A great "no money down" purchase - yippee!

[Perp]

My current situation is that we have excess borrowing capacity and servicability, but relatively small equity. So the ambitious goal that I've set for myself for 2008 is to find deals requiring little or no money up-front, but also with strong capital growth prospects, and preferably cashflow positive (or at least not very negative). Yes, I know - I want it all

I've probably made 20 or so offers incorporating an element of vendor finance the past few months, and have been disheartened to not have the slightest interest from any vendors. Nobody even counter-offered - the agents have all come back quickly saying "they only want a clean contract". I have a preference for non-strata titled property, so I've been looking primarily at established properties, not new developments (where vendor finance is somewhat more common).

Well, thankfully I didn't give up. I kept looking, and today had an offer accepted on an industrial property. The deal is structured such that I needn't put in any money at the start, it will be cashflow neutral in the first year, then cashflow positive thereafter. The valuation was above the purchase price, so the lender is lending against purchase price initially, but after the 12 months - when the vendor finance component becomes due - the lender will lend against valuation, and I'll then have enough money to pay that out, still putting in no cash of my own, and it will still be cashflow positive.

Now that's my kind of deal. I'm already happy with that; if I can find another one this year, I'll be delighted!

 

[GIDDO]

Congratulations Tracey,

Cashflow neutral in the first year and positive after that!

Roughly 100% of Somersofters are looking for a deal like this.

Mind if I ask what sort of tenant you have got. Is the lease solid?

well done.

 

[Dazz]

had an offer accepted on an industrial property.

Well done ozperp. Fantastic that you didn't give up when you became disheartened.

Any details on the property itself or the tenant. Green title ?? Do the tenants pick up all of the outgoings ??

Once again, onya !!!

 

[GoAnna!]

Great achivement

 

[NedKelly]

Do they have any more for sale?

 

[kum yin lau]

Hi, to add a facet from a potential vendor. I was approached for vendor finance on my commercial property.

I did some calculations & found that I'd have to charge extra for tax & other costs.

It was something that I didn't chase down as my property was undervalued & under performing. It's since caught up some but there's still room for improvement.

I'd have taken 900 thousand for it a year ago but now I'll put the valuation up to 1.2 to 1.4 million based on current leases which are still $25 /m2 short of the recommended rental.

I'd have taken an offer for vendor finance on my current house which I sold to an investor on a 5 year leaseback. As it turned out, my landlord doesn't need the funding as they have excess liquidity & are as happy as can be with our arrangement.

The point to all this is that deals can be honest ones. For example, I still have excess equity but want to reduce my loans. The reason is I have less need for gearing.

Therefore, if you come across a deal that is doable, it might just be.

The downside is, who can you trust?

Good luck with your search,
KY

 

[Perp]

Thank you all for your support!

I'm happy to share actual figures once I have everything "bolted down" - for now, I want to be a bit cautious in case the vendors are on Somersoft and decide that I'm getting too good a deal For order of magnitude: we're talking small-ish - sub-$1M bracket.

For now, I'll amplify as follows: the lease is a 5x5 with 3.5 yrs to run on the first term. Good fixed rental increases are built in with a market review at the expiry of current term. Yield on settlement day is 9.6% (is that passing yield? Still learning the lingo!). The tenant pays outgoings. The tenant is only a small business operator, not a national or franchise, but they have substantial assets that back the lease.

And I have the best of all worlds anyway - if the business goes bust I've discovered that the property, unusually, is worth more as a general property (as a warehouse) than in its current specialised use, and that warehousing is in short supply in the area. It's against the valuation as a warehouse that I can borrow (after 6 months) to pay out the vendor finance component.

Thanks again for your support, guys!

 

[skater]

Congrats! Sounds like a good one.

 

[Perp]

OK, premature celebrations... Despite having accepted my written offer, the vendors mucked me around for 5 weeks then presented a contract with substantially different terms than were in my written offer. In particular, they put in the contract that they were to have a first mortgage for the vendor finance , which of course my lender won't agree to, and which I'd already explained to them.

So I'm now trying to salvage the deal. I know that the business owner is willing to pay a higher rental in exchange for a few minor works (inexpensive - improve aesthetics of facade, new tin storage shed). So what I'm hoping I can do is sign the lessee up to a "heads of agreement", whereby if I purchase the property and perform the works they've asked for, they'll agree to enter into a new 5-year lease at a higher rental. Then I'm hoping that based on that, I can get a valuation higher than purchase price and borrow enough to pay the entire purchase price from borrowed funds.

I don't think this is impossible, but realistically, I do think it's going to be difficult to pull this off. The lender who's already offered finance at 85% of purchase price has said that they'll look at it provided I actually complete all the works and get the new lease in place before settlement; but I don't have the cash to pay for those works, and I don't want to hand the current owner a better lease that may make them reconsider their decision to sell (again).

So, does anybody here have any suggestions for salvaging this deal?

Do you know any lenders who might look at going to 100%+ LVR on a second mortgage? Or who'd lend a lower percentage, against the higher valuation based on the heads of agreement plus my undertaking to complete the specified works within, say, 6 weeks of settlement?

Alternatively, do any of you cashed-up people who are waiting for the downturn want to lend me $200K? I would be willing to offer a second mortgage on our other IP (Spring Hill, app $500K equity) as an alternative to this property. I'd want to borrow for at least 1 year, preferably up to 3 years. We'd be willing to pay 12% interest, 1% per month, (I like round figures ) with a balloon payment of principal at the end of the term.

We have generous ongoing cashflow, ample to meet interest repayments. It's free lumps of cash that we don't have right now, due to our Spring Hill project having been such a large cashflow drain for so long. (Stay tuned: API magazine "My Property Nightmare", April issue.) We've poured in over $120K from household income in the past year , so now that that's fully tenanted (hooray! Just this week) and cashflow positive, we theoretically have $120K free cashflow pa. (Man, will that be a relief.)

Can't wait to hear what wonderful ideas you all have...

 

[steveadl]

Sorry to hear you're being jerked around Tracey!

Wish I could offer some ideas, but commercial lending is all new to me. If I had that sort of cash, I'd be happy to lend it to you.

 

[willair]

So, does anybody here have any suggestions for salvaging this deal?

Do you know any lenders who might look at going to 100%+ LVR on a second mortgage? Or who'd lend a lower percentage, against the higher valuation based on the heads of agreement plus my undertaking to complete the specified works within, say, 6 weeks of settlement?

Alternatively, do any of you cashed-up people who are waiting for the downturn want to lend me $200K? I would be willing to offer a second mortgage on our other IP (Spring Hill, app $500K equity) as an alternative to this property. I'd want to borrow for at least 1 year, preferably up to 3 years. We'd be willing to pay 12% interest, 1% per month, (I like round figures ) with a balloon payment of principal at the end of the term.


Can't wait to hear what wonderful ideas you all have...

OZprop,just can't understand this ,first you said the vendors had accepted your written offer,did they sign the contract in black and white?with the intention to enter into legal relations or were they just playing games with you,If it was me i would walk,if this is the start of the games the vendors will play,then there will be no end to it and all it will cause you is a lot of worry, how come you waited five weeks?..willair..
BTW,Iknow people that lend shorterm funds but the terms,and interest rates would blow you out off the water,why not try the several M-B that work this site..willair..

 

[evand]

Ozperp,

Would you be interested in $200k @ 15% for one year? You pay all costs, mine and yours.

If so, pm me.

Alternatively, do any of you cashed-up people who are waiting for the downturn want to lend me $200K? I would be willing to offer a second mortgage on our other IP (Spring Hill, app $500K equity) as an alternative to this property. I'd want to borrow for at least 1 year, preferably up to 3 years. We'd be willing to pay 12% interest, 1% per month, (I like round figures ) with a balloon payment of principal at the end of the term.

 

[GoAnna!]

Can you not increase your first mortgage against Spring Hill Given it had $500K equity) or some other property?

The timing of the availability of money can be soooo frustrating.....

 

[Perp]

If I had that sort of cash, I'd be happy to lend it to you.

Thanks, Steve. You're a gem.

OZprop,just can't understand this ,first you said the vendors had accepted your written offer,did they sign the contract in black and white?

No, I submitted a written offer, which they accepted by faxing the real estate agent indicating their acceptance. They took 5 weeks to get the contract drawn up, and when they did, the conditions of the contract were different to those that we'd agreed. If you're wondering if I can "force" the issue and whether we already had a binding agreement, that's quite possible. But I'd prefer to avoid litigation if possible. I think they just didn't understand what they'd agreed to, then when they finally did understand, they wished they hadn't agreed, and refused to sign a contract reflecting our agreement.

If it was me i would walk,if this is the start of the games the vendors will play,then there will be no end to it and all it will cause you is a lot of worry, how come you waited five weeks?

I think they're genuine sellers, just think they're naive. I was chasing this up frequently during the five weeks, kept calling the agent asking if they had cold feet, kept getting reassured that it was just a backlog of work at the vendor's solicitor that was causing the delay. I truly think the agent is surprised and annoyed, too.

BTW,Iknow people that lend shorterm funds but the terms,and interest rates would blow you out off the water,why not try the several M-B that work this site.

Takes a fair bit to scare me but yes, perhaps I should try one of the SS brokers. I have a broker who's pretty good, and I've tried one SS broker who couldn't help me, but perhaps I should talk to another.

Would you be interested in $200k @ 15% for one year? You pay all costs, mine and yours.

Just might be! Will consider over weekend and get back to you; thanks.

Can you not increase your first mortgage against Spring Hill Given it had $500K equity) or some other property?

Problems getting Spring Hill to value up to market, as highlighted elsewhere, so whilst quite a lot of equity would be released by selling, far less equity is available by refinancing. Can't refinance other property because we bounced one payment 4 months ago, and we need 6 clear months before we can refinance... yes, this whole timing thing requires incredibly good management when you're trying to aggressively accumulate, as we are.

 

[GIDDO]

I think they just didn't understand what they'd agreed to, then when they finally did understand, they wished they hadn't agreed, and refused to sign a contract reflecting our agreement.

I think they're genuine sellers, just think they're naive. I was chasing this up frequently during the five weeks, kept calling the agent asking if they had cold feet, kept getting reassured that it was just a backlog of work at the vendor's solicitor that was causing the delay. I truly think the agent is surprised and annoyed, too.




All my sympathies to you.

I did a lease contract last year and the solicitors love to highlight any negatives in order to justify their fees.
This will be on your side, and also on the other side.
So your vendors need to know their minds when they visit their solicitors, and be prepared to say "I am comfortable with that".
Best of luck. Too bad I haven't got a lazy 200k lying around to help out.

 

[Perp]

Thanks, Giddo, for your kind words.

I'm delighted that I mustered the courage to admit that I was having trouble holding this deal together; I've been overwhelmed with support. I've had one offer of a second mortgage (thanks evand), one offer by an equity partner to JV on this project (which I'm very interested in pursuing further), and another offer to possibly JV on future projects.

You guys are the best; thank you.

 

[Perp]

The final chapter

OK, this deal has fallen over, so now I'll give you full details.

The property was (is? still on the market I believe) a leisure centre in Mildura, Victoria. It's a 2100m2 steel and tin shed on 3000m2 land, not far from the CBD and only a couple of blocks from the new inland marina on the Murray. I know Mildura well as I was born and raised there. Being so far from its nearest capital (Adelaide 400km, Melbourne 500km), it's a bit isolated and tends to be forgotten, but I did note it appeared as a hot tip in API recently. The business on site is thriving, and so is the town. (Though they've had a bad fruit season and everybody local thinks the sky is falling. I'm detached enough to be confident that their industry base is broad enough for this to pass, as other bad years have passed.)

I originally negotiated to purchase the property for $675K, with 30% vendor finance, meaning I'd have to pay $472,500 at settlement, $202,500 1 year later. Current rental income $65K pa, 3.5 years to go on current lease with 3% rises pa. So it's very near 10% pa on purchase; the cap rate usually used in the area is 8.5-9%, so you've got instant equity.

But it gets better; the current rental represents about $32/m2, whereas my research found that current market rate is more like $40/m2. So in 3.5 years, you can renegotiate up to market rental, and if you get, say, $43/m2 at that time, in 3.5 years you sign up a lease at $86Kpa, cap rate 8.75%, means you have an asset that is valued at $983K. That's nearly 50% capital gain in 3.5 years, just for bringing the rent up to market.

And the business owner has just changed over; the new business owner has a larger asset base (good for commercial valuation) behind them, and they also want some improvements to the property which wouldn't cost much but would allow the rent to be raised. ie you'd get a raise in rent of probably 20% or more of the cost of the improvements, meaning your overall yield on your cost base would increase substantially. I reckon you could spend $100K, making your total investment $775K, and then increase rent such that in 3.5 years you'd set the rent at, say, $110K pa, and your $775K investment would then be worth $1.26M.

So why aren't I buying? Basically, the vendor is pretty amazingly naive and thus difficult. They agreed in writing - ie via faxes and email - to sell it to me under the terms above. They didn't want to memorialise it in a contract until we went unconditional (? just wrote it off to eccentricity at the time) but assured me all was well because they'd accepted my offer in writing. You guessed it - after I've spent nearly $10K on due diligence and finance approvals etc, contract signature day rolls around and they back out on the vendor finance component. And I have no free cash, so I couldn't buy it without vendor finance.

Then I found a JV partner via Somersoft; his family would provide equity from their home and use some of the commercial loan, we'd use 100% commercial loan funds, and as we were able to refinance over the years, they'd get the extra cash released until we had equal portions of equity and cash in the deal. After lengthy discussions and him doing his own due diligence (quite reasonably), we recently made an offer of $625K, subject to due diligence. (We just really wanted to cover ourselves in case we'd missed anything.)

Firstly, the vendor said that they'd spent money on getting the fire system code-compliant, so they wanted $680K now instead of $675K. Right, like I'll pay more when I've been dicked around and have to go in with a JV partner, than when I had vendor finance in the deal.

Secondly, the vendor said that it was outrageous to ask for a due diligence period "above and beyond what the contract provides for". ???? Real estate agent as confused as we are, given that there isn't yet any contract. Vendor clearly clueless - insistent that we've got a cheek to ask for "extra" due diligence. Note that he's not saying he only wants an unconditional contract - that would be completely his right, of course - he's somehow got it in his head that the "standard" contract (which doesn't exist for commercial anyway) has some due diligence clause in it, but we're trying to ask for more than the "standard due diligence". Agent can't convince him otherwise. She's a gem; has the patience of a saint. (The owner is non-local and I know the agent - well, not directly, but we know lots of people in common - we know each other in the way that all people from Mildura know each other. )

Whilst I still think this could be a good investment for somebody, I haven't got enough money to do it on my own, and I've decided that I've wasted enough time and energy on making this deal work with a difficult vendor. There's obviously another deal out there with my name on it.

 

[GoAnna!]

How frustrating and disappointing. It will mean the next deal is better though. You are missing out on this one for a reason.

 

[steveadl]

Sorry to hear the deal fell through Tracey.

Not nice to spend that amount of time and money on a deal and get this as your end result.

On the bright side, it's great to have this sort of experience and be able to learn from it for the next deal. Plus, you seem to still have your usual optimistic attitude, and I'm glad to see it hasn't scared you off trying to find that next deal!

Good things come to those who wait, there will be an even better deal around the corner!

 

[grossreal]

hi ozperp
I am with steve on this one.
the deal may have fallen over but thats business
and there not alot you can do about that.
but this has given you a very good understanding of whats out there.
my advice to you for the next one is to do a deed of agreement legally binding on both tat when the deal is agreed that you are going thru with the deal.
they are cheap to organise and the names can change one in place then go to purchasing.
I have held a property on one of these for about 6 months
yes the deal does go thru as both want at that stage to finalise and both are locked in.
as they say no point worrying about spilt milk.
you have got the idea of what to do so now the next one will be easier
hope you well and the next won't be as hard