inspection. The inspection was complete within the next couple of days and I learned and confirmed 2 things.
1). The settlement issue along the sea wall was real! SO real you could see the deep cracks in the walls and you could see where the main floor had dropped inches away from the foundation and you could even tell inside the upstairs units that the floors were not level.
2). All 8 AC units were 28 years old and would need replaced any day!
3). The roof was good.
I had learned from the seller prior that he had gotten 2 quotes to fix the settlement issue along the seawall and I had determined to replace the AC units it would be $3k per unit or $24K.
So, I went back to the negotiating table and stated that because of these issues I wanted an addendum to the contract to reduce the purchase price by another $50k. Clearly, they wouldn’t accept it.
The addendum was accepted the next day. Now, a little fear set in as I contemplated all these issues but I quickly said to myself, every issue has a solution. I’ll cross that bridge when I get there.
I now had 30 days to seal the deal with my new commercial lender.
For the next few days, I worked with my lender that had approved me and due to new internal criteria, I learned that they would not be able to provide me the lending and declined to work with me.
Good news was, I now had 30 days to get the lending – so I wasn’t concerned. Back to the internet, I went!
After several days of hunting, talking and submitting documentation, I had a conventional lender and a hard money lender on the hook.
The choice was mine!
However, let’s dissect the differences between the two options.
- Conventional lending – was just that get an appraisal, inspection and put 20% down and get a lower interest rate – at the time it was 5% – all qualified with tons of paperwork.
- Hard Money Lender – Validate with an appraisal, they would use the 4-point inspection I already had, 20% down, 10% interest only loan with 4 points. Sell or refinance within one year – short term loan.
Now, let’s talk about my strategy.
My strategy was to keep the property (buy & hold) but first I wanted to fix the settlement issue, upgrade the units as the tenants moved out, raise the rents to market value and hire a great property manager.
Which option did I select? I’m confident most would say Option 1 – Nope, my brain doesn’t go with the flow – I go against the grain.
I selected Option 2 – the Hard Money guy!
Why? That was simple, I wanted a relationship with the hard money guy, because I figured we could quite possibly do other deals together in the future. So, I was after the relationship!
Before I agreed to go with the hard money guy, I called the Hard Money lender’s mortgage broker and said, “look I’ll go with you, but I need you to confirm that I’ll get to meet the guy behind the curtain’. He was reluctant at first and told me that wasn’t customary, but he did agree to call him to see if the arrangements could be made. He was able to confirm with the hard money guy and the meeting date and time were set.
I met with him prior to closing, because it was important for me to know him and for him to get to know me and what I was all about. After all, it held me accountable for this large transaction that I was about to embark on!
Then 3 days before closing, I learned that 1 AC unit had broken down and the sellers had to replace it prior to closing. I knew then it was just a matter of time, before the other 7 started to breakdown.
The meeting with the man behind the curtain went as expected and we moved forward with the purchase and I made my payments on time without fail.
At the end of the day, I had just purchased my first multifamily property with tons of issues! I mean, who would buy a building that could one day at any time just fall into the water? If you’ve read my book yet, you’ll learn that I love making mistakes, because I learn! But if someone were to ask me at this point in time what my stress level was – I would have told you it was low, because remember my day to day JOB was much more stressful and I didn’t worry about those AC units or that the building could just collapse, because I had a plan!
In my next episode I’ll continue with talk about the ownership of the 8 Unit Apartment Complex.
Thank you for listening, I hope you were inspired, entertained or you learned something new!
You can get a free copy of my book Why my J.O.B. Quit Me, jumpstart Your Firing, go to fearlessinnovator.com/freebook..
Hey, I’m looking for homeowners that may have a second home, but you’re not sure you want to keep it or let it go? I may have a solution for you. Hit me up on Fearlessinnovator.com.
Catch me later…