Top 10 Tips for Acquiring Distressed Multifamily Properties
- Oct 28, 2011
By Michael Bull, CCIM
Atlanta—It’s a great time to buy distressed apartment properties. That is, if you can find them, get them at the right price and effectively manage and lease them.
The bottom of the cycle has passed and the rate of foreclosures is beginning to decline. Most markets are experiencing both rental rate and occupancy growth. Lenders’ recovery rates are slowly increasing, and when bank-owned properties hit the market there are more buyers and better offers. Investors are no longer saying they are afraid of catching a falling knife.
There are still plenty of properties worth less than the debt, and there are more foreclosures to come. Most of the distressed multifamily properties are B, C and D class properties. These properties can provide great returns with cap rates from 8 percent to 12 percent on existing income, and in most cases have plenty of vacancy for even more upside.
Finding the right properties, winning the bids and getting a good price are key if you want to end up clapping, rather than bandaging, those hands. While there are many issues to consider when buying distressed apartments, these top 10 tips will help keep your hands clean and your investors applauding.
Property sources: Get to know the attorneys in the distressed market and the lenders with existing loans. Establish relationships with brokers who specialize in multifamily properties who track distressed apartments and have relationships with lenders. Offer to protect their reasonable fee for acquisition opportunities they source for you.
Notes: Consider buying notes, but be sure to understand the risks of stepping in the lender’s shoes. Consider the collateral, the collateral title, the borrowers’ intentions and jurisdiction issues related to the foreclosure process and recent bankruptcy/cram down court decisions. Also consider the time, risks and costs to get from lender to property owner.
Joint venture: Consider joint venture recapitalization acquisitions with existing owners. There are experienced owners with good reputations who were just caught with bad timing and/or too much leverage. You may be able to provide capital to renegotiate loans. Ask to be paid first with reasonable controls on management costs. Engage experienced counsel to help negotiate the joint venture partnership agreement. Be sure to consider all contingencies and possible exit plans.
Offer format: Get the seller’s attention. Make offers in full purchase and sale contract format with multiple copies signed in blue ink. If possible hand deliver them or send via FedEx. Servicers and lenders in most cases have a heavy caseload; you want your offer to stand out.
Patience: If a lender in a short sale or OREO situation does not respond to your offer in a timely fashion, be patient. Consider making the offer again closer to the end of the quarter or end of the year. Motivations change; if a lender, seller or broker says the time is right, make your offer again.
Ability to close: Provide your best proof of ability to close in writing with offers. Liquid cash in the bank sufficient to close all cash is best. If not, get as close to that as possible. Consider large earnest money deposits—of course with a solid contract and a safe escrow agent. Lenders in short sale, receivership or OREO situations may not respond to offers without proof of ability to close.
Quick and clean: When practical, make written offers with short fuses for closing and contingencies, since occasionally quick and clean wins. When making offers to lenders write offers with as little to no seller reps and warranties as possible. Contingencies should be as short as possible but be sure you have time for adequate due diligence and clean title.
Due diligence and underwriting: To increase occupancy in most cases you should underwrite your lease rates and lease up conservatively. Make sure you understand the sales comps, lease comps, demographics, the job market in the area, the loan status of competing properties and all the costs to bring the property to stabilization. Sometimes when buying notes or when in a competitive bid situation, it pays to do your due diligence prior to making an offer.
Good management: Distressed B, C and D properties require experienced and diligent asset and property management. Your management team should be top notch. Your turnaround plan should be realistic and properly implemented.
Talented leasing staff: Your leasing team should be properly motivated and for lease marketing extremely thorough. You want a well-thought-out, multi-disciplined lease up plan to stabilize properties in this cycle.
With the market improving and loan defaults declining, this could be the time to grab more acquisition opportunities. Considering low interest rates, very little new construction and the rose off the bloom of home ownership, the knife is certainly much safer to catch.
Michael Bull, CCIM is host of the Commercial Real Estate Show, a national talk radio show, and founder of Bull Realty, a regional commercial brokerage firm with three offices, headquartered in Atlanta.