MSP Quarterly: 4-Plex Sales

August 30, 2011
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Minneapolis 4-Plex Sales – Distressed Sales are still the majority, but are rapidly decreasing in the market

Investors, banks and owners are trying to understand how the multifamily market is doing in 2011 and where the multifamily market is heading.  This post is the first in a series where InvestProp will review and comment on sales data of various sized multifamily properties in Minneapolis and St. Paul.

In this post, InvestProp takes a look at 4-plex sales in Minneapolis since 2009.  In order to simplify matters we picked a value of $200,000.  Any sale below was classified as a distressed sale. All sales above $200,000 were assumed to be an arms-length transaction.  While exceptions to this rule exist, InvestProp believes it is a good short hand way to divvy up the data.

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You can see from the graph above that the number of distressed sales per quarter peaked in 2009.  The graph was formed from sales reports that were taken from Northstar MLS and broken down by quarter.  It was subdivided by sales/quarter and distressed sales/quarter.  The graph shows us that the number of sales decreased in 2010 and has remained around the 13-15 4-plex units sold/quarter.

The alarming number is the amount of sales that have been distressed.  Quarter 4 of 2010 distressed properties were over 90% of the sales in the quarter.  The number has been consistently going down and was at 67% (the lowest percentage on the graph) in Quarter 2 of 2011.  Another good sign can be seen on the graph below that shows us the current 4-plex properties for sale.  This information from Northstar MLS tells us that of the 32 4-plex properties currently listed for sale, only 31% are distressed.  This is the lowest number recorded since January 2009.

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Please comment and let InvestProp know what you think.

Next Up:  Minneapolis 2-3 Unit Sales.

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InvestProp U: Section 8

August 16, 2011
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Volume 6

If you own multifamily property in the Twin Cities Metro area and have been contacted for the first time by a section 8 participant expressing an interest in a rental unit, you need to read up on Section 8 Voucher Housing.  Details vary by locality, which can be found on the HousingLink interactive map that leads to location specific information.  The Section 8 Program is a three-way partnership between tenants, property owners, and the HRA.  The household tenant first receives a Section 8 voucher from a housing authority.  The household will pay 30-40% of their income towards the rent, and the local housing authority pays the difference.  The program offers the owner a guaranteed portion of rent paid at the beginning of each month by the HRA.

The following steps can be followed to begin renting to a Section 8 participant after they have expressed interest in an available unit.  After the landlord screens prospective tenants, they will complete the “Request for Tenancy Approval” (RTA) form.  This then allows the HRA to “approve” rent and tenancy.  Following approval, a HRA or City inspector will perform a housing quality standards inspection.  After the inspection, the owner receives leasing and contract documents from the HRA.  When the documents are finalized, the HRA issues rent assistance payment to the owner.  This is guaranteed by the Housing Assistance Payment (HAP) contract.

As an owner/manager you might still have questions about affordable housing.  The Metropolitan Council website provides information, including a detailed specific Owner Handbook.  An owner may also list their vacancy at www.housinglink.org.

For more information by specific location:

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InvestProp U: Select a Location

August 8, 2011
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Volume 5

Select a Location

A deal on a small multifamily investment property located across town may seem too good to be true.  Well, that is just it, it might not be the property for you.  With small investment properties, the returns are much greater if you own and manage most of the property functions yourself, mow the lawn, lease the units, etc.  Thus, if you have to pay one month’s rent to a management company to lease a unit and also outsource all the basics, the property can easily go from cash flow positive and supporting your fishing budget, to cash flow negative and taking money away from your family budget.

If you can purchase a property in or near your own backyard, you will leave yourself open to more flexibility and oversight.  Even if you plan to hire a property management company, an investment property near your home or work allows you to swing by the property and “check-in” to see if the tenants are acting in order, if the property is free of trash, etc. It is always better you than the city or a neighbor to address livability issues.

In the end, it is all about your investment strategy.  Buyers need an investment strategy that details property location and property management.  InvestProp is happy to walk first time buyers and investors through these and many other realities of owning multifamily investment property.

 

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InvestProp U: Security Deposits

August 2, 2011
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Volume 4

Whether you own and operate multifamily property or have an interest to buy or sell multifamily property in Minnesota, it is wise to be knowledgeable about security deposits.

Minnesota Statute 504B.178 requires the landlord to hold all security deposits for tenants with non-compounded interest.  Since August 1, 2003, this has only been 1% annually, but in some instances, tenants pre-date August 1, 2003, and are owed 3% annually for any time prior to August 1, 2003.

If you own and operate multifamily property, you need to be aware of the law governing withholding and returning security deposits.  The State of Minnesota Housing Court has a great overview that can be found here.  There are very specific dates and processes that must be followed to be compliant with the law.  One practical note,  most money market accounts in 2011 generate much less than 1% in annual interest.  So, unless you are parking those deposits in a higher interest bearing account, you are losing money on the security deposits.  Some banks, like Bridgewater Bank have account options for their multifamily owner clients to address just this issue.

If you are selling multifamily property, don’t count your cash at closing until you know how much money will have to be transferred to the buyer at closing–all security deposits plus interest. You may withhold security deposits for un-paid rent, but you will also have to document this withholding in writing to the tenant (See  Minnesota Statutes 504B.178 Subd. 3b). The burden of proof to withhold security deposits is on the landlord, so don’t take this one lightly unless the evidence is clear–rent not paid, photos of witnessed damage, etc.

Practically speaking, buyers are not at all pleased to find out just before closing that they may not be receiving a chunk of security deposits at closing.  This is a delicate issue.  Talk to your broker to navigate this issue without last minute rough seas.

If you are buying multifamily property, security deposits on file are a big deal.  It is entirely feasible that you purchase a multifamily property and find out just before closing on the Settlement Statement that multiple tenants do not have security deposits on file or have forfeited their security deposit for non-payment of rent.  Not all brokers give buyers a heads up on this one, so be careful.  If you find out late in the game and were not informed as a buyer, negotiate. That said, I believe in the phrase, “Buyer Beware.”  Buyers can work with multifamily brokers to determine in due diligence whether or not there is a great deal of un-paid rent that will translate into seller withheld security deposits at closing.

After closing, you’ll need to keep track of these deposits, because they are just that, deposits.  When you go to sell the property, you will transfer security deposits plus interest to the buyer dating back to the first 1st of the month following the first month the tenant paid his or her security deposit.

 

 

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InvestProp U: Selecting a Broker

July 28, 2011
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Volume 3

Selecting the Correct Broker

Whether you own 2,000 apartment units, 200, 2, or 0, an investor has to be confident that their agent or broker is qualified to represent him or her on a given class, type, and size of property.  An investor’s first call should not be to a residential real estate agent or attorney.  The call should go to a qualified broker with multifamily experience.

The correct broker must possess a sophisticated understanding of financial and physical aspects of multifamily property.  This simple decision can make or break whether you  collect excess cash flow each month or year, or “feed” the property–spend money each month to keep the property operating as-is with little to no cash flow–roof or plumbing leaks, replacing a non-functioning boiler, legal costs to obtain possession from non-paying tenants, etc.

Part One:  Financial

The financial numbers for a given property–net operating income, cash on cash returns, return on investment, achievable income and expenses, capital expenditures, debt service, entry and exit capitalization rate, rent comps, etc. all matter.  If your agent or broker cannot model or underwrite a prospective investment property based upon these terms, and share with you his or her homework, you are working with the wrong person and company.   Time to say “sorry, but I am looking for someone more qualified.”  Moreover, if your agent or broker knows these terms, but does not work on multifamily investment properties, again you are working with the wrong person.  Believe it or not, agents and brokers have a tough time saying “No,” “No I do not do know how to properly underwrite an apartment building, but I know someone who can.”  Instead they say “yes” and your hard earned money that is put at risk, not theirs.

Part Two:  Physical

Simply put, apartment buildings and small multifamily properties have been built over decades and have had multiple owners who all operate and manage property differently.  A stucco, 1960s apartment building with small 550 SF 1 bedrooms with carpet and vinyl floors, vinyls “slider” windows, and modern plumbing and electrical has very little in common with a brick, classic pre-WWII apartment building with 1000 SF 3 bedrooms units with hardwood floors, large old double hung wood windows, and old electrical and plumbing that may have some settling issues due to its age.  All of the physical attributes of a property are at various stages of their useful life–from the boiler, to the windows, to the surface parking lot, to the plumbing.  It is your agent or broker’s job to look for and alert you to these items.  If discovered, he or she should recommend a  contractor to get capital estimates, ideally before you spend the time to make an offer to purchase the property.  In sum, even if your agent or broker can successfully model investment returns, if he or she does not or cannot account for necessary short term capital expenditures, all that modeled cash flow and return on investment may never be realized.

If you are interested in purchasing multifamily investment property, call InvestProp and let us demonstrate our experience and value.

 

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InvestProp U: Pre-Approved Financing

July 25, 2011
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Volume 2

If you are ready to submit an offer on a multifamily property, are not paying all cash, and don’t have a specific plan to finance the property, it is time you find a financing solution.   In today’s market, sellers of multifamily properties have no interest having their property tied up by a buyer if there is little chance the buyer can  close on the property.  As a broker, my job is to report back to the seller my recommendation on the overall strength of the offer.  The strength of the offer has as much to do with the capacity to close in all cash or successfully finance as it does the actual offering price.  To that end, prior to submitting an offer on a property, multifamily buyers need to have completed 1 of 3 options:

1)  Produce a bank statement with the full purchase price in cash,

2)  Produce a pre-approval letter by a local lender (i.e. Bridgewater Bank), or

3)  Produce a letter by a reputable multifamily mortgage broker who has reviewed the assets and liabilities of the buyer and in his/her professional opinion, believes the buyer is “bankable” or will be financed.

Other options include calls from personal financial advisers or personal bankers.  These options help, but are not as indicative of success as those with specific multifamily experience.

Last but not least, it matters whether or not the buyer plans to finance a property with 4 or less units (duplex, triplex, four-plex), or 5 or more apartment units in one building.  In either case, buyers can talk direct to a bank or talk to a mortgage broker.

Two good options for investors looking to finance multifamily properties with 5 or more units:

Non-aligned mortgage broker:  Jason Hardy of Welsh Companies 952.897.7893

Local multifamily lender:  Jeff Shellberg of Bridgewater Bank:  952.893.6868

Two good options for investors looking to finance duplex, triplex, and four-plex buildings are:

Non-aligned mortgage broker:  Bill Schwietz of Advisors Mortgage, 952.838.8749

Wells Fargo mortgage broker:  Dan Zufall of Wells Fargo, 612.251.8478.

 

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InvestProp U: Confirm Rent Roll Income

July 18, 2011
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Volume 1

Welcome to the first installment of InvestProp’s Minnesota Multifamily Monitor.  MMM will offer Minnesota apartment investors and owners real world buy and sell advice.  The Monitor will be published Monday of each week to be read in 5 minutes or less.

Tip #1:  Always Confirm the Income in a Rent Roll.

OK, so you or your broker have signed a confidentiality agreement and have obtained a rent roll from the Seller or the Seller’s broker for a specific apartment property.  Congratulations, good first step.  Your next step is to dump those rents into your spreadsheet or model, right?  Wrong.  You first need to know what the numbers do or do not represent.  They could be more misleading than helpful.  Here are a few tips:

1)  Determine the rent roll date. If the rent roll is even a few months old, who knows what rents are in-place now.  Ask for an updated rent roll dated after the most recent completed month.  This way, you can underwrite value based upon true and accurate “in-place” rents.

2)  Request a “Tenant Status Report” or “Aging Report.” This needs to be done in the Purchase Agreement (Look for a follow-up MMM to focus on purchase agreement clauses).  It seems counter-intuitive, but just because there are tenants in place does not mean the tenant has the capacity to continue to pay rent when and if you own the property.  The standard rent roll may not contain this information, so you may otherwise not have access to it.  It is entirely plausible to close on a property then find out multiple tenants cannot pay rent.  When this happens, you are not only out rent, but hundreds or thousands extra to re-take possession through housing court.  To make matters worse, the Seller may have kept the security deposit at closing, and you are negative cash flow month 1. Ouch!

3)  Request a Certified Rent Roll.  This request also needs to occur in the Purchase Agreement.   With a Certified Rent Roll, a corporate officer, individual, or finance professional will have to sign and state that under penalty of perjury, the rent roll is true and accurate.  This is the safe way to go.  Make sure you or your broker ask for it every time.

That is it.  Let me know what you think.  Offer your comments here.

Best.

–Brad Schaeppi

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SOLD: 24 unit apartment building in Mound, Minnesota

July 18, 2011
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In June 2011, Brad Schaeppi successfully brokered the sale of Langdon Lake Apartments in Mound, MN with George Zeller of Welsh Companies.  The Property transacted for $1,190,000 (or just under $50,000/unit) to a first time local buyer all-cash.  Contact Brad Schaeppi directly for more detail.  The transaction was arms-length and on the open market.

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SOLD: 18 Unit South Minneapolis Apartment Building

July 18, 2011
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The AntonoffIn May 2011, Brad Schaeppi brokered the sale of the Antonoff, an 18 unit apartment building in South Minneapolis.  The property sold for $780,000 or $43,333 per unit.  The buyer 1031 exchanged into the property and financed the property with Bank Financial.  The sale was arms-length.  Contact Brad Schaeppi at InvestProp for more details at 612.770.7447.

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Collaboration Blog

June 14, 2011
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Dear Apartment Owners and Investors:

This InvestProp Blog will be soon filled with collaborative one on one conversations between InvestProp and experts who work across the Twin Cities apartment industry.  Topics will cover everything under the roof (and including it).  From apartment financing and brokerage buy/sell tips, to extermination and legal advice, this InvestProp blog will keep owners and investors up to speed with rapidly evolving, dynamic multi-family or multi-unit housing world.

If you would like to personally contribute or have a topic you want to see discussed, please write to us on the “Contact” page.

Cheers!

–Brad Schaeppi

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