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REAL ESTATE Finding Apartment Deals

SteveO

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This post is intended to help those that are in the hunt for apartment buildings. I consider the market for properties in the 5-19 unit range to be in the "challenged" zone so this is really geared for the 20 unit and up range. While this method will still work for 10 units, it starts to get back into the typical MLS and less specialized at some point.

There is also an assumption that you have done all the homework required to determine a location. You are now ready to move forward in the search for a building to purchase.

Contacts are important. You will need a good mortgage broker or bank on your side. Insurance is critical as well. Property management will make or break your investment and can play a vital role in the due diligence portion of your purchase.

Finding agents (that's right, agents plural) that will bring deals to you is key. It sounds easy but in reality this is a major challenge. The nuturing of these relationships will pay off if you do it right.

The first step is to identify them. A good place to start is on www.loopnet.com. You can look up your desired location and see which agents and brokerage houses have listings. This is where is gets tough. You want to find an agent that is hungry enough to work with you but experienced and well connected enough to get you access to the good deals.

My first phone call is usually to someone in the agency that has a number of listings. I call all of the different brokerage houses that appear to specialize in apartments though. The conversation is around good mortgage brokers and property management companies. These are the people that can tell me who the good agents to work with are.

I have gone into markets and called agents only to get little response and lots of frustration. The current market conditions will dictate how much attention you will get. Fortunately, if you are looking to purchase in a soft market, the agents will tend to be more amiable to the buyers. This does not mean you will get attention without nurturing your contacts though.

If you can put yourself into the heads of these agents it helps to understand where they are coming from. An agent only gets paid when a deal is completed. If there are more buyers than sellers, the agents are going to be spending their time trying to court sellers. These deals will be taken to their tried and true buyers. This is probably not a good time for you to buy anyway.

Even if the table is turned and there is an imbalance with more sellers, the agents will not spend time with you based on a quick phone call. They get a lot of calls from people that are feeling a market out. Everyone tells them they are ready to buy. You need to convince them that you are ready.

Getting yourself access to the deals before they are mass marketed is important. Agents will tend to call the people that they know are ready to buy and are proven performers in the purchase process. Getting yourself on the top of the list is difficult to do. Until the relationship is established, steady contact needs to be kept. If they are not calling you with deals, you need to call them on a regular basis.

Loopnet is a great website with a lot of information. Most of the properties listed have been there for a fairly long period of time and are overpriced. Occasionally, there is a way to work these into deals. Keep in touch with the listing agents. Mention that you would be interested in talking to them if they get motivated with time. I kept in touch with an agent on a property for a year before we came to a deal. I ended up paying 20% less than they originally wanted.

Some of the best deals never make it to Loopnet. They are communicated through the circles and sold prior to a mass marketing effort. Some of the brokerages require that a all of the listings in their service go through the full process. These will end up on Loopnet. If the property is a deal, it will likely have a number of people bidding on it. I will usually (not always) try to stay out of the mix of buyers but may come back in once the original flurry is over.

If the deal is really good, you may need to join the fray. Then an offer needs to be made that may raise you above the level of the other potential buyers. As a starter, you can forgo the financing contingency and shorten the due diligence process. this is risky but can be minimized by working with the lender at an early stage of the game. If you have 3 weeks for the inspection, you need to get a fairly strong committment from the lender (be careful here, there can be a lot of deception). If not, dump the deal. I have actually gone so far as to offer a non-refundable deposit on the day the contract is signed.

Speaking of dumping deals. You don't want to do this too often. The sales agent should understand if you have a good reason to let a deal go prior to the expiration of the inspection period. They will have another opinion if you tie up deals and then bail out for no apparent reason. This is a quick way to lose the reputation and relationship that you worked so hard to establish in the first place.
 

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yveskleinsky

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What do you mean by "properties from 5-19 units are in the challenged zone"?

You were also talking about asking around about good property mgrts. When you guys take on a 20+ unit building and are looking for property mgrs, do you hire a company who represents numerous properties, or do you prefer to hire on-site managers?

Thanks for the run down. Good info as usual!
 

snowbank

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I'd love to invest in apartment buildings, but by far the hardest part for me would be knowing how to find a property management company that I can trust to do what I need them to do, and trust them in general. How hard was it initially for you to find a trusted company who would manage your properties for you? I assume this isn't as easy if someone's buying a 20 unit instead of a 200 unit. How do you find a company that will work hard for you even if you're buying small.
 
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SteveO

SteveO

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What do you mean by "properties from 5-19 units are in the challenged zone"?
...or the black hole, or no man's land, or well, you get the point... :smx6:

There are a number of reasons with the first being economies of scale.

Who will manage these? If the answer is you, then my process is out the window. Unless you live in one of the areas that is poised for appreciation. The economy of scale here is the fact that you will not be able to afford someone to be on the property at all times for leasing activity.

Financing is limited. Local banks are the primary source of loans for this size of a building. There are still plenty of costs associated with these smaller loans and the rates will be higher than you can find through the larger apartment lenders.

There is also a lot of competition for these types of purchases. Usually local buyers with some experience.

You were also talking about asking around about good property mgrts. When you guys take on a 20+ unit building and are looking for property mgrs, do you hire a company who represents numerous properties, or do you prefer to hire on-site managers?
Both or either. It really depends. I had a 21 unit building and hired an all-in-one manager and maintenance. I did all the financials and made regular trips to the property. At the same time I had a property that was out of state and had a professional management company running it. I also had a 52 unit with 2 employees for leasing and maintenance. It was a bit overstaffed but that is better than understaffed.

Ideally, you want to find an excellent management company that is working to make you money. This is very difficult to find!
 
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SteveO

SteveO

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I'd love to invest in apartment buildings, but by far the hardest part for me would be knowing how to find a property management company that I can trust to do what I need them to do, and trust them in general. How hard was it initially for you to find a trusted company who would manage your properties for you? I assume this isn't as easy if someone's buying a 20 unit instead of a 200 unit. How do you find a company that will work hard for you even if you're buying small.

Like anything, you will need to understand what you are looking for as the better managers tend to deal with the larger properties. This does not mean that all larger management properties are good.

It is a major challenge and one reason that I am a fan of pooling money for these deals. Going with an experienced and trustworthy investment group could be the answer. :smxB:
 

Sid23

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It is a major challenge and one reason that I am a fan of pooling money for these deals.
Are you saying in your experience many markets are begging for a top-notch property management company that knows how to make them money? Could be an opportunity for someone...
 
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SteveO

SteveO

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Are you saying in your experience many markets are begging for a top-notch property management company that knows how to make them money? Could be an opportunity for someone...
Maybe, but I think there are easier ways. There are not a lot of excellent management companies because it is a difficult, low margin, and low reward business. They deal with constant complaints and issues from ALL sides.

I wouldn't do it. :bgh:
 

Sid23

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Maybe, but I think there are easier ways. There are not a lot of excellent management companies because it is a difficult, low margin, and low reward business. They deal with constant complaints and issues from ALL sides.

I wouldn't do it. :bgh:
I figured there was a good reason...

Steve - I'm meeting a potential partner on Sunday to discuss what he is hoping to do with apartments. I think he's got deep pockets and an inkling to invest in apartments. We'll see.
 

Russ H

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SteveO-

We were able to get a "black hole" (10 units, mostly studios) for $1.5M in '05. Cost to rebuild this particular building (10,000 ft2, 12' ceilings on the 1st floor, 11' ceilings on the second, 20' cathedral ceilings on the 3rd) is $2.5M.

And they even "threw in" a lot next to it worth $300K.

So I figure we bought the building for about 50% of what it would cost to build it today.

And it happened to be sitting on prime real estate (the above #s are for construction costs only, and do not count the cost of the land).

Thing is: It was losing money as an apt building.

And it would lose even more if we bought it at $1.2M ($1.5M minus the $300K lot).

So as you know, we're working on changing the use.

We've put 2+ years and over $500K into it so far.

Another year or two and $500K (or so) to go.

As rehabbers, we're somewhere between you and Kimber:

A bit faster than $1M in 13 years (we're generating ~$1M every 2 years).

But also a bit slower than you.

I'm OK with that. It gets us where we want to go.

AND . . .

We're having fun! :banana::banana:

-Russ H.
 
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SteveO

SteveO

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SteveO-

We were able to get a "black hole" (10 units, mostly studios)
-Russ H.
What?!? Clearly you are not using my process so it won't work... :smash:

You mean there are other ways to make a buck? Who knew? :icon_super:
 

snowbank

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Like anything, you will need to understand what you are looking for as the better managers tend to deal with the larger properties. This does not mean that all larger management properties are good.

It is a major challenge and one reason that I am a fan of pooling money for these deals. Going with an experienced and trustworthy investment group could be the answer. :smxB:
where are the best places to find and compare trustworthy investment groups?

i've always been hesitant to invest in other people's deals without a lot of control. i was ripped off last year on a deal, so am even more hesitant now.
 

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Adam

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where are the best places to find and compare trustworthy investment groups?

i've always been hesitant to invest in other people's deals without a lot of control. i was ripped off last year on a deal, so am even more hesitant now.
Fortunately or unfortunately, depending on how you look at it, most of the smaller (<$50M in buying power) investment groups are found by networking. I work with a couple small groups in my area and the best way to get to know them is by seeing how they operate. Any good investment group should be able to give you some good references; agents, lenders, appraisers, title companies, other investors, etc. Actually, the title company/closer usually know the best because they are the ones that see how smooth the closing goes.
 

JesseO

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Thanks Steve for yet another post. So often I forget to give you and other rep speed for good posts and especially good replies to my questions. You are very appreciated here =)
 

hawaiiloans

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Great information.

Say you've found a deal, and now you need funding. How would you obtain funding besides banks? I've always wanted to put together a commercial deal, but due to lack of capital I can't do this myself. If I put together a group of investors, would that be worthwhile? How would I do this?

Or am I rushing too far ahead? Because of the situation should I purchase a vacant building, and then work to fill it? Being as I am a mortgage broker I can give myself the best deal, so I should have no problem with that. Thanks.
 
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SteveO

SteveO

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Say you've found a deal, and now you need funding. How would you obtain funding besides banks? I've always wanted to put together a commercial deal, but due to lack of capital I can't do this myself. If I put together a group of investors, would that be worthwhile? How would I do this?

Or am I rushing too far ahead? Because of the situation should I purchase a vacant building, and then work to fill it? Being as I am a mortgage broker I can give myself the best deal, so I should have no problem with that. Thanks.
Capital is critical. The ability to find funding and investors is always so much easier when you have some experience. You can make up for this by finding incredible deals. Take those deals to the local real estate investment group and offer it up for investors.

There is a lot of work that goes into the structure of a deal but this is not the first part to learn. The initial goal is to develop an investment plan that is going to make money.
 

Bilgefisher

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Steve,
in your success story you mentioned that you managed your first property. (8 unit I believe). Has that experience helped you when finding and judging good property managers?

Also, you mentioned using a tenant in common for your second deal.(24 unit?) How did you go about finding partners for that deal?
 
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SteveO

SteveO

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I self managed the first 4-plex. The TIC deal that I participated in next was 46 units. It was formed by another group.

Since most of my properties were not in the same location that I lived in, I hired managers and maintenance staff through a company that I started strictly for management of my own properties. When the company got to 25 employees, I tried to hire someone to run it so I could step out. This proved to be very challenging.

I decided to go with professional management and my life has been so much better since then.

The apartment sales agents see the operations of a lot of deals. I asked a number of them for recommendations. A couple came highly recommended so I looked into the management structure of each to see who exactly would be overseeing the properties. I also asked for a list of customer references. One company gave me a full list of all the current clients and I called all of them. I liked their management structure because there were few layers. I still call the owner to get any updates and he can frequently answer my questions immediately.

So, yes, the fact that I self managed for a while was helpful. Constantly evaluating apartments for purchase gives a far greater insight though. The management can get in the way of this and other important tasks. At some point you need to figure out how to economically move past the management mode.
 

snowbank

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Fortunately or unfortunately, depending on how you look at it, most of the smaller (<$50M in buying power) investment groups are found by networking. I work with a couple small groups in my area and the best way to get to know them is by seeing how they operate. Any good investment group should be able to give you some good references; agents, lenders, appraisers, title companies, other investors, etc. Actually, the title company/closer usually know the best because they are the ones that see how smooth the closing goes.
my main concern is how to find a trustworthy one. talking with people they work with, they aren't going to tell you they are untrustworthy. the person i was ripped off from last year no one said they were untrustworthy, because they all worked with/for them. something where i don't know the business inside and out, i think it'd be very hard to protect myself from being ripped off since i may not know if something's shady until too late in the game. how do you avoid this? seems like a catch 22- if i knew the business inside and out i could do apartment deals by myself, if i don't, i would need to trust others and invest with them, but without having control/knowledge, you now have the potential to get taken.
 
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SteveO

SteveO

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Suggestions:

  • Read and understand all offering information
  • Review due diligence information
  • Follow the track record
  • Check references
  • Have your attorney review all documents and setup
 

Sid23

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Steve,

Other than throwing darts at a map, how did you decide which markets to research (based on Volluci's criteria) in your beginning steps?

Thanks,
Sean

PS. I understand what I'm "looking for" in a given market, I'm just not sure how to narrow down the 200+ US cities to begin my research.
 
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SteveO

SteveO

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That is the tough part Sean. My simplified model that I am willing to talk about is:

I reduce the search to areas that are experiencing population growth. Strong employment usually goes hand-in-hand. Some opportunities may be missed but the major players will be in the mix.

Look for high vacancy that should begin trending down. Overbuilding or large, one time employment losses can be major contributors to this cause. If there is strong data suggesting that new jobs will be coming to the area, there may be some opportunity.

Obviously there are other factors that will need to be considered such as, cost per unit compared to replacement cost, barriers to entry, area desirability, etc... The major factors are simply around the reduction of vacancy and rent growth. You don't need to complicate it too much.

My model is proprietary though.
 

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Sid23

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Steve - Thanks for the answer. Much appreciated.
 

randallg99

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Thanks for an excellent post here... have you used costar.com? any advantage/disadvantage vs. loopnet?
 
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SteveO

SteveO

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I haven't used costar. I really don't use loopnet for much more than helping me to identify who the major players are in a market. Even then, after a couple of calls, I have a good list going.
 

S928

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Great article, needs to be bumped.

:smxA:
 
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SteveO

SteveO

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I felt that this post could use a bump.

I had a conversation with someone recently about some of the basic rules of thumb when hunting for deals. The question was whether the 100, 10, 3, 1 rule applies to apartments. The answer that I gave was yes. You will need to look at a lot of properties and make a number of offers to land a deal.

In reality the answer should be maybe....

Where this differs is that the market may not have 100 properties (obviously the numbers are loosely interpreted) to look at. Time may be a factor as well since some buying opportunities may have a limited period.

The market will dictate how many deals are out there to be had. A buying opportunity for a given market may yield many deals in a time period. There may be other times when there are no deals to be had. You may scour the market and turn up nothing at all!

The real answer lies in the market opportunities at the time.
 

goobers753

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Hey steve i was wondering how long would it take to sale an apartment building do you think ca is still good for investment for apartment buildings?
 
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SteveO

SteveO

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bump for @Arun Siva

This is a very old post but still relevant in my opinion.
 

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