How to find distressed multifamily properties. I hate to disappoint you, but you won’t find these on any list.
Good deals, deals that are really “deals”, deals where there is a healthy profit for you, are a needle in a haystack.
To really ”get” this reality, grab a list of absentee apartment owners and start calling them, asking if they want to sell. See how long you last.
The deals are there. But where? Will you keep calling until you find them?
The answer is “no”, you won’t. Unless you love confrontation and rejection, it’s just too painful.
Having a system for lead generation and lead conversion is how you find distressed multifamily properties, develop profitable deals, and extract the needle from the haystack.
The System Is The Solution
Before setting out on your quest to put a smoking hot deal under contract, bear in mind, there are forces arrayed against you whose aim is to achieve the exact opposite; that is, to get you to pay more than you should.
There is a whole industry set up to assume you are the dumb money. So you have to be smart.
Profitable deals come from motivated sellers, people who don’t want their property, and want to end their ownership of it, so they can be free of the problem the property represents and can move on with their lives.
It’s important to realize, a seller only reaches this state after every other option to get a higher, usually unjustified, price has been exhausted. There is a lot of denial and magical thinking the seller indulges in before accepting the reality they will not get what they want, and (god forbid) have to lower their price, and/or be more flexible on terms.
Hand Me That 2 by 4
As the buyer, spending time on sellers who are not dealing with reality is time completely wasted. You want only to be spending your personal time and attention on a seller after they have been slapped around by the market. Ideally, right after they have been smacked up side of the head with a 2 by 4 and their ears are still ringing.
For example, after 18 months on the market the property has fallen out of closing for the third time, the REO manager responsible won’t meet his numbers for the quarter and his job is on the line.
Or, two years after first making contact with a seller, you follow up to touch base about a cash offer you made that was originally deemed “insulting”. The then vacancy rate of 16% has recently jumped to 41%, the seller is suddenly struggling with negative cashflow and non-paying tenants.
The fourth or fifth follow up call is a very different conversation to the first contact where you gathered information and floated the initial offer.
In both cases, the deal wasn’t found, it was developed.
Situations Change WIth Time And Circumstances
The needle, to continue the metaphor, is found only after all the hay has been blown away by time, dumb money, and retail market activity.
How do you get to the needle, or needles?
By developing a lead generation system that identifies all potential deals (i.e. properties with value plays) in the market you are working in, making your initial offer, and following up until the seller has either sold to someone else, or sold to you.
So what does this look like in reality?
Step 1. Generate leads. This is creating the core list of properties that have the buying criteria that would make for profitable deals if/when you get your price/terms.
If you are using a commercial broker you would be calling on every listed property, identifying prospective deals, and getting the broker to send you unlisted deals as well. Of all of these listings, you identify those that meet your buying criteria.
If you are using direct mail you would be obtaining a list of all apartment buildings in the county you are working. This can be obtained by contacting the County Assessor and asking for a spreadsheet of the multifamily property tax roll, which they will send to you free of charge. If you are willing to pay a few dollars you can use a service like ProspectNow, from which you can create a list of the names and mailing addresses of the property owners, along with their phone numbers. You can then mail a letter or postcard to the list, or a section of the list, once every three months. Each mailing will produce a number of calls from apartment owners interested in selling their property. On each call you screen the seller and the property for your buying criteria.
If you are cold contacting distressed apartment owners, you would be looking for signs of distress so you can choose properties to visit and walk into the leasing office, asking to speak to the owner. You would build your list of prospects with, properties in the county you are working that have low star ratings and bitter tenant complaints on websites like Apartmentratings.com, 5+ unit properties with mortgages in default, or in foreclosure, 5+ units with property taxes in arrears, boarded up properties you notice while out visiting owners of other apartment buildings. For properties in all of these situations, you visit the property, talk to the owner, get information about the property and the owner’s situation.
Step 2. Do deal analysis. For any lead you generate via a commercial broker, direct mail, or visiting the property, you get the property information, fill out a Property Information Worksheet, and figure out what price/terms it would make sense for you to pay for the property in its current condition. If you own the Apartment Wholesaling System you have a process for doing this. If you are not yet a Member, here is deal analysis in broad strokes.
- Get the information about the property, including number of units, unit mix, unit size, vacancy rate, individually metered, master metered, current rents, current expenses, cost of repairs needed
- Calculate current NOI
- Divide NOI by Market Cap Rate to arrive at current business value of the property
- Calculate stabilized NOI using market rents and market vacancy rate
- Divide NOI by Market Cap Rate to arrive at stabilized value of the property
- Use the Cap rate approach or the MAO formula to arrive at an offer price, depending on current vacancy rate, NOI, and level of repairs needed.
Step 3. Make initial offer (Letter Of Intent) to the seller. After doing deal analysis on a property, you have an offer price and terms you can present to the seller.
In making your offer, the basic objective here is to:
- let the seller know the detail of what you can pay, and the terms
- prick the bubble of the seller’s unrealistic notion of what their property is worth. AKA: “smacking heads” with the seller (remember, they want you to be dumb money)
- reorient the seller’s idea of what he/she can expect to receive for the property, at least from a serious buyer like you
- place a flag in the ground of where the market is for this property.
If dealing with a commercial broker, the LOI is submitted through them. Given the price and terms of your LOI are going to be significantly less than the asking price, you will get an immediate return phone call from the broker, either enquiring about the offer and why it is so low, or trying to get you to raise your offer to be more in line with the seller’s asking price.
It is important you don’t engage the broker in their mindset. His/her interests lie in avoiding acknowledging what the property is really worth (i.e. your price), and trying to get you to do something against your interests (i.e. pay the asking price).
Your Frame to Broker, “I’m the Prize”
In a neutral tone of voice, simply inform them, “this is what I can pay based on the information I have.” If the broker gives any pushback, you could elaborate slightly to the effect of, “I know the seller wants to get full price, but this property’s got significant problems, and from my standpoint, being the one who’s going to own those problems as soon as we close, the asking price isn’t justified.” If broker continues to talk, simply say, “Look. I’ve made a good offer. I’d appreciate it if you submit my LOI to the seller.”
If dealing direct with the seller, you are usually untangling a mess, so the situation varies. Sometimes you are dealing with a single owner, sometimes partners, sometimes multiple owners who are not talking to eachother.
Acknowledgement as Oxygen
The overall best approach is to adopt a problem-solving posture while gathering information. You show concern and interest in the seller personally, allow them to vent the frustrations associated with the project that may have built up over the years. Get it all out. With a relationship of trust between you and the seller, they feel secure in speaking freely about the real causes of problems and what is going wrong with the property.
With accurate information about the cause of the problem, you are able to craft an offer that addresses the problem(s) directly, and provide a real solution to the seller (and partners).
***Important point: a ‘real solution’ may not involve cash, or high price. When the seller’s problem is genuinely solved, and emotions are acknowledged, issues addressed, the property becomes secondary. When everyone feels they are being treated fairly, and have what they need to move on, the deal comes together, and closes.
This is simply the most effective way to have your offer received in the most favorable light. But also, when there are partners unhappy with eachother, or not talking to eachother, to have one partner, or trusted representative be an advocate for your offer.
Ultimately your objective is to get your offer in the hands of all the owners so they have it for their consideration.
Granted, their first reaction will be to snort at it, or throw it back in your face, but that’s their business. Your job, getting your offer in their hands, is done.
Step 4. Follow up on your offer.
If the seller is genuinely motivated, they have to sell … to someone.
Your initial offer may be sneered at, dismissed, demeaned, flat rejected, ignored.
But … if there is a breakdown in communication among the owners, and the property management is suffering, at some point in the future the property will go into foreclosure and the owner’s investment will be lost.
It could be the previous owner died, and now in probate the management company is milking the property, while at the same time vacancies are increasing, deferred maintenance is piling up. Income is vanishing … foreclosure looms.
Tax credits expire, divorce, illness, there are many situations that result in owners taking their focus off property management.
Disciplined, rigorous property management is what creates maximum income and wealth in multifamily properties. Once the emphasis is taken off property management, the property enters a downward spiral, that, once begun is hard to reverse.
The one certainty is though, if the owner(s) do not address the situation, he/she/they will lose the property.
Deals Are Created, Not Found
So for your apartment wholesaling marketing funnel to be effective at producing deals at the low prices and/or crazy good terms that make cash buyers clamor for the property when you ring the bell … following up on your initial offer is critical.
It doesn’t have to sophisticated, or artful, you simply have to do it.
It is as simple as an email, phone call, or letter.
A contact management system is critical for making follow-up happen. There are the classic apps like ACT!, or apps like Salesforce.com. If you use ProspectNow, it has a contact management function included.
Initially you may need to do this yourself, however after your first deal, or whenever you can afford it, this is definitely work to assign a VA. Because:
- It is work that doesn’t require your level of skill to do
- Your time is better spent on higher dollar activities, like, negotiating with sellers, closing deals in process
- If you make it someone else’s job, someone who will be fired if they don’t do it, it will get done.
The content of the follow-up contact is very straightforward. It’s purpose is to simply put you back on the radar of the seller, and remind them of your offer. It can be as simple as the following:
This is Ben from Schumpeter Capital.
Just a quick note to touch base on the 88 unit on 25 Pitt St, Sherman Oaks. Is the property still available?
If so, I’m still interested in buying the property. If you remember, I made a cash offer on Feb 2, 2017. I’m still interested in buying the property for cash.
If the property is still available and you are still interested in cashing out of the property, give me a call. I’d love to talk with you.
Looking forward to hearing from you soon.
If you made an owner financed offer, stress ‘getting out from under the property’ instead of ‘cashing out’.
Vary the media in which you send the message. Follow-up #1 may be a phone call, #2 may be an email, #3 may be a phone call, #4 may be a letter, #5 may be an email, #6 may be a phone call, and so on. The point is, do them. Make them happen.
Your VA should have phone skills and be able to make a certain number of calls every day. After a while you should expand to two, (or more) VAs manning your Follow-up Team, one doing the computer work, one doing phone calls.
So your Follow-up Strategy is simple.
- Identify motivated sellers with properties that are “deals”
- Present the initial offer
- Follow up with all sellers you have presented offers to
- Keep identifying deals and adding them to the follow-up list.
The end game here is you have identified every property in your target market that is (at your price) a “deal”, and are periodically “pinging” sellers, waiting them out until they are ready to sell.
You don’t compete with amateurs, or dumb money that gets lured into paying too much. Those deals, for the most part, fall out of closing, helping sellers become more motivated along the way to their breaking point.
You simply wait.
When the seller is ready, and sees it’s, a) lose the property, or b) sell to you … you get a call. Or, you are greeted happily, like a long, lost friend next time you connect with a follow up phone call. It is comical sometimes, the difference in attitude of the seller to your initial offer, to the follow up call six or twelve months later.
(The market is not kind to sellers in denial.)
Past sins are forgotten. Your deal is now on the table.
I hope you can see, having a steady flow of smoking hot multifamily deals to wholesale (and collect fat assignment fees from) isn’t about being a supernatural negotiator, or a real estate genius. Rather, it’s about being systematic, and having a lead generation and lead conversion system that identifies and develops deals, to your exact buying criteria in a predictable, systematic way.
This is the way of the successful apartment wholesaler.