Lease W. Option To Buy A Multifamily Building
Does anyone have any experience with a lease option to buy multifamily building/s? It was my long time opinion that with proper targeting this approach may particularly work fine on hard to sell, dilapidated, code violation encumbered long term owned building/s in a slow or slowing-down hot-markets such So. California is today and will be even more tomorow. With extra crisp knowledge of local rent control low, construction and management, this can be a killer strategy.
With proper contract closes and addendums in place, lease w. option to buy can be an excellent way to assume control, improve income (CAP rate) then if you chose so, you can flip it to a new buyer while avoiding down payment expenditure, postponing closing cost and monthly payment of newly assessed property taxes that would otherwise substantialy eate in andreduce your cash flow, if you buy it in traditional cash to new loan transaction.
If you tried this strategy and it worked for you or if you think there is a downside or unforeseen hurdle I failed to mention, please elaborate.
Thanks !
[ Edited by REOCON on Date 06/11/2006 ]
Hi Waylon,
Look hard at bumping your deductible to higher levels to offset part (at least) of the increase. Unfortunately, as you state, it is the market, especially in the coastal states. This article may help as you look for the best value (not just the lowest price):
http://www.thecreativeinvestor.com/commercial/modules.php?name=Articles&file=article&mode=nested&articleid=438#3298
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Yeah, if you bump your deductible up you can often save at least 10% and sometimes a lot more. I just increased mine from $1k to $2,500 and the price went down about 15%.
Great idea! Thanks for the responses. The current provider is checking into adjusting the deductible for a better rate. The biggest problem is the building needs Windstorm coverage due to the proximity to the coast. Many underwriters are canceling policies left and right and not writing any new Windstorm policies. Several companies have pulled out of FL completely. I am happy to get insurance (Man, that sounds so weird!) but I’m always looking for way to tweak the business plan when large increases come my way. Still shopping on the side but I hope they come back with a better deal.
They agent should have access to the "wind plan", or "pool" to obtain that part of your coverage...
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Well that did not work; I received a call back from the agent stating the underwriter would not change any portions of the deductible. 2% Windstorm and only $500 for all other claims. I wished they increase the $500 amount and bump up the Windstorm percentage to maybe 4-5%. They will not tweak the policy and say it is the best deal they can offer. I do have many leads out, but I get the sinking feeling I will have to deal with the new rate.
The current provider again infers I should be happy to have a policy at all. It is a sad thought but if FL continues to get hammered by Hurricanes and if premiums continue to jump each year at this rate, I will be giving up on this venture. Location, Location, Location...My county has a big red X on it when comes to underwriting. A desirable place to live that comes with an outrageous insurance premiums and it is not even beachside or near the water.
To offset the new cost I will most likely need to raise the rents. This is not what I want to do but my hands are tied. The long term question is will my rents be able to keep up with the ever increasing insurance? Maybe I should begin looking into places like AZ where Mother Nature is kind.
King,
I agree. You probably should start considering a $25,000 these days...
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Finally some good news, well I hope so, I found out that, yes, my current provider is a Surplus type agent. Hence the reason they will not adjust any terms for a better price. I was able to find another insurer that is not a surplus vendor (regular market type) and will tweak rates, terms, deductibles, etc. The offered rate is less than half of what the Surplus Co. offered although my windstorm deduct goes from 2% to 5% and the other deductibles are significantly higher as well.
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Here is the catch (there is always one) the company is "B" rated as opposed to the Surplus one that is "A" rated. The company is Bankers Insurance, I hope they do not mind if I post the actual companies name, I mean no disrespect, I have nothing negative to say about them, I just want to know if anyone has dealt with this company and what are the pitfalls of a "B" rated company. The agent said the state has their back if they can not reimburse the policy holders (go bankrupt). Any thoughts on "B" status companies? I have always heard get the best insurance you can get, but I am sure I would not submit a claim unless we get hit by a Hurricane or something really bad happens (fire, lawsuit, etc.) I like to be off the radar when it comes to the claims department of any insurance company.
Waylon,
Assuming the "B" you indicated is an AM Best rating, this info should help considerably:
http://www.ambest.com/ratings/pcbirpreface.pdf
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Consider, however, the "catastrophes" are when the rating becomes more valuable to a policyholder...
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You should focus on the immediate neighborhood. You can get large variation in rental performance in a relatively small area.
Check with property managers to see what they think of the area as rental. You might even have a friend pose as a tenant looking to rent in the area. I posed as a tenant to an on site manager on a building I was looking to purchase. After seeing one unit I asked if there were others and was told there were quite a few others and that I could get two free months because the owner was trying to fill the building. You should also check for "For Rent" signs. You should also be able to gauge if $700-$750 is a reasonable range.