Assumable Mortgage (high Prepay Penalty), Lots Of Equity, Owner Needs Cash...Any Ideas?
I've found a great deal on a mismanaged property owned by out of state owner who wants out. The financial Rundown is at the bottom.
After 50K of maintenance and better management it should cash flow about 12K per month and have about $500K (on the low end) of equity in it.
The owner has a 1st mortgage in place for 1,950,000 (7.75%, 6.5 year balloon, and a VERY heavy prepay penalty)
He wants cash for the other $850K.
I've got private investors that could come up with about $500K if they were all in on it.
I need to come up with another 350K or figure out another way to get it done...
Owner would like to get cash to do a 1031 and isn't too keen on carrying any or part of it.
So here's my question(s):
Are there any 3rd Party lenders that will write a wrap-around mortgage or high LTV 2nds?
Are there any graceful ways to get around a prepayment penalty?
Is there any way to get the loan in place re-written for a larger amount (in this case $3-400K more) and leave it in place?
I'd love to hear any other ideas that you guys might have.
84 Units
Price: $2.8M
GSI: $607K
GOI: $504K (high vacancies and expenses right now)
Current NOI: $252K
Projected NOI: $324K (estimating very low)
Defered Maintenance: $50K
Current loan: 7.75% fixed, 6.5 years left on note (25 year am.)
Expenses & Vacancy: 50% (high estimation)
Cash Flow (Monthly): 1-12K (1K at purchase, $12,000
after improved management)
GRM: 4.6
Cap (at purchase) 11%
Cap (after renovations) 14%
There are secondary lenders that will do what you want, but higher interest rates. They usually require a credit score of 780 or higher.
If it were me I would pick apart the property for its value and see what else I could get loans on, equipment loans, if any mobiles are owned get single loans for those, build a smaller apartment building on site, laundry room or a convenience store (construction loan), etc etc.
Also dont forget that the prepayment penalty is negotiable, and/or could go away if you use the same lender to get new financing. If there has been appreciation since he got the loan, this shouldnt be a problem.
On the flipside, Given the bad condition of the property and the bad financials, you may just want to buy his note out and foreclose since he obviously will not be able to make the payments for very much longer. Or make a deal with the lender that you will take over the loan and catch them up on payments when (not if) the foreclosure starts.
Good Luck,
Kyle
So-- the 24 Unit wasnt enough huh Hibby... hahaha.. Just Kiddin.. Congrats on the find. I hope it works our for you, and also interested in what other ideas the Gurus have for ya... :-o
be careful of pooling multiple investors funds, as you would be in violation of SEC regulations by offering securities that do not follow their codes and regs.
If you do it, you'll need a creative attorney who can work their magic.
The risk is yours...
Ask him to take out an equity line for the $350K (maybe a little more, so you can get some cash too) he wants and you can repay that too.
Good thoughts. Here is a bit more info.
His payments are up to date, and I don't think there's much risk of him foreclosing. Based on the current asking price, he's got 850K in equity. Monthly mortgage pmt of $14,300 per month.
there are 2 parcels...one with nothing on it (5 acres total are included in the deal). Could I get a construction loan to do something on that parcel (like build a mini storage) and then use it for something else? I think that's what was recommended, if I understood you right.
davehays, thanks for your advice. As I understand, I have to be careful when soliciting for partners, but it's a different story if they come to me or if we have a relationship already. Am I right?
I've also considered making him a partner in the deal somehow, so that he gets some of the cashflows and appreciation from the deal.
I'd love to hear more thoughts if you've got em.
The simple answer to your question-- yes there are commercial lenders who will wrap the first or (more likely) make a 2nd mortgage. The rate will be higher.
The first mortgage holder may be softer than you think. Doesn't hurt to ask them. Although in a relatively low interest rate market their willingness to get paid off is low because they will not be able to match the rate. How much is the prepayment penalty? A hot-shot attorney who can review that document to find some leverage is probably a good investment.
Your prior relationship with the investors and whether they found you or not is probably irrelevant. The penalty for trading in securities in violation of the Securities and Exchange act is ususally around 5 years in the Federal penitentary. I have a good friend who will get out in 60 days after 44 months and he raised a lot less money than you are talking about. Limited partnership agreements which would cover your but ususally run around $15,000 in legal fees.
I'd also look hard at your renovation budget. $50,000 isn't going to go very far in a building big enough to be worth $2.7 million in less than stellar condiition.
Does the current first attach to both parcels? If not you've got a "hidden asset" that you might finance to come up with some part of the money you need. If not you might get the lender to release just that lot for a relatively smaller fee than the prepayment penalty since the bulk of the value is in the building (and its income) and their LTV on just the building is probably still fine.
Mark
Mark,
That's a great idea to see if we can use the parcel of raw land. I hadn't thought of that.
The prepayment penalty is around $600K. Pretty steep.
This question probably merits a new topic, but I'll ask it here for now. What do I need to watch out for to stay in line with the Securities and Exchange act? I'll do some reading and see what I can find out on my own. What are the major "do's and dont's" when i comes to the SEC?
The necessary repairs are primarily cosmetic. New paint. Landscping. Patch some cement. The main thing is that it's been sustaining 20-25% vacancy rate.
Thanks for your comments.
Well the essence of the history of the situation is as follows,
ini 1933 Congress passed the Securities Exchange Act. This established the SEC and made it illegal to trade in certain kinds of securities without first registering them with the SEC.
The objection at the time was that these SEC registrations would be expensive and Congress really didn't want to make it necessary for every corporation with two or three guys as shareholders to have to register with the SEC. So they established an "exception". Small, privately placed securities did not have to be registered and would not be regulated by the SEC.
So the "rule" became this, if you did not have more than 35 partners and you did not generally solicit the public then you could avoid registration. If, however, you took more than 35 investors or you generally solicited the public then SEC registration was necessary. Below this threshold the States are free to regulate the exchange of securities as they see fit. Such state regulations are known as "blue sky laws" because some senator, in the debate over the SEC act of 1933 stated that the states could regulate such small securites " to the blue skys" if they wished, that the purpose of the SEC was to regulate only publicly traded securities.
So, when you acept an investor you run the risk of violating both the Federal SEC rule and the State statute. This is not a small matter. I have a buddy who is 60 days away from the end of his 4 years plus as a guest of the government in Terre Haute Indiana at the Federal Prison Camp there.
I thought I remebembered someone in this thread (but it must have been another one) recomending a newspaper ad as a way of raising money. I cannot think of a method more certain to qualify as "generally soliciting the public".
The essence of the answer to your question, Hibby, (how can you stay out of trouble with the SEC?) Is this, never loose anybody else's money. If you do, and if they complain to the SEC or your state securities commission the penalties may be severe because these rules are sufficiently complex that you are almost certainly in violation.
Sorry to be so long winded in response, but you did ask, both here and in a private message.
Mark
Quote:
On 2004-04-01 14:58, hibby76 wrote:
Mark,
That's a great idea to see if we can use the parcel of raw land. I hadn't thought of that.
The prepayment penalty is around $600K. Pretty steep.
This question probably merits a new topic, but I'll ask it here for now. What do I need to watch out for to stay in line with the Securities and Exchange act? I'll do some reading and see what I can find out on my own. What are the major "do's and dont's" when i comes to the SEC?
The necessary repairs are primarily cosmetic. New paint. Landscping. Patch some cement. The main thing is that it's been sustaining 20-25% vacancy rate.
Thanks for your comments.
Mark,
Thanks once again with your response. I've been doing some reading on the SEC Act, but I generally prefer the 'Cliffs Notes' version over the legal jargon.
From my understanding there is no securities violation if funds are not pooled. In other words, if you get funds from someone and use it to put a first mortgage, second mortgage or third mortgage etc you are fine.