The Saga of West Parker Part 2

February 26, 2021

see part 1 here.

I called the broker back. She said there was a wrinkle. I love wrinkles… it turns off other buyers. There was already a buyer and he was looking to flip the contract. Now for large multifamily flipping a contract is VERY frowned upon. It makes the broker look bad (because the contract flipper found a better buyer), it typically adds time to the deal to close, it dramatically increases the risk that the deal falls through, and burns all the assignors bridges in a market. Buying an assignment is great because you came in and closed when the original buyer couldn’t. These guys were desperate. They were mostly involved in the LA markets where there were massive protests and tenants weren’t paying. 

I got sent their contract after indicating I was interested. The price was whited out.. I was told that the buyer wouldn’t disclose the price. I didn’t mind too much. I’ve never based my offer on what someone else is paying or would pay. I have my own models and calculations that I’ve created based on our management portfolio. I also am very plugged into a network of other brokers. Brokers love talking bad about other deals. They are one of my best resources to discuss your numbers with. I scheduled a showing asap.

Luckily the inspection was in a couple of days so we agreed I would meet at the property during inspection. It wasn’t anything out of the ordinary for a 1970s property. Aluminum wiring with CO/ALR boxes, boilers, older counters and dated paint. The previous owner had replaced half the roofs leaving us with the other half. The laundry rooms had been emptied due to Covid and needed to be updated. 17 of the balconies had been replaced with a few more likely needing to be done over the next few years. While the inspectors didn’t find anything wrong with the plumbing I knew that cast iron drains will have issues over time due to corrosion and boilers eventually need to be replaced.

As everything was within expectation I began my more diligent underwriting. It typically takes a couple of hours to put together a spreadsheet. I’ll also look into our other properties and see how they are performing per door. The property was well run due to the existing office staff who had done a great job of collecting on rents and working with tenants through Covid. With just 3 vacancies at the time and stable collections it was one of the things you want to see with a 2020 deal.

The repair budget was a little low for a property of this size. Typically I expect to see 5-7% of collections. It’s usually a sign of bandaids and deferred maintenance. Luckily we have been dealing with these properties in Houston for 6 years and know what to expect. I budgeted an extra $95k over recommended reserves to make up for the reduced maintenance expense.

Staffing seemed a bit high. You need an office and maintenance staff roughly every 100 doors. We figured if we could get rid of one maintenance team member and have a floater we would be able to save on overhead. There were also some payroll costs and software costs that were higher than what we were paying.

I made an offer for $9M on a Friday. By Monday we had an accepted offer. Now the game was really on. Due to it being an assignment we had just over a month to wrap things up.

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