Dealing with Banks

Posted on November 30, 2011 by Mike

Banks are a strange animal. Most people don’t really understand how to deal with them.

I have heard countless stories online, from my investors, from my friends, on how they are difficult to deal with, illogical, and unreasonable. I have listened closely to all these situations and have found a something similar in them. Everyone has focused on their OWN situation and tried to convince the banks to align with their needs.

That’s the big mistake. Negotiation 101: understand the other sides position and needs. Negotiate with their needs in mind. The goal in negotiation isn’t to get the best deal you can get for yourself (that’s soooo 1980′s), it’s to meet your requirements. That usually means giving up things to the other side in an effort to achieve your end goal.

I think that is where people go wrong – thinking that they can only get what they want if the other side doesn’t get what they want.  The true advantage goes to the party who has the most flexibility.  Ever heard MBA students talk about a BATNA?  Best Alternative To Negotiated Agreement.  Typically, whoever walks in with the best alternative to reaching a compromise has the ultimate power.

In a future post, I will talk about my unique experience. How I approached the bank, how I dealt with them, and how we were able to come to a mutually beneficial resolution.

Posted in Apartments, Lending, Negotiations | Leave a comment

Change is Good

Posted on November 28, 2011 by Mike

I promised I would update on the 30 unit building in Kansas City.  First some background:

If you were just born yesterday, the real estate market crashed.  Yes, surprising I know.  Well, myself and some investors purchased a small apartment building in Kansas City (an older building with a bunch of studios and one bedrooms) back in 2007.  Of course, we felt the impact of the economy, softened rents, increased vacancies, etc.  We were working through this issue when we ran into bed bugs!  Ugh… this spread quickly and we were not made aware of this until we had multiple units affected.  When a building gets bedbugs, you typically lose the tenants in affected units, other tenants in the building who are concerned with getting them, and future renters who hear about the issue will likely not take a chance to move in.

Getting rid of these pests took a long time and ended up being very expensive.  We went through many rounds, eventually calling in a professional exterminators at $250/unit.  That seems to have done the trick, but am anticipating a couple more treatments.  They key is staying on top of the residents to report any bites they get…

Now for the update:

We decided to let our previous management go.  There wasn’t enough activity on the bed bug problem to make me feel comfortable they had it under control.  Also, their make readies left much to be desired.  We replaced them with a new company, North Terrace Property Management, who has pretty solid processes and a competent staff.

We have had them since September, and so far it has been positive.  A little slower than I prefer, but a manager never works as fast as an owner will (they have other properties, after all).

Already cleaning out some of the tenants who won’t pay and filling vacant units with solid residents.  We are making visits every two weeks until we achieve our desired progress, then we will move to monthly visits.  Change is good…

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Paying Rent Online

Posted on November 14, 2011 by Mike

Having tenants pay rent is always a hassle.  Some tenants pay on time, other tenants don’t.  There are always excuses as to why it may or may not have gotten there.  Long story short, landlords and tenants seem to have recurring complexities getting the rent on time.

One solution is to pay online.  This eliminates late payments and disputes on when a payment was made.  It also allows landlords to save a trip to the bank to deposit the check.  Time savings are always appreciated in this high tough business.

There are several methods for approving online rent payments:

  1. Merchant Account – set up a merchant account through your bank.  Most banks offer a merchant account for a small fee plus a percentage (usually 2-3%).  This allows you to accept credit cards and by using shopping cart software, process online.
  2. Paypal – set up a Paypal account and add access on your webpage.  Paypal is easy, no up front charge, no need to implement shopping cart software, just a 3% off the top charge.  Paypal provides you with all the code to add it to your site.
  3. Dwolla - the new disruptive technology.  Dwolla is a brand new payment technology, basically using cash to pay online.  Their system is setup to process ACH transfer (think money wiring).  The catch is they charge only $.25 per transaction!  This is a HUGE savings for landlords doing thousands of dollars in rent per month – 3% of $10k per month is $300.  Amortized over a year is $3600.

That is a sizable sum for a small time landlord.  Now imagine you are collecting $300k/month in rent, the savings is $108k per year!  Obviously, Dwolla is an incredibly payment option for the high capacity landlord.  Getting set up it the key.  It actually allows you to pay through your cellphone.  Their goal is to take on the point of sale devices out there.  Disruptive technology to say the least…

I just set up my account and it took about 3 minutes.  Amazingly easy and simple.  Will start implementing with my tenants over the next three months.

Quick update on San Juan – we rented the studio, no only have the 2 bedroom vacant which is ready for move in.  All in all, that property has been easy to manage.

Report on my 30 unit after I get back from KCMO next Tuesday.

Posted in Apartments, Tenants | 2 Comments

The Real Estate Market

Posted on November 11, 2011 by Mike

One of my partners, Steve Olafson over at Legacy Gold, follows the markets of many metro areas and recently wrote a very interesting article on Phoenix and Vegas:

The following article has an interesting comparison between the Phoenix and Las Vegas apartment markets.

http://www.multifamilyexecutive.com/distressed-assets/phoenix-and-vegas-where-are-they-now.aspx

I agree with much of the general discussion and flavor of the article.  I do wonder where REIS gets the information that the vacancy rate in Phoenix is 7.5%.  All indicators that I see show a higher rate.  I would also question the reported 6.1% cap rate.

Cap rates are typically reported by the sales agent.  The tendency is to want the sale to look good and good numbers reported will accomplish this.  Financials used in these calculations tend to be presented in a favorable fashion as well.  Small changes in income and expense can have significant changes in the cap rates.

Vacancy rate reporting is great as an indicator of direction.  Most of this data is compiled by surveying properties.  Sample sizes need to be large to get an accurate count    The properties polled needs to remain fairly consistent in order to have a solid trend in direction.  I have witnessed some of these calls in the past.  They come to the property manager that usually wants to present a better front than the actual count.  A greatly over-exaggerated example would be on a 12 unit property that I recently visited.  I was told that it was fully occupied with a waiting list.  When I looked deeper, there were actually five vacant and only four units that were current on rents.  The remainder were more than one month late!  There is no consequence to a property for any inaccuracy in reporting.

With all this said, There is still a lot of room for growth and opportunity here in Phoenix.  As odd as this sounds, I believe the best deals made in the past year were on property sales that had actual cap rates of 0-3%.  These are typically under managed with motivated sellers.

Steve Olafson

I would tend to agree with him on the cap rates topic.  True cap rates are never reported these days.  They are just another tool used to market and sell apartment buildings.

Posted in Apartments, Investment Strategy, The Economy | Leave a comment

San Juan, Pt 3

Posted on November 5, 2011 by Mike

Okay, last post on this deal.  I promise.

I figured you might want to see what the property actually looked like and I was able to take a quick video of two units.  A studio and a two bedroom.  You can see, they are actually pretty nice considering the low price we payed for them.

The studio:

The two bedroom:

Both of these units will rent for $25-50 more than we were forecasting…

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San Juan, Pt. 2

Posted on October 28, 2011 by Mike

Here is how the deal progressed:

The property was a short sale from the owner who had bought back in 2006 for $950k.  It was currently under contract with another buyer for $300k.  We heard that the existing buyer was having issues closing, so we put in an identical back up offer.  The seller accepted the back up offer and we waited.

Sure enough, the seller could not close.  When his contract expired, ours became effective and we went into escrow.  Both banks accepted the same offer we had and we moved forward, ordered inspections and title.  It took a VERY long time for the banks to respond to our requests for info and finally, when we were ready to close a title issue came up.  The cloud on the title reduced the value of the property, so we made a revised offer of $70k less.  To our surprise, the seller and banks accepted!  $115k per fourplex.

We closed on the first four units with the first bank, that went relatively well.  However, the second bank started dragging its feet.  They made up excuses like folks being out of town and systems being down… not cool.  Finally they responded, about 3 weeks later, stating they needed to reassess the sale!  Now we were a bit nervous, because we purchased the first four units and had no desire to own half an 8 unit.  The bank took another month to get back to us, creating quite a bit of stress and scrambling.  Finally, we went back to the bank and requested a $5k price reduction and immediate close or we would walk.  The bank realized that selling half an 8 plex would be nearly impossible without a MUCH heavier discount to what we were paying.  They agreed to the reduction and immediate closing… and that was that.

We closed about one and a half months ago and the property has been operating well.  We are currently trying to finance it – though that has proven difficult due to the low commercial loan amount.  More on THAT at a later date.

Posted in Apartments, Negotiations | Leave a comment

San Juan

Posted on October 26, 2011 by Mike

Thought it might be interesting to tell you a little about the last deal I did.

This deal was with a partner who has great experience with Arizona apartments. We located a great deal in the Central Corridor. Here are the details:

  • 8 units – 2 studios, 4 one bedrooms, 2 two bedrooms
  • Fully leased – no current vacancies, but some collection problems
  • No documentation – there were leases but no income or expense files
  • Short sale – owners purchased for $950k in 2007, were selling for $280k
  • Two banks – two fourplexes owned leaned by two different banks who were not cooperative
  • Back-up offer – there was already some yahoo in front of us, but he was having trouble closing

 

Not an easy deal, but the best ones never are. Let me tell you how it progressed…

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Don’t let the Bed Bugs bite…

Posted on October 21, 2011 by Mike

by StarMaster from flickr

Bed bugs are awful, vile, little creatures.  Imagine ravenous mosquitos without wings.  They live in nooks and crannies in bedrooms and come out at night to drink your blood.  Nasty…

They used to be a serious issue back in the 1930′s, but it is believed the introduction and heavy use of DDT (which came with its own set of issues) largely eradicated the problem.  Now it’s back – with a vengence.  I am currently dealing with a very difficult infestation at one of my apartment buildings and it has proven very difficult and expensive to remedy.  I will go into more detail in a future post on techniques I used and what has seen to work, but sufficed to say, the absolute best way to treat bed bugs is to get their early.

Bed bugs spread incredibly fast, so if you get a tenant making a complaint about them, jump on it immediately.  If you have a property manager and they take the issue lightly, make sure you force them to get serious about it.

by louento.pix from flickr

Bed bug bites are also nasty.  Though they have not been linked to spread of disease, they are itchy, ugly, and a often psychologically disturbing.  Usually it looks like a red rash, but can take several days to show up.

No kidding, jump on these little guys the moment you hear about them.  It will save you a lot of time, money, and heartache.  Remedies are costly: lost rent from tenants who move out hurts, and they spread very fast due to their reproduction cycle.  Don’t give them the chance…

Posted in Apartments, Tenants | 1 Comment

Where in the HELL have you been?

Posted on October 17, 2011 by Mike

I’m sure you are asking this question if you are still following my blog…

Long story short, a lot of crazy stuff has gone on which I was not able to share at the time for various reasons (but will in the coming weeks).  Now that things have wrapped up, I can get back to sharing these details with ya’ll!

A preview of my upcoming comments:

  • Bed Bugs!!!
  • Dealing with Banks
  • Unique and Crazy Tenants
  • Buying MORE Real Estate in this Awful Market?
  • And many more…

 

I did notice that I had a lot of traffic over the last year, so I felt it was important to come back and share all the great, crazy, and truly awful experiences I have gone through.  Thanks for your patience. :)

Posted in Investment Strategy, Personal Life | Leave a comment

Get Started Early

Posted on January 1, 2010 by Mike

from flickr by angietorres

It’s a new year, do you have your goals set?  You should.  You don’t want to waste a single moment of time not achieving what you can for this year.  It’s never too early to start.

Last year was a doozy.  The economic difficulties threw a major wrench in most folks plans.  It was all they could do to survive.  Survival instinct kicked in and companies and businesses scattered away from investing.  Loans could not be found, apartments were stuck in receivership with banks unsure what to do.  Despite not being able to close a large transaction this year, I was able to build a solid team of folks in the states we are investing.  Building those business relationships ensures the best for us in 2010.

2009 threw a lot of curve balls this year.  Fortunately, my companies were able to stay on their feet.  This bodes well for us, as many other individuals were unfortunately floored.  While many will spend 2010 getting back on their feet, I plan on pushing heavily forward with my investments.

If you don’t have your goals set, set them quickly.  We have precious little time on this earth and the sooner you achieve your goals, the sooner you can enjoy the results!

Posted in Motivation, Personal Life | Leave a comment