Brown St Duplexes - 3 Themes in a Successful Deal
Like most deals, there was very little about closing this one that was very straightforward and easy. The deal looked great all along, but getting it under contract at the onset of the Coronavirus outbreak made things a little difficult.
From start to finish, three common themes prevailed as we pushed to get this deal to the closing table:
It all starts with a great deal
Get creative, be persistent, but never quit
Find a great partner
The lessons from each of these themes are what allowed us to successfully close the deal and will be invaluable moving forward. Apply them to your business!
The Great Deal
If you've followed anything I've done in real estate, by now you should know I love small multifamily properties. I wasn't seeing much that I liked around the Charlotte and outlying areas, so I decided looking into Fayetteville (we'll save the stories, rationale, and those lessons learned for another day).
After talking about it with Martin, a friend and fellow investor/partner (check out his business - Blue Equity Investments), he found this property listed by a wholesaler out in the Fayetteville area. At first glance the numbers looked great:
Listed for $125,000 (UC for $120,000)
4 units, 100% occupied
Renting for a combined $1,780
On top of that, it looked to be in great condition! One duplex had a new roof and relatively new HVAC, they were both in pretty good condition inside, and the inspection revealed only minor issues throughout the properties.
By our analysis it needed around $8,500 in rehab to maximize the value and bring in the market rent of $600-650/door. Add to that the fact that the tax value alone was $144,000, and we were thrilled.
As a part of the lending process (more on that in a sec) we ordered an appraisal that we expected to come back around $160,000. It returned with a value of $187,000!! We had an incredible deal on our hands, we just needed a lender to help us get across the finish line.
Don't Give Up...Seriously
As I mentioned before, we got under contract as Covid-19 was really picking up steam in early April. We knew that it wouldn't be easy as lenders were tightening their belts, but we knew with such a great deal we'd find something.
We went through almost 10 lenders before finally finding 2 that were willing to help us out. We ran into a few different problems, some common and some very strange:
They simply weren't lending at the time
Lending criteria got more strict, leading to high down payments and insane points that we couldn't justify (60% LTV, 4 points as an example)
The rehab budget was too low. Despite the great deal, one lender was only comfortable with fix-and-flips and didn't like this because our rehab budget wasn't $20k+
What saved the day?
Persistence and creativity
As we got down to the wire and were running out of time, Martin threw up a couple of Hail Mary's (is it still called that if there are two??) He posted in a local Facebook group asking for lending options and also reached back out to a Hard Money Lender that previously said this deal was a no-go for him (if you haven't already, check out the Networking page to learn about some of these groups!)
Both options worked!
The Facebook post led us to a private lender that was interested in lending out of his self-directed IRA. He was willing to loan on 80% of the purchase price at 16% interest and 1 point, with all interest deferred until the end. Compared to the previous lender that wanted 13%, 35% down, 4 points, and 6 months of prepaid interest, this deal looked pretty good. We got the ball rolling with him.
At the same time, the other Hard Money Lender started to bear fruit. The terms were a little more favorable (12% interest, 3 points, 65% ARV, up to 100% purchase price), so we just had to get it through underwriting. They were also uncomfortable with the low rehab amount, so it took a significant amount of coaxing to get everyone to see things the same way.
At the end of the day the Hard Money Lender pulled through! We ended up bringing $12,050 out of pocket to fund the deal, $8,800 of which went to the rehab. It came down to the wire but it worked out. This leads me to the last point...
Strong Partnerships are Invaluable
Martin and I wound up working together perfectly on this deal. I'm a numbers guy and get into the weeds on all of it; he's a salesman and built a good enough relationship with the seller that she somehow liked him even more with each time he asked for an extension.
Most importantly, we both had one single thought driving us - we were going to close.
Our first lender fell through a week before our first close date. A week later we had been told no by every lender we spoke to. We didn't close until 3 weeks after the originally scheduled date.
The process was not easy at all, but there was never a question on either side as to whether or not we would close. It was a matter of HOW, not IF. It didn't matter what it took, we would figure it out and get the deal done.
On top of that, there was no panic. It's one thing to be persistent and work through the issues, but another to do so while also panicking at the first sign of trouble. That never once happened here.
Sure there was frustration, but who cares? There are real things going on in the world that deserve true panic and/or serious concern. A slight delay on a deal hardly matters in the grand scheme of things.
Find a good partner. The right one will complement your skillset and you'll help each other move forward (if you want to learn more about the benefits of partnerships and different options, check out the partnership article I wrote for BiggerPockets).
What's Next for Brown Street?
All roads lead to refinance at this point. The terms of our hard money loan weren't bad relative to other options at the time, but it is still short term financing that we need to get out of ASAP. That requires doing a quick rehab and initiating the refinance.
The benefit of our current situation is threefold: 1) each of these units are already rented and produces enough income to covers all holding costs; 2) the rehab funds were put into escrow at closing, so there are no costs coming out of pocket; 3) we have a commercial portfolio lender lined up who requires only a 90-day seasoning period and we will begin the steps for the refinance next week.
We're now in the process of getting the property manager and contractors into the units to get quotes for the work that needs to be done so we can initiate movement on the rehab. Because of how minor the rehab is we should wrap it up relatively quickly and aim to have it complete by July 1.
Once all the work is done we will work with our property manager to raise rents to market value, giving us time to turnover units if necessary and meet our refinance timeline.
Assuming the refinance appraises no higher than the previous appraisal, we'll leave a combined $6,700 in the deal and see the following returns (thanks to the BiggerPockets Pro calculators for the help running numbers!):
This deal will pay for itself in 16 months once stabilized! Hard to beat that kind of return on investment. If you're interested in keeping up with the numbers and the progress on this deal and the rest, keep your eye on the Portfolio Snapshot where all the properties are maintained!
What are you waiting for??? Get out there and make this type of deal happen for you! Just remember:
Find a great deal
Never quit
Find a great partner
Get that next deal and send a note to patrick@investdgp.com once you do!!!