Safari Steve the Apartment Guy:

Learning from each transaction-

There is a lot of serendipity in every real estate deal, and a lot to learn. A 2001 memory…

My first multi-unit transaction was in 2001. I had been selling homes for two years while studying the apartment market, not to mention getting up the courage to make my first apartment building offer. Apartment building owners are a tough, smart group to deal with. I started checking out the L.A. Times “Income Property” section of the classified ads. When this property ad “20 Units $360,000 call….” showed up, I immediately drove over to a frightening looking one story building in showing signs of neglect. The building was located in an Industrial area, none of the tenants spoke English, and you could see stacks of outhouses from our front units, not to mention an auto repair shop right next door.

We made a full price offer of $360,000 on the building the next day: The price worked out to $18,000 per door. I was inexperienced about commercial financing at the time, and in the offer we asked the seller to carry back a 20% second TD, thinking we could put 15% down and get a 65% loan conventional or hard money loan. Our offer was accepted. Nervously, I went to three of my friends and they each kicked in $18,500, totaling $55,500, equaling the 15% down. Talk about leverage!

After an offer is accepted the buyer has the right, and obligation to do a physical inspection. This is sometimes called “The second bite of the apple,” and it is this second inspection where you ask the seller for repair money. Our deal was so good we did not ask. We did a unit by unit walk thru led by the buildings on site manager. The building was full which I took as a good sign at the time. During the inspection we found the tenants had rat holes in the walls and pictures of rats in their units. One tenant had a picture of a rat by her sleeping daughter! 

Although the building appeared full during our walk thru inspection, it turned out the seller thought the building was running at a 50% vacancy. His on – site manager was “creaming the rents” and not turning in all the money each month. I would guess he was “creaming” over $3,000 per month the seller never saw. The lesson was you have to visit your buildings and “trust but verify” as Ronald Reagan used to say.

I did not realize or pick up on the desperation of the seller at that time. I can still remember negotiating with the seller and his realtor in his panoramic view 25th floor office in Santa Monica. I was outclassed by these smooth talking operators at the time.  They were using real estate terms I barely understood. I remembered the old saying about not speaking so they would assume I was smarter than I was. I asked for a typical termite inspection assuming that the seller would pay for any repairs, thinking, in my naiveté, they would have to bring the building up to snuff. If a termite inspection finds dry rot around the toilets you can have the seller repair. The seller agreed to the termite report, but cleverly had the report done “with the exception of the toilets.” I am still not sure how he pulled that off, but keep it in mind when you order a termite report.

When you purchase a building your lender requires a current rent roll, plus 2 years of income statements.  As you can guess, no bank will loan on a 50% vacancy rate. We went back to the seller and asked him to carry a note. He ended up carrying an 85% First Trust Deed. Almost unheard of! We saved the appraisal fee and the loan commitment fee, and we made the note for 4 years. 7% interest only year one, 8% year two and so on.

Taking over: The tenants were a pretty tough breed. I was too intimidated to even attempt to manage the building on my own. Funny enough, I currently manage 54 units. I knew of a good management company and I met the owner at the property for a walk thru. She was one tough cookie. Call me if you need the name of a great management company in the South bay area of Los Angeles. Anyway, Sherrie agreed to manage our building. At the time I think rents were $365 per month for our 500 Sq.Ft 1 bedroom units. Sherrie ran the building for a year with no dividends, but we did not have to put in any funds either. She was able to do all the repairs out of cash flow.

I will discuss the operation and the $1,000,000+ sale of the building and the sale in my next blog.