“Carlos, we should be buying only less than note amount deals”

October 31, 2008

Today, what was supposed to be a short phone call to a partner became a conference call on “less than note amount deals”. Well, I think that my day to day has a lot of tips to offer to those interested in apartment buildings.

First things first, do you know what is a less than note amount deal? Let’s say you are buying a 50 unit apartment building and the asking price is $1,7MM but the current note (purchase price – down payment = note) is $2MM, this property has a lower asking price than the note or mortgage, thus this would be a less than note amount deal.

Many people know that one of my specialties is to find bank owned deals and negotiate them even more. However, just because you found a property whose asking price is lower than the note does not mean you have a good deal. You should be careful. As a matter of fact, do not use that as your only “strategy” to buy a property because it can be deceiving.

Right now I can name and give the details of 2 apartment complexes, bank owned deals, that you can buy for less than the mortgage amount. One you can even buy for almost $730,000 less. Does that make them a good deal? No! It always depends on more factors such as the following approaches:

1) Replacement (the cost of rebuilding that property in today’s market)

2) Income (how much revenue that property is producing, our net operating income will give us the value)

3) Sales (what are other properties similar to this one selling for?)

Interestingly enough I was asked this same question while speaking at a seminar in Las Vegas.

Be cautious because the market today has changed a lot from what it was 3 to 5 years ago. Back then, both East and West coast were “booming” with real estate and finance was much easier to obtain. A lot of that funds went to places like Texas where investors saw an opportunity to buy bigger and better deals. However, many people bought properties based on speculation and just “skipped” those 3 approaches mentioned. (the concept of trying to put California inside of Texas and vice-versa). That said, since many investors overpaid, even buying a property based on the note can be a mistake.

My tip to you: Usually I like looking at deals that I can buy for less than the tax district value. It’s a very safe approach since the appraisal for that property will be coming at least 5% higher than that tax district value (being very conservative). In addition, I will go ahead and do a tax reassessment to reduce my property taxes and increase my return.

Another thing you need to keep in mind about bank owned properties is the “WHY”, why is that a bank owned property? Lot’s of bond deals are coming due. These are the ones I really stay away from and many of them are very nice properties. The amount of time it will take me to “clean” the property, take that stigma out of a “tough” apartment community and make it a good place would be too much of an opportunity cost.

Just do your homework and keep constanly learning. Remember that saying, “not everything that shine is gold”; well, it is true!

Carlos Vaz – The Multi-Family Mentor

Share and Enjoy: