Client interest was in reallocating funds currently in the stock market and purchasing another income-producing property. Client is passive investor, hence suitable property would be one that either required minimal active owner management or could effectively be managed by a property management firm. Newer/quality retail (single & multi-tenant) and apartments were the likely target property types.
Many properties were both physically and financially screened from April through June. The initial short-list included 2-3 apartment properties, a multi-tenant retail property and a few unique high revenue producing vacation rentals. As of early June, we were not able to come to terms on any of the properties on this initial short-list.
Developer owned condo project missed the market (not completed until 2008) and was now sitting with a handful of temporary renters and many vacant/new units. The developer was still hoping to “wait-out” the market and ultimately sell the individual units (approx. value= $190,000 to $220,000 each). However, the underlying lender was putting some pressure on the developer due to liquidate. Hence, the developer reluctantly agreed to attempt to sell as a condo grade apartment complex. The asking price was much less than the once projected sum of individual condo unit sales, but overpriced as a near half-empty apartment complex. But, if/once fully rented (@ full-market rents), the property would immediately be worth 20%+ more than the asking/listing price, as apartments.
Since this was a non-performing apartment complex (vacancy at time listing time was 38.4%), any conventional lender financing would not be able to be secured. Hence, the amount of investor cash required to purchase would be considerable, and out of play for most private investors. And, to make things even more challenging, the existing loan amount exceeded any reasonable current market sale price. Lender approval (and release) would need to be part of any deal.
Purchase and Sale Agreement was executed with necessary provision-s (including lender release) and specific methodology for lease-up was detailed. Contract language was such that Client/Investor would have authority to be participative, if necessary, in order to secure needed tenants for property, if seller failed to do so. In essence, the contract was drafted with language that would make it difficult for a “reluctant” seller to purposely kill his own deal.
Though a long and arduous contract period (June 21st through November 15th), the deal got done. The final purchase price was $1,466,000. The appraised value came in at $1,650,000. As of February, 2012 the property is fully leased up (@ full market rental rates) and monthly collected rents have been increased from $8,675 (June, 2011) to $14,459 (February, 2012). Based on current market capitalization rates, a value of $1,775,000+- is suggested (2/2012). This numbers tell it all.
Realty Yield Comments
Though opportunities like this do transpire from time-to-time, it is not the norm where instant (6-9 months) equity gains of this level (%) can be realized. However, the learning point is that with proper and experienced guidance such opportunities can be spotted (and exploited) even when the majority of the market often simply misses. This property was clearly listed on RMLS. Still, it just sat there, primarily just because there were some holes in the presented sales package and it took some time and work to fill in the blanks.