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Podcast Series 8: Understanding Commercial Real Estate Contracts and Letter of Intent.

The Small Apartment Investors Show
The Small Apartment Investors Show
Podcast Series 8: Understanding Commercial Real Estate Contracts and Letter of Intent.
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Hey everyone Cordell Davenport here with a small apartment investor my thing that I always say is mindset plus skill set plus performance equals results and right now introducing once again. John is going to talk about skill sets when it comes to. Legal matters. That is a real estate attorney. The second time actually we’re gonna have a conversation.

 

I’m gonna have a conversation with them and as I learned you guys will learn but before we get started, I’ll talk about a letter of intense and purchase other agreements but John would’ve been up to what’s new in your life. That you want to share about it is might.

 

Today, thank you. Cordell nice to see you again glad to see you’re well covered continues to make life interesting in just about every aspect real estate-wise. You know, people are being cautious about entering into transactions but I see sort of a steady increase in activity. I speak with residential and commercial brokers practically every day and at the end of every conversation.

 

I always ask people what they see happening on the front lines and so far it seems like 2021 is a continuation of where we left off in 2020. So I’m hoping that with increasing vaccination rates with more access to units because one of the issues right now is inspecting a property before you commit to buying it tendon occupied properties can be challenging to get into and so I’ve seen a number of transactions just sort of remain in a state of suspended animation that’s the other transactions fall off the table because is inhibiting the normal process but I’m, An optimistic but.

 

It’s complicated. I just thought about knowing that when it comes to buying there is a course we have due diligence. You have a financial due diligence roll. Looking at the trailing 12 looking at least is verifying all that then you have the physical due diligence. But because the code if you can’t walk every unit and you can’t do a full inspection.

 

That’s gonna be interesting because I would think when you write a contract you have certain things embedded inside the contract that you know, if something happens you find something and then it can be like a credit or whatever but if you don’t have a traditional way. I don’t know why anybody will make a move right now because I know that personally I am trying things but in California where we’re at I know that on June 30th, I heard an attorney from San Francisco give a webinar.

 

I talked about Kobe as tenants, oh money, hey what he said in California is they will be able to get eighty percent of what is held to them if they file these paperwork. And then at the end of June 30th, they decide not to take the money they can go ahead and perceive the court proceedings and try to go to small claims court but there’s no given that’s gonna happen for them so until June 30th, basically there’s there’s that cause when eviction convicting people but at least now some of the owners in California are going to be able to get some of that money back.

 

But do you think that? It makes sense just to let the dust settle. Or how are you seeing you know, because like if you can’t truly do diligence just you know, you’re going to get caught with somebody else’s mess. And now their message is your mess. Yeah exactly as I tell clients when you buy property you step into the shoes of the previous owner no matter how clean or unclean those shoes are it’s an interesting question you’re referring to the latest piece of state legislation, it’s referred to as SB91 California has set up a rental assistance program.

 

As always the devil is in the details and we don’t have a lot of details yet as to how that’s going to work and how much money is there and when is it going to run out? But if that works then it will provide some relief to some property owners.

 

Tenants generally remain protected against eviction and will be protected against eviction if the reason for the eviction is they couldn’t pay rent during covet as a result of covet problems that they were experiencing so you know, if and when the dust finally settles. A there will be evictions that’s going to clog the courts and slow down what otherwise is supposed to be an expedited process.

 

And those are going to be evictions generally for non-covid rent reasons. And. Otherwise owners are going to have to go to small claims court to try to get some money but that is not going to result in an eviction that’s just going to be compensation or core payment of moneys that were owed.

 

Transactions that I’m seeing occurring with covet inspection problems, like I said generally either tend to remain in suspended animations, you know, the contract the contingency period comes up for expiration and it just gets renewed or there’s a provision that says the contingency period doesn’t start until I have access physical access to the unit.

 

In other cases people are doing virtual tours and inspection but I think you’re absolutely correct that it’s a it’s a risky proposition for for buyers but there are also some desperate sellers who are willing to take a haircut on the purchase price just to get rid of the property either because they absolutely need the the money or they just want to get out from being a landlord during times like this.

 

I think that’s when I sell it to play if it’s so things like that because. Yeah because even an article about someone in San Francisco. I think oh like 35,000 dollars and back pay. And he’s out of work and if you want to try to buy something you buy on the numbers, like how much money is this thing producing it’s not producing or what it used to be is it’s going to just be a mess so I don’t know yeah so it’s going to be interesting.

 

I think that when it comes to buying and selling this about finding problems and coming up with some solution that that person benefits from the other person can benefit from. Seller may have issues. Property may have issues, so how do you uncover that a lot of that is track finding?

 

Figuring out motivations from people but in this conversation, we’re gonna have today. We talked a little bit and you said something about me and said something about contingencies. I know what those are a little bit operate what contingencies are when it comes to the purchase celebrant for commercial property. Sure, um, a contingency is just a condition that the buyer or the seller imposes on the transaction.

 

If I have access and I am satisfied with my inspection, that could be one contingency. I need financing and so before I commit to buying I want to make sure that a the property will appraise and this goes to the issue that you just brought up about what happens to the appraisal value of a property under covet when nobody’s getting rent and we don’t know for sure what the rents are going to be in the future but typical contingencies are.

 

As a buyer I want to inspect the property before I have to commit to buying it. I want to make sure that I’m going to get the financing which includes. Having the property of prey is at a level high enough so that I can borrow as much as I need to in order to buy the property.

 

And even with an appraisal I just got to make sure that I get approval from the lender for that loan. Sometimes there are other contingencies that buyers put into the transaction and those often include. I own another piece of property. And before I commit to buying your property Cordell, I have to sell my other property because I need the money from that transaction in order to buy this transaction.

 

And people can come up with other contingencies, but I would say, you know inspection and financing are the two most common and inspection, of course means not only the physical inspection, but as you said reviewing the rentals inspections also can and quite often I would say should include looking at things that are not specifically in the property like the condition of the property but also looking at public records in order to understand.

 

Is this property currently in compliance with local laws or does somebody think that there are code violations right has the city or has the county communicated with the owner to say, you know we’ve received a complaint and inspected or have we seen that you’re operating illegally. For any number of reasons including these are not legal units or you know, you’ve got electrical outlets next to the sink that are grounded.

 

All kinds of different things like. There’s a statement. I know there’s a phrase. That says if this then this. So this is the continuity that someone has If this happens then this is what we’re going to do. Like okay this is broken we want twenty thousand dollars off or this is this all one extra ten days how does a person figure out okay, this is a problem my contingency is this and I want to get this like how do you?

 

Is it the same thing recycled through a contractor contract like common common theory or common practices that people use or? Is it up to the person to figure it out?

 

Yeah, probably the latter. I mean, a typical contract will state the expected closing date, right? So depending on the property that could be 30 days, it could be 60 days it could be 90 days and you know, one of the other things is that there might be SBA money involved and SBA has its own.

 

The loan approval process that’s different from the lenders. But typically, the contract will say, you know, we’ll sign a contract dated March 1st and it will say closing is supposed to occur by May 1st or April 30th.

 

So we’ve got roughly two months to close this transaction. During that time. I as the buyer want to inspect the property and I want to make sure that I get financing. So I would put in provisions that say. Even though I’m supposed to close in 60 days, I want 21 days to inspect the property and kick the tires.

 

So to speak I want 28 days to get my lender’s satisfactory appraisal and loan approval. And when those dates come up 21 days 28 days of my example, if the buyer hasn’t had access to the property. Then both the buyer and the seller have to agree to extend the time period for that inspection.

 

Otherwise buyers could be deemed out of contract if they don’t act to either remove or otherwise wave their contingency. So typically when the process of clearing the inspections is delayed because of external factors usually the parties can agree to some reasonable extension of time. So, okay, we’ll give you another 20 days.

 

To do an inspection and now we’re going to have to extend the closing date that we otherwise thought was going to be a 60-day date. Now, we’re going to kick that date out further as well. But another scenario is the buyer does have access to the property and maybe they’re making it all cash offers so they’re not worried about appraisals and financing.

 

So the buyer has access to the property and she doesn’t like what she sees. Something about the physical condition of the property, maybe they met a tenant or you know, tenants put nasty signs out on the door basically saying, you know, I don’t like you. I don’t want you here that kind of thing.

 

And so the buyer then has to decide. Do I still want to buy this property or should I just walk away? And if they’ve decided to walk away, then they would tell the seller. I haven’t satisfied my contingency. I’m not going to go forward with the transaction and then typically both the buyer and the seller will sign a cancellation and deliver it to the escrow and the buyer should get their money back.

 

They’re deposited back. In other instances where the buyer isn’t as afraid of the property the buyer might say hmm, it’s not perfect but I can probably live with it. But seller if you want me to stay in this deal give me something right which is as you said typically a discount on the price, whether it’s because the roof needs replacement the foundation is cracked, there’s a nasty dispute going on with a tenant that’s likely to involve, you know litigation or proceedings and so it’s up to the buyer to decide am I in and if so am I in under the same terms as we originally negotiated or is this an opportunity for me to cut a better deal for myself?

 

Obviously that depends on the cooperation of the seller so it can just say not interested. Take it as is or move on. And I’ve heard when it comes to contracts when you know negotiating certain things okay? I’m gonna give you your price which if you give me my terms or vice versa, that’s a common thing that I’ve read tremendously.

 

When it comes to the negotiation, yes. Yeah and but regards to the contract. What is the most common is if the buyer comes to the attorney with the contract or is it the seller comes with their contract and then the buyer has their attorney scratch it up and then make some addendums to it, how does that work?

 

Well it depends on a few different considerations, you know first is the buyer working with a broker or an agent or is the buyer representing himself okay, you don’t have to be an attorney you can create your own contract whether you find some form or. Create something out of whole cloth.

 

Typically the buyer will prepare the offer in the form of the contract. And then the seller will receive it and either accept it as is or make a counteroffer right and so they may play ping pong with the contract for one or two rounds in most transactions. Where agents are involved they tend to use a common form of purchase contract the California Association of Realtors publishes contracts as you know, both residential and income property and so quite often especially in Alameda County there’s a form that everybody has seen and it’s mostly you know, fill in the box fill in the blanks and check off the appropriate boxes in other transactions.

 

I’m handling the transaction for the sale of a fairly big building. It’s a custom. Contract we’re now three rounds into ping pong on the contract. And it’s heavily negotiated. Every turn can be heavily negotiated whereas often in these form contracts people focus on one or two items.

 

So it’s a world of different possibilities depending on the property depending on the sophistication of the owner. And so on. Now when the parties come together there’s an agreement meeting of the minds is there someone to notarize it or they just sign the paperwork or they do it in front of an escrow company, or how does that work?

 

Yeah, there are a lot of misconceptions about notaries in different countries lawyers are referred to as notaries, especially in Latin America or the people that we consider lawyers or are described as notaries in in this country in different states different documents have to be acknowledged by a notary and essentially what that means is that the person who is signing the contract has proven their identity to the notary.

 

A notary is a licensed person. And there are licenses at risk if they notarize bogus documents. So they insist on seeing you know, valid proof of a driver’s license, a passport birth certificate, something like that. In most cases. Signing a contract does not require a notary’s technology. I mean, if one party is suspicious about the other party then there’s probably bigger problems in the transaction and you know, they should obtain proof of the identity of that person quite often that’s simply using a title company opening up an escrow and the escrow the time company will identify according to the public records who they believe is the current owner or owners.

 

So if there’s a discrepancy between you know, James Smith who’s signing a contract but, According to the title company, it’s actually John Jones who owns the property then there would be some discussion improved but typically it’s not a notary’s acknowledgement. More commonly notary acknowledgments are required in California for documents that are going to be delivered to the county recorder and put in the public records.

 

So private documents between two parties generally. Don’t require notarization documents or instruments like deeds easements leans things like that have to be notarized. In regards to talking to the other about it earlier negotiating, you know, you’re going back and forth you mentioned that one big contract the third goes around.

 

What kind of tactics do you see for negotiating that seems to work over and over again and what doesn’t that work over again? It’s like someone you know, the traditional I want a hundred okay, or I want 50 on let’s put the middle you know, how does that all work that you see?

 

That’s a big question. On. I guess to keep it simple one basic rule is who wants this deal more okay the buyer or the seller, right? I did another transaction where we went through a similar large transaction. We went through 16 rounds of kicking the purchase and sale agreement back and forth back and forth back and forth.

 

And my client had taken a position, that was basically. Buyer when you buy this property you are taking it as is and I never want to hear from you again and you’re gonna sign and you’re gonna sign something in this contract this contract is gonna have it’s sort of an extraordinary provision that says you understand and agree that you’re buying this thing in whatever way shape or form it’s in good bad or ugly and when we close.

 

You can send me a Christmas card but otherwise don’t call me right so that’s a tough sell sometimes but you know the buyer hung in there long enough until we finally got the terms that the seller wanted. Unfortunately the buyer was dissatisfied with their inspection and they went away after being inspected again.

 

Or he’s probably had about that’s not especially if he’s working with brokers, they’re not going to hear all that someone just farts around not serious. You know, this person was serious, this is big money, this is you know more than 20 million dollars, so everybody was serious.

 

But yeah brokers that’s a whole different conversation about their motivation and how they influence a transaction but again just to keep it simple, you know, generally speaking.

 

Some people like to play hardball and they just simply insist it’s gonna be my way or no way and sometimes they just keep saying no no no right until the other side either gets tired of that and says, okay, then go away or again if they’re motivated they’ll hang in there and they’ll say well, I’ll give you a little bit of that a little bit of that a little bit of that.

 

So it really depends on negotiating style it depends on the motivation depends on other obvious factors like the physical condition of the property whether they’re not there are legal problems affecting the property or swirling around that could become issues specifically landlord tenant disputes those kinds of things so I would say for the most part what works is using objective factors.

 

As the reason for negotiating hardware if it’s just your personality you like to say no you like to be the boss you like to be the person that wins all the time. That’ll work in some cases but it’s gonna be a lot of cases where it’s not gonna work.

 

Thank you a couple things come to mind is that even I probably find third party reports that back up your viewpoint and that’s that’s kind of yep neutral it’s not it’s not me this is what this report says other thing that I think about reading is great book called never split the difference is only if you’ve heard the book yeah, oh god it’s great book no but I’d like to prison yeah that’s Chris somebody yeah for you guys don’t know he was like an ex FBI negotiator.

 

I took time. I have to go through the interesting act, but okay, there’s unrelated go ahead, no go ahead now. I’m gonna ask you one more. I was gonna say that. Yeah, no, but I just wanted to say that split the difference is a phrase that comes up often in the context of mediation or arbitration of disputes.

 

The parties are trying to negotiate to get to some sort of settlement party a is over here part of B is over here and they just can’t get to the middle and then somebody says okay, let’s just split the difference or sometimes a criticism that I’ve heard about arbitrators is, you know, arbitrators generally speaking are not judgments.

 

I suppose you could be a retired judge and still lead arbitrator, but often I hear criticism in arbitration. Which is an alternative to a lawsuit we could talk about that probably some other time sometimes the rap is that in arbitration the arbitrator doesn’t do the hard work of telling somebody sorry you lose.

 

And they split the difference so that you get a little bit and I get a little bit and maybe we’re both equally happy or unhappy at the result but we’re both in the same boat and maybe both of us might one day in the future use that same arbitrary again.

 

So splitting the difference is basically a way of avoiding the harder process of saying absolutely my way or no way. Yet a god is crazy says the negotiation starts when the other person rather than the person says, no. Games begin. You want to get you first so but yeah never spent the difference, check it out you guys.

 

Wow, ask people the other corollary the other corollary to that. Cordell is. Tried not to negotiate against yourself. Right? Don’t just be the person who’s tossing up softballs and having the other party just hit him out of the park all the time or specifically in this case, the example is one party says well how much do you want to pay?

 

Yeah, the other party says X the first time says, nope what else have you got? Okay, why? No, that’s still not good enough. How about Z? No, not good. So, Don’t negotiate against yourself try to use a reasoned or rational or logical or objective approach and that usually is something like when you tell me you don’t like what I’m offering you then I would turn around and say well, what do you like?

 

It’s going to be trying to get when you like. Why don’t you just tell me what you like? And it’s about questions. I remember. Many years ago. I wanted this real estate bootcamp. It was like a one-day thing that got around LaGrange. Basically it was if you’re going to try to buy something you say, okay, I want to buy some from you and let’s say you of course you don’t want to give it the first price, you know, how much do you want?

 

And then you can say, okay, I want a million dollars I go. Million dollars. Man. Is that the best you can do? Or what do you say? Okay. There’s something like okay, what’s the least amount you’ll be willing to take without losing sleep at night. Say your friends. So if you don’t get X amount, you’re not going to do the deal.

 

Okay, what’s the least amount? So if you just ask two questions, they may go from a million to eight hundred thousand just by asking the questions pausing and don’t leaving. So yeah, you’ve heard that expression if you don’t if you don’t ask you, don’t get. Right? All right, and I got our last conversation last topic and then we can wrap it up.

 

John I know you’re a busy man, but we talked a lot about contracts, but how do letters? Relate to contrast why why are there important you know what to look out for as well when comes a letter of contracts like what’s the whole process there that you can later others well that’s a timely question because this morning I prepared a letter of intent for a client who owns commercial property and they’re about to begin discussions with tenants commercial tenants.

 

Letters of intent are sometimes also referred to as memoranda of understanding LOIs or MOU’s. Are. Useful tools for. Flushing out these disagreements or issues about the major terms of account attract before you actually start drafting the contract. So it can be a good way to sort of test the other parties seriousness and generally a letter of intent or an MOU or an LOI is a term sheet that’s another way of describing it it’s just a series of line items that says who other parties what’s the property how much is the price how much is the rent what contingencies are there etc etc, and usually it’s one party that prepares the LOI and gives it to the other and says here the terms that, I’m expecting.

 

Can you live with this or not and so hopefully you cut down on the number of hours and the number of dollars spent trying to negotiate the transaction because you find out quickly you and the other party are just in completely different solar systems, you’re not you’re not even in the same general vicinity as each other and maybe it’s not worth it okay, or you find out that you are close and then you can come to some understanding about the price or some of these other terms.

 

The important thing. Also to understand about Illinois as an MRUs is that in general they should not be binding contracts. However people make the mistakes of preparing LOIS and not putting in the right qualifying language and unwittingly when both parties have signed the LOI suddenly there’s a contract an LOIS can be, you know short it can be a page it can be two pages at three pages, whereas the contract itself the lease or the PSA the purchase and sale agreement might be forty or fifty pages, but if you write an LOI that doesn’t have the right language that says, hey, we’re just talking here we don’t have a deal until there’s a lead.

 

Or a PSA that we both agree on that has our signatures on. Okay so important to note that LOIs can backfire if you’re not aware that it could become a contract then you don’t put in the appropriate language and otherwise can be a good thing the flush out issues early quickly and inexpensively before the parties make the commitment to do the heavy lifting then going on to that 40 or 50 page contract.

 

So a good LOI is like a road map for the person who’s drafting the contract. There are still other provisions in the contract that aren’t addressed in the LY the LOI typically concentrates on the material economic and legal terms but the bill rice okay yeah basically yeah, it’s the yes the the foundation of the contract but there could still be details in the actual contract that the parties might not be able to get over.

 

So signing an LOI doesn’t obligate anybody there are some other cautions to bear in mind among them is that if the yellow eyes says the parties will negotiate a contract. Then under California law. There’s an obligation in the context of negotiating contracts to act in good faith. Right now you and I sign an LOI and we say in the LOI now we’re going to go out and and you know negotiate the rest of the contract that means both of us have to take you know, somewhat reasonable positions we can’t just suddenly arbitrarily pull out of negotiations.

 

I don’t feel like talking to you anymore right you could be soon. For that so an LOI in addition to having certain basic terms also has to make it clear whether. It’s binding or not binding whether portions of it are binding other portions may not be binding binding portions might be for example you and I are both going to keep this conversation confidential we’re not going to tell anybody else about this or you the seller agree that you’re not going to negotiate with anybody else while you and I continue to negotiate the terms of the contract.

 

Okay, so there’s important stuff to put in an LOI in addition to the basic terms that you’re trying to flush out and the additional stuff is to protect the parties against the possibility that they unwittingly have made a contract or that they have somehow bound themselves to continue to talk to the other side and negotiate even when they don’t feel like it.

 

So. They’re simple, they’re simple documents, but they have like most documents, you know, trap doors and pot holes in them that you also need to be aware of. What I will basket and look the same let me just say in larger transactions you typically see LOIs. In advance of the agreement and if I could just say from a personal point of view.

 

At least half the time that clients asked me to prepare or review commercial leases or purchase contracts, they’ve already signed the LOI and they’ve already made some sort of commitment on some of those terms. Right, it’s not necessarily a binding contract, but you and I have both agreed that the price is going to be 1.5 million and so.

 

You know, when you come to me and you say here would you look at this I might say really is 1.5 the right price, maybe it should have been like 1.1 or something else due to these other circumstances. Okay well this is how did the seller need to sign so or the just the buyers like I said one party one party prepares the yellowy for the other party to sign and say yeah, I agree to these basic road map milestones, okay, but my point that I was gonna make is.

 

Often brokers are involved in the drafting of LOIs, and if you’ve got a good broker that could be good that could be all right like I say at least half the time I only hear about the transaction after the LOI is signed and sometimes in that context. I have to tell the client gosh it’s too bad you made that commitment.

 

You know, maybe we should have talked at least two days before you signed the LOI so that you had more information going into that. LOI.

 

The same anyway the two pages opportunities can’t put it back yeah right right all right well thank you for John and everyone thank you small apartment investor calm times and stuff on there. John, how can people get in contact with you with their needs or questions? I don’t know if you have a link on your website to mine otherwise they can find me at the law office of John Gutierrez, that’s g u t i e r, r e z or john at j gut tiara’s law.

 

Dot com. Right and on the website you guys you can the first episode that I have with John and it’s these out and have other things other videos and. All kinds of stuff. So, thank you all. Hope this has been helpful for you to take some action and but the right action I all action it equals progress.

 

So just. Thank you for your time. Cornell. Cordell is always a pleasure. Take care everyone. Okay, bye now. 

 

Podcast Series 6: The Journey

The Small Apartment Investors Show
The Small Apartment Investors Show
Podcast Series 6: The Journey
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All right Cordell Davenport here again, small apartment investors com go to the website get your free report, have your family then expenses covered by small apartments that you've owned. Got some good data in there, go check it out. Mindset. Plus skill set plus performance equals results. Foundation is mindset and so these videos that I'm doing right here these recordings is talking about mindset. 

And then soon I'm going to introduce my team CPA attorney, property manager and mortgage broker. And those are four main pillars when it comes to. Owning and managing and buying apartments but my niche is small apartment. Margo is to own a portfolio a small apartment. It's multiple reasons why I'm not going to get into it right now, but that's Michael. 

If you have the same goal as me check me out online check out the website, follow me here as I try to. Push out information that I. Digest so to speak. And this video I'm going to talk about beliefs. And your beliefs compose your purpose. Your purpose formulates your desire your desired fuse your actions your actions manufactured your results. 

And your results determine your success. Now you most likely are familiar with the story of Wizard of Oz. But have you really thought about the lessons that it could have for you? Like the little engine that could. The Wizard of Oz has been inspiring children who are now grandparents even great great grandparents this author lineman. 

Frank bomb born shortly after civil war. Lived enough. To see this beloved story come a hit a play throughout the years became a movie and now here's my summary of it. Once a tornado blew through a town a girl named Dorothy from her home in Kansas and brought to us place called laas lost she was lacking a roadmap of directions she relied on the advice of a good witch who advised her to follow the yellow big probe to Wizard of Oz who maybe can help her get back home because he was powerful now on the way to the wizard George made a scarecrow we're joined her now. 

I hope that the wizard could give him some brains the name both made a ten man, he wanted a heart because they wicked witch had put him under a spell removed his heart. By now Dorothy and Escare Corps are such true believers in a power of the Wizard of Oz that they easily convinced the 10 man to join them. 

Lastly, they meet a line. It was afraid of everything and everybody. He joined the journey hoping the wizard can give him courage to be the king of the beasts. As in any good story, there are problems on the way. First there's the guard who tells him that if they have come for a stupid reason the wizard might get angry and destroy them all because this was the belief that the Wizard of Oz the projected. 

The Wizard said they couldn't get what they wanted until they killed the Wicked Witch and brought him proof in spite of vast odds and lots of trickery on the wicked which is part they prevailed in the end the wizard is revealed as a fake but he can't do two important things which is acknowledged that the scarecrow tin man and line already have had the quality song like courage brains and a heart also being from Kansas. 

There was a hot air balloon that they could return to Kansas. The stories of brilliant portrayal of how easily our beliefs can trip us up. Hoffman, are you like the good witch who makes pronouncements based on nothing more than hearsay how often are you like Dorothy he was so quick to believe the pronouncements of others how often are you like Dorothy's traveling companions who look outside themselves for the power's already have the story also shows how basic is the human drive to better ourselves often the main characters reinforced their beliefs. 

That they could get what they wanted. Remember the 10 men saying he could hear that he had not yet found. The heart beating in his body how often do you go beyond your limitations because you want something so much how often do you find just the right allies because you are so engaged in your journey of change that they want to come along to. 

How can you like Dorothy at the end rediscover the joy and possibilities in your world that you have once overlooked? What other stories from this childhood have powerful wisdom for you as a dumb. So, Everything about. Wizard of Oz was about beliefs. And. There is a quote that I heard I ran actually. 

And it says a belief doesn't he does not need to be considered a belief all you need to do is believe it and is true to you. When you live your life, we'll believe are you rolling with? 

Are they limiting beliefs? Time will tell. But the first step is really for you to be aware. So we had Wizard of Oz. They go on this journey. But that journey didn't really need to be to happen because they had everything they needed. All right, so that's it for this little brief recording on mindset. 

I look forward to sharing some more now, go get it.

Podcast Series 5: Attraction

The Small Apartment Investors Show
The Small Apartment Investors Show
Podcast Series 5: Attraction
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I'm back y'all. Cordell. Davenport, small apartment investors.com. Preaching mindset plus skill set plus performance equals results, check out the website, small apartment advances.com, get your free report, have your family live in expenses to be covered by a small apartment that you own. And as I mentioned and I continue to say. 

Everything starts with mindset is a foundation of all personal growth and there is a weave that consists of thoughts goals self-discipline. Self-talk affirmations and about dress some of those previously. And in this one they talk about mindset, I'm going to continue to talk about thoughts, but also talk about affirmations and how they can help. 

To help you accomplish your goals. And so when it comes to self-talk it changes thoughts, and as I mentioned to you all earlier that thoughts are things thoughts are very important. And thoughts change beliefs beliefs change attitudes added to the change at actions. And actions will change the future now if you want to break the cycle of negative thoughts you have to repeat the positive statements, these are called affirmations statements of the reality that you want to create as if it's already true, although it hasn't happened they can help you erase fears change attitudes focus on what you want for yourself make beliefs create focus, create confidence. 

And to use affirmations you have to speak in the present tense and describe what you want as if it's already accomplished let's say that you're afraid of heights and don't want to be afraid so make an affirmation. I'm enjoying being high up. I love these views although you may not feel that way you can trick yourself into believing the commands that you give yourself and acting as if it's true. 

Now when you hold yourself back. Aren't you acting as if you believe your fears to be true over time the affirmations you tell yourself will become just as powerful as the old negative statements now to reiterate these positive statements should be in the present tense as though they have already happened they've already been accomplished but using affirmations say what you want not what you don't want don't say. 

All right. I will not lose my temper say I am relaxed calm impatient don't say I won't break my diet say I prefer nutritious foods, don't say I'm getting fit do say I am fit. Now let's say that you have found out that your car is in the shop and these major repairs you you say I can't pay for this. 

Why me? How do I get to work? This think it makes you feel upset that kind of thing it doesn't provide a solution to get the situation focus on how to make it better. Focus on what you want now what you don't want change around something like I'm grateful that I have this card. 

It has provided me with good transportation in the past and now I know my car is gonna be a shop. I'll be a little time. I can always get a ride from a coworker and pay them. Now, you notice how you change your feelings to a change what you say to yourself. 

Negative so talk great limits us if you are constantly saying to yourself, I'm not smart. I won't ever amount too much. You probably won't try to learn a new skill that's because learning the skill doesn't fit in with what you're telling yourself. Thus become a prisoner of your own beliefs. 

Nothing has changed when you first change your self-talk except the signals you sent to your brain which caused you to feel a certain way, but this simple change has huge impacts remember the minds of cockpit in the airplane your mind controls the body. Tell me someone you hate your job cannot help your job by telling yourself you are unhappy with your job, you are most likely will not like it if you want to change certain behaviors, sometimes the trick is to say exact opposite of what you feel but what you currently do. 

If you're always late say to yourself, I'm always on time. I'm always on time. If you want to quit smoking don't say I have to stop smoking say I no longer enjoy smoking smoking is disgusting. If you want to stop procrastinating focus on the benefits, you can achieve I enjoy getting things done on time. 

So those little samples that I just relate to you. Has nothing to do with buying and managing small departments, but they're transferable skills. That you can utilize and sometimes you may have to get a depend a paper or write yourself an email and create things. So if you have a certain goal that you want to achieve whatever it is. 

Right affirmation, look at those affirmations read them out loud that can help. It's helped me. Once again go to my website small apartment vessels.com, get your free report, have your family live in expenses covered by small apartments you own. See you later. On the next one. I look forward to still talk to you about mindset.

Podcast Series 4: Self Talk

The Small Apartment Investors Show
The Small Apartment Investors Show
Podcast Series 4: Self Talk
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Back at it. Cordell, Davenport, small apartment investors.com. Still on the journey talking about mindset. Go to the website small apartment investors.com pick up your free report, have your family live in expenses covered by small apartments you own so 38 page document. That has some gold in it. And. Once again mindset plus skill set plus performance equals results. 

Going to focus on mindset later as I mentioned after I get through with these mindset I recording so I'm going to introduce. Professionals that talks about skillset. And now after you learned a mindset, hopefully not just for me, but you get it from a variety of people. I know I did. 

You get that skill set under your belt not a performance up to you. I could pass you the ball but I can't make you shoot. And I mentioned earlier about thoughts and how it's so key. And it's very true and I'm going to stick with thoughts of talking about thoughts. 

And there are things that you need to consider about thoughts. And that is like how you think is how you act. And you can determine how you act sometimes by using self-talk. What do you say to yourself? So talk can be done out loud. Or it can be done silently. 

And we talk to ourselves constantly. Throughout the day. Now there are types of successful self-taught them their self-delimitating self-talk. That's the starting gate really to success is learning how you talk to yourself it's how you explain events that happen in your life how you direct yourself what you tell the brain most it will accept that's true. 

Now no one's in charge of your happiness except for you realize that all your habits are learned and that's your past thoughts your past self-talk will influence your future some explanations we give ourselves our positive their empowering others, they give us anger, they feed our frustration at least a depression despair, but most people don't stop and think about how they talk to themselves. 

If you listen to yourself talk, you can then change that talk as necessary to help you change help you improve your behavior your results accomplish your goals. And form new beliefs if you need that self-talk is a song that's burnt into your mind. Now you hit the play button when something happens and stored by paying attention to what's going on in your head, you'll be able to decide for the thoughts and then sing a new song that gives you different thoughts. 

When you repeat a mistake. It's time to mistake a decision. So when you say to yourself any of the following things. Of this negative type of self-talk, like I have to I should I need to I'm trying to keep what you really want. You have to change it. Change yourself talk. 

I choose to I will. I must I am. That's how. Self-taught. Now. That little book was not the book the little trained a little engine that could Google that story. Where he goes trying to go up the mountain. I think I think he's talking to himself. So just be aware what you say to yourself. 

As you live your life. In our those self-talk. Affirmations helping you or they hurt you. Now, go get it. See you later.

Podcast 3: Self Improvement

The Small Apartment Investors Show
The Small Apartment Investors Show
Podcast 3: Self Improvement
/
Hey. What's up Cordell? Davenport here small apartment investors, once again. Go to the website small apartment investors.com get your free report, have your family living expenses covered by small apartments you own. And as I roll these videos out. I'm trying to disperse what I've learned from books from podcasts. 

I'm a constant learner. And I always want to improve. And a lot of times I have ideas. I always have ideas, but I try to put those ideas out. And create something out of ideas because ideas are nothing without follow up in action. So here I am, this is the third recording of my video podcast recording. 

And. As I mentioned when these beginning stages of these videos, it's just gonna be me and I'm gonna only talk about self-improvement. I always say mindset plus skill set plus performance equals results now the skill set aspect is gonna come into play when I start showcasing my team of CTA attorney mortgage broker. 

And property manager. And I'm gonna give them the floor and have them talk about a variety of different topics so that we all can learn what the with the goal of owning portfolio a small apartment. And so in this report being mindset is still the nucleus and I'm gonna continue to talk about thoughts no my thoughts are important and key. 

Now. We all live our lives. And sometimes when we live our life we have to look at what is coming into our head. And sometimes we have to block it. And sometimes we have to purposely program thoughts in our head to make us endure something to help us push us through tough times to. 

Entice us to do more. Now when it comes to thoughts. What are thoughts come from comes from the brain? A brain is always with us. But are you really putting your brain to best use? 

What are you pumping in your head? Are you letting unconscious things go into your brain into your life it's your work. Or are you using your brain proactively so it can serve you well. Then about a computer you punch a lot of buttons on the computer much this it does this app do this it does that app. 

Now. You punch a different set it gives you different items different conclusions. And if you're not getting what you want guess what you may be punching the wrong buttons. Maybe you have not installed the right buttons. It's the formula. So you have to know what's the right buttons to push what's the wrong ones to push which ones to install which ones are like a virus. 

So you have to analyze yourself do a self-audit. And when it comes to self-improvement it covers a lot of things in life from your family, your spouse your friends your money. Your your your relationship with the creator. Now for me my journey itself improving started 2006. Friend gave me some audio books and I devour them. 

I mean devour them and from that it kind of started off a chain reaction of rotting things to help me improve myself. And it's always now about constant never in being improvement. Now the goal is to make this really a part of your lifestyle. On how you do everything. 

Now it when I say everything and anything really we think about diets diet is going to work. Because the person goes right back to how they used to do things they have to change their lifestyle. And I'm not saying because I'm like totally in shape. But at the same time I know what to do and I don't do those certain things to. 

So just as speaking of eating you are what you eat, you are what you think you're always you put in your head. You are what you think about most of the time. Your thoughts make your character. Your life is parallel to the thoughts you have there are things we can control there are things we cannot control in any given situation we can control our thoughts decide our reaction tell ourselves who we are and how to respond. 

So you need to direct your thoughts for what you want. Now. It's up to you. Go get it.

Podcast Series 2: Thoughts

The Small Apartment Investors Show
The Small Apartment Investors Show
Podcast Series 2: Thoughts
/
Hey. What's up y'all? Cordell Davenport here again, small apartment investors.com. This is the second video podcast that I've done as I said. I'm gonna continue to roll these out by clockwork, that's the game plan. Go to the website small apartment investors.com. I have a free report for you it's called have your family live in expenses covered by small apartment to your own. 

It's about 38 pages a full with a lot of data. I went to the lab big time to come together to bring that document together, so check it out, you can learn some things. And I always say mindset let's scale set plus performance equals results. I'm going to focus on mindset these first several videos that I'm doing or recordings. 

And then when it comes to the skillset, that's why I'm going to introduce the team that I have of the property manager attorney CPA and mortgage broker commercial at that so that you all can learn. I can learn. I'm selfish to be honest, not just selfish but you know when I'm doing these things and as I learned in a I want to know what to do as well, so as I'm learning as I talk to these. 

Four individuals like I said before this is going to be a merry-go-round. I'm not going to deviate and trying to talk to other people every week trying to be on the hustle on a grind trying to find somebody to talk to that's not what I want. So. What I'm going to talk about in this recording is thoughts in the past I listen to. 

Probably 50 different audiobook recordings. And they have a common theme. And the number one thing that really stands out is thoughts is how a person controls their thoughts. And that's what I'd like. I said, I'm going to talk about in this recording. Now there are things that you can control. 

Really. Number one is thoughts. To his actions three is the disciplines that you have then the fourth one is friends. Now the acceptance of responsibility is not optional. The words I am responsible are perhaps the most powerful words in any language to short circuit negative emotions and gain focus your job is to accept responsibility, even if you are only responsible for how you respond to the events that come your way in life, you can only claim your surprise once and after that you're unprepared. 

Whether you just differences between successful people and those wish they were successful is how they respond to opportunities in life successful people make better choices and they practice self-discipline while unsuccessful people don't success comes in many shapes now, my definition is to go from. Knowing your goals and you accomplish your goals. 

That can be wealth health spirituality fitness, whatever it is. That's what it is, it's to know what you're wanting to get that's what success is in my book, so you have to write your future what you want. Now most likely sometimes. You try to live your life. But you're missing something. 

And that missing something is really self-improvement. And practicing habits to get better you may lack vision you may waste a lot of energy without getting really where you want to go because you don't know where to go you can't hit a target you can't see thus, you don't reach your goals because you like vision you let confidence to keep you going through the hard times. 

You may not bother to learn what what really is self-improvement. How can I get better? Tony Robbins says successfully is clues find them. Sometimes you may hang around around crowd wrong crowd we all heard the same birds are the same feather flock together how true is that well you hang around with your socialists are. 

Can bring you up or they could be crabs in a bucket pull you down. Winners makes progress makes excuses don't be stuck on the loser mindset, but making excuses have self-different discipline. To do anything is how you do everything. Discipline is what puts the gas in the tank. Discipline is the glue to keep you going it what it does it creates stain power. 

And I don't play sports anymore. Well actually I'm starting to learn how to play golf. I haven't got on a course yet just been on the golf range trying to get my swing tight, but um, I used to play who basketball once a week. Grew up playing a high school in college, but those days are gone. 

But I can tell you what? All the good players that I've known that I played with. Or against they had good self-discipline and all the great players have self-discipline not just ambassador ball, but it can be anything that a person wants to do. So hope this has helped. And I'll see you back next one go to the website small apartment investors.com get that free report. 

And I'll holler at you soon. Go get it.

Podcast Series 1: Mindset

The Small Apartment Investors Show
The Small Apartment Investors Show
Podcast Series 1: Mindset
/

Cordell here with the very first podcast for small apartment investors and I’m going to do things differently.  There are a lot of people on the hunt trying to find the same people, I shouldn’t say the same people but different people every time they do a podcast.  It is always an interview,  a Q&A which is good. I’ve learned a whole lot that way.  

 

When it comes to multifamily Apartments a lot of the time these are syndicators that are talking to people about their business and how they do their business,  I’m not knocking it. I’ve learned a lot through that.  But my approach is different. I don’t want to be an indicator and I don’t want to invest in a syndication.  My goal is to hold small apartments and my goal is to find people who speak the same language as I do.  That has the same goals as I do.  

 

My thing is I’m going to introduce four different people and I have the same people talk so once a month I’m going to have a CPA once a month my real estate attorney once a month will have a property management company and once you might want to have a mortgage broker that talks about buying a managing small apartments.  

 

First I want to talk about mindset self improvement and it is very important that you and I develop those skills and so everything starts to self improvement mindset and I have this Mantra that I always preach mindset + skill set + performance = results.  

 

On my website small apartment investors.com I have a free report that took a lot of work to make.   It’s called have your family living expenses covered by small apartments you own.  

 

So this very first video recording I have decided to talk about complaining.   When you or I or someone you come across, complains.  Now when it comes to complaining about events and your life you complain and you don’t put forth any action you will make no progress.   The thing is you want to say don’t blame it own it.  Until you accept responsibility and take charge of your life nothing is going to change.  A lot of people like to have this,  become this type of person,  have good qualities, look a certain way and although they may know what they have to do to achieve certain goals they have the excusitis syndrome.  They say someday, I’ll someday get this someday,  the truth is the road someday,  will lead to the town of nowhere. 

 

Of course, responding differently means you must give up blaming the event itself. At times when something doesn’t work, we blame what happened rather than our reaction to it.

When you don’t take responsibility and make excuses, you:

  •         Procrastinate
  •         React rather than be proactive
  •         Blame others
  •         Justify your actions or lack of actions
  •         Not act humble

Once you begin responding decisively to signals and events as they occur, life becomes much easier. The feelings of hopelessness and lack of control go away. You start seeing differently. No longer do you say to yourself:

“I feel like a victim.” “I feel used.”

“Only bad things happen to me.”

 

Rather now you say:

 

“I feel better.” “I’m in control.”

“I can make things happen.”

 

You need to accept the fact that you are the one who has created the way things are. You took the actions, you thought the thoughts, you created the feelings and you made the choices that got you to where you are now.

 

YOU ALONE HAVE THE POWER TO MAKE SOMETHING HAPPEN IN YOUR LIFE, WHETHER YOU ACTIVELY CREATE IT OR PASSIVELY ALLOW IT TO HAPPEN OR CONTINUE.

 

What are your favorite excuses for not making the changes you know are necessary if you want to achieve your goals? The starting point of personal liberation is for you to accept complete responsibility for who you are and for everything that you become. You can never give responsibility away. The only thing that you can giveaway is control.

so what are you going to do once again check out small of her you bastard, and I’ll come back later some more videos okay y’all go get it

Podcast Series 7: Understanding Commercial Real Estate Contracts and Letter of Intent with John Gutierrez

The Small Apartment Investors Show
The Small Apartment Investors Show
Podcast Series 7: Understanding Commercial Real Estate Contracts and Letter of Intent with John Gutierrez
/

Hey everyone Cordell Davenport here with small apartment investor my thing that I always say is mindset plus skill set plus performance equals results and right now introducing once again. John is going to talk about skill sets when it comes to. Legal matters. That is a real estate attorney. The second time actually we’re gonna have a conversation.

I’m gonna have a conversation with them and as I learned you guys will learn but before we get started, I’ll talk about a letter of intense and purchase other agreements but John would’ve been up to what’s new in your life. That you want to share about it is might.

Today, thank you. Cordell nice to see you again glad to see you’re well covered continues to make life interesting in just about every aspect real estate-wise. You know, people are being cautious about entering into transactions but I see sort of a steady increase in activity. I speak with residential and commercial brokers practically every day and at the end of every conversation.

I always ask people what they see happening on the front lines and so far it seems like 2021 is a continuation of where we left off in 2020. So I’m hoping that with increasing vaccination rates with more access to units because one of the issues right now is inspecting a property before you commit to buying it tendon occupied properties can be challenging to get into and so I’ve seen a number of transactions just sort of remain in a state of suspended animation that’s the other transactions fall off the table because is inhibiting the normal process but I’m, An optimistic but.

It’s complicated. I just thought about knowing that when it comes to buying there is a course we have due diligence. You have a financial due diligence roll. Looking at the trailing 12 looking at least is verifying all that then you have the physical due diligence. But because the code if you can’t walk every unit and you can’t do a full inspection.

That’s gonna be interesting because I would think when you write a contract you have certain things embedded inside the contract that you know, if something happens you find something and then it can be like a credit or whatever but if you don’t have a traditional way. I don’t know why anybody will make a move right now because I know that personally I am trying things but in California where we’re at I know that on June 30th, I heard an attorney from San Francisco give a webinar.

I talked about Kobe as tenants, oh money, hey what he said in California is they will be able to get eighty percent of what is held to them if they file these paperwork. And then at the end of June 30th, they decide not to take the money they can go ahead and perceive the court proceedings and try to go to small claims court but there’s no given that’s gonna happen for them so until June 30th, basically there’s there’s that cause when eviction convicting people but at least now some of the owners in California are going to be able to get some of that money back.

But do you think that? It makes sense just to let the dust settle. Or how are you seeing you know, because like if you can’t truly do diligence just you know, you’re going to get caught with somebody else’s mess. And now their message is your mess. Yeah exactly as I tell clients when you buy property you step into the shoes of the previous owner no matter how clean or unclean those shoes are it’s an interesting question you’re referring to the latest piece of state legislation, it’s referred to as SB91 California has set up a rental assistance program.

As always the devil is in the details and we don’t have a lot of details yet as to how that’s going to work and how much money is there and when is it going to run out? But if that works then it will provide some relief to some property owners.

Tenants generally remain protected against eviction and will be protected against eviction if the reason for the eviction is they couldn’t pay rent during covet as a result of covet problems that they were experiencing so you know, if and when the dust finally settles. A there will be evictions that’s going to clog the courts and slow down what otherwise is supposed to be an expedited process.

And those are going to be evictions generally for non-covid rent reasons. And. Otherwise owners are going to have to go to small claims court to try to get some money but that is not going to result in an eviction that’s just going to be compensation or core payment of moneys that were owned.

Transactions that I’m seeing occurring with covet inspection problems, like I said generally either tend to remain in suspended animations, you know, the contract the contingency period comes up for expiration and it just gets renewed or there’s a provision that says the contingency period doesn’t start until I have access physical access to the unit.

In other cases people are doing virtual tours and inspection but I think you’re absolutely correct that it’s a it’s a risky proposition for for buyers but there are also some desperate sellers who are willing to take a haircut on the purchase price just to get rid of the property either because they absolutely need the the money or they just want to get out from being a landlord during times like this.

I think that’s when I sell it to play if it’s so things like that because. Yeah because even an article about someone in San Francisco. I think oh like 35,000 dollars and back pay. And he’s out of work and if you want to try to buy something you buy on the numbers, like how much money is this thing producing it’s not producing or what it used to be is it’s going to just be a mess so I don’t know yeah so it’s going to be interesting.

I think that when it comes to buying and selling this about finding problems and coming up with some solution that that person benefits from the other person can benefit from. Seller may have issues. Property may have issues, so how do you uncover that a lot of that is track finding?

Figuring out motivations from people but in this conversation, we’re gonna have today. We talked a little bit and you said something about me and said something about contingencies. I know what those are a little bit operate what contingencies are when it comes to the purchase celebrant for commercial property. Sure, um, a contingency is just a condition that the buyer or the seller imposes on the transaction.

If I have access and I am satisfied with my inspection, that could be one contingency. I need financing and so before I commit to buying I want to make sure that a the property will appraise and this goes to the issue that you just brought up about what happens to the appraisal value of a property under covet when nobody’s getting rent and we don’t know for sure what the rents are going to be in the future but typical contingencies are.

As a buyer I want to inspect the property before I have to commit to buying it. I want to make sure that I’m going to get the financing which includes. A having the property of prey is at a level high enough so that I can borrow as much as I need to in order to buy the property.

And even with an appraisal I just got to make sure that I get approval from the lender for that loan. Sometimes there are other contingencies that buyers put into the transaction and those often include. I own another piece of property. And before I commit to buying your property Cordell, I have to sell my other property because I need the money from that transaction in order to buy this transaction.

And people can come up with other contingencies, but I would say, you know inspection and financing are the two most common and inspection, of course means not only the physical inspection, but as you said reviewing the rentals inspections also can and quite often I would say should include looking at things that are not specifically in the property like the condition of the property but also looking at public records in order to understand.

Is this property currently in compliance with local laws or does somebody think that there are code violations right has the city or has the county communicated with the owner to say, you know we’ve received a complaint and inspected or have we seen that you’re operating illegally. For any number of reasons including these are not legal units or you know, you’ve got electrical outlets next to the sink that are grounded.

All kinds of different things like. There’s a statement. I know there’s a phrase. That says if this then this. So this is the continuity that someone has If this happens then this is what we’re going to do. Like okay this is broken we want twenty thousand dollars off or this is this all one extra ten days how does a person figure out okay, this is a problem my contingency is this and I want to get this like how do you?

Is it the same thing recycled through a contractor contract like common common theory or common practices that people use or? Is it up to the person to figure it out?

Yeah, probably the latter. I mean, a typical contract will state the expected closing date, right? So depending on the

property that could be 30 days, it could be 60 days it could be 90 days and you know, one of the other things is that there might be SBA money involved and SBA has its own.

The loan approval process that’s different from the lenders. But typically, the contract will say, you know, we’ll sign a contract dated March 1st and it will say closing is supposed to occur by May 1st or April 30th.

So we’ve got roughly two months to close this transaction. During that time. I as the buyer want to inspect the property and I want to make sure that I get financing. So I would put in provisions that say. Even though I’m supposed to close in 60 days, I want 21 days to inspect the property and kick the tires.

So to speak I want 28 days to get my lender’s satisfactory appraisal and loan approval. And when those dates come up 21 days 28 days of my example, if the buyer hasn’t had access to the property. Then both the buyer and the seller have to agree to extend the time period for that inspection.

Otherwise buyers could be deemed out of contract if they don’t act to either remove or otherwise wave their contingency. So typically when the process of clearing the inspections is delayed because of external factors usually the parties can agree to some reasonable extension of time. So, okay, we’ll give you another 20 days.

To do an inspection and now we’re going to have to extend the closing date that we otherwise thought was going to be a 60-day date. Now, we’re going to kick that date out further as well. But another scenario is the buyer does have access to the property and maybe they’re making it all cash offers so they’re not worried about appraisals and financing.

So the buyer has access to the property and she doesn’t like what she sees. Something about the physical condition of the property, maybe they met a tenant or you know, tenants put nasty signs out on the door basically saying, you know, I don’t like you. I don’t want you here that kind of thing.

And so the buyer then has to decide. Do I still want to buy this property or should I just walk away? And if they’ve decided to walk away, then they would tell the seller. I haven’t satisfied my contingency. I’m not going to go forward with the transaction and then typically both the buyer and the seller will sign a cancellation and deliver it to the escrow and the buyer should get their money back.

They’re deposited back. In other instances where the buyer isn’t as afraid of the property the buyer might say hmm, it’s not perfect but I can probably live with it. But seller if you want me to stay in this deal give me something right which is as you said typically a discount on the price, whether it’s because the roof needs replacement the foundation is cracked, there’s a nasty dispute going on with a tenant that’s likely to involve, you know litigation or proceedings and so it’s up to the buyer to decide am I in and if so am I in under the same terms as we originally negotiated or is this an opportunity for me to cut a better deal for myself?

Obviously that depends on the cooperation of the seller so it can just say not interested. Take it as is or move on. And I’ve heard when it comes to contracts when you know negotiating certain things okay? I’m gonna give you your price which if you give me my terms or vice versa, that’s a common thing that I’ve read tremendously.

When it comes to the negotiation, yes. Yeah and but regards to the contract. What is the most common is if the buyer comes to the attorney with the contract or is it the seller comes with their contract and then the buyer has their attorney scratch it up and then make some addendums to it, how does that work?

Well it depends on a few different considerations, you know first is the buyer working with a broker or an agent or is the buyer representing himself okay, you don’t have to be an attorney you can create your own contract whether you find some form or. Create something out of whole cloth.

Typically the buyer will prepare the offer in the form of the contract. And then the seller will receive it and either accept it as is or make a counteroffer right and so they may play ping pong with the contract for one or two rounds in most transactions. Where agents are involved they tend to use a common form of purchase contract the California Association of Realtors publishes contracts as you know, both residential and income property and so quite often especially in Alameda County there’s a form that everybody has seen and it’s mostly you know, fill in the box fill in the blanks and check off the appropriate boxes in other transactions.

I’m handling the transaction for the sale of a fairly big building. It’s a custom. Contract we’re now three rounds into ping pong on the contract. And it’s heavily negotiated. Every turn can be heavily negotiated whereas often in these form contracts people focus on one or two items.

So it’s a world of different possibilities depending on the property depending on the sophistication of the owner. And so on. Now when the parties come together there’s an agreement meeting of the minds is there someone to notarize it or they just sign the paperwork or they do it in front of an escrow company, or how does that work?

Yeah, there are a lot of misconceptions about notaries in different countries lawyers are referred to as notaries, especially in Latin America or the people that we consider lawyers or are described as notaries in in this country in different states different documents have to be acknowledged by a notary and essentially what that means is that the person who is signing the contract has proven their identity to the notary.

A notary is a licensed person. And there are licenses at risk if they notarize bogus documents. So they insist on seeing you know, valid proof of a driver’s license, a passport birth certificate, something like that. In most cases. Signing a contract does not require a notary’s technology. I mean, if one party is suspicious about the other party then there’s probably bigger problems in the transaction and you know, they should obtain proof of the identity of that person quite often that’s simply using a title company opening up an escrow and the escrow the time company will identify according to the public records who they believe is the current owner or owners.

So if there’s a discrepancy between you know, James Smith who’s signing a contract but, According to the title company, it’s actually John Jones who owns the property then there would be some discussion improved but typically it’s not a notary’s acknowledgement. More commonly notary acknowledgments are required in California for documents that are going to be delivered to the county recorder and put in the public records.

So private documents between two parties generally. Don’t require notarization documents or instruments like deeds easements leans things like that have to be notarized. In regards to talking to the other about it earlier negotiating, you know, you’re going back and forth you mentioned that one big contract the third goes around.

What kind of tactics do you see for negotiating that seems to work over and over again and what doesn’t that work over again? It’s like someone you know, the traditional I want a hundred okay, or I want 50 on let’s put the middle you know, how does that all work that you see?

That’s a big question. On. I guess to keep it simple one basic rule is who wants this deal more okay the buyer or the seller, right? I did another transaction where we went through a similar large transaction. We went through 16 rounds of kicking the purchase and sale agreement back and forth back and forth back and forth.

And my client had taken a position, that was basically. Buyer when you buy this property you are taking it as is and I never want to hear from you again and you’re gonna sign and you’re gonna sign something in this contract this contract is gonna have it’s sort of an extraordinary provision that says you understand and agree that you’re buying this thing in whatever way shape or form it’s in good bad or ugly and when we close.

You can send me a Christmas card but otherwise don’t call me right so that’s a tough sell sometimes but you know the buyer hung in there long enough until we finally got the terms that the seller wanted. Unfortunately the buyer was dissatisfied with their inspection and they went away after being inspected again.

Or he’s probably had about that’s not especially if he’s working with brokers, they’re not going to hear all that someone just farts around not serious. You know, this person was serious, this is big money, this is you know more than 20 million dollars, so everybody was serious.

But yeah brokers that’s a whole different conversation about their motivation and how they influence a transaction but again just to keep it simple, you know, generally speaking.

Some people like to play hardball and they just simply insist it’s gonna be my way or no way and sometimes they just keep saying no no no right until the other side either gets tired of that and says, okay, then go away or again if they’re motivated they’ll hang in there and they’ll say well, I’ll give you a little bit of that a little bit of that a little bit of that.

So it really depends on negotiating style it depends on the motivation depends on other obvious factors like the physical condition of the property whether they’re not there are legal problems affecting the property or swirling around that could become issues specifically landlord tenant disputes those kinds of things so I would say for the most part what works is using objective factors.

As the reason for negotiating hardware if it’s just your personality you like to say no you like to be the boss you like to be the person that wins all the time. That’ll work in some cases but it’s gonna be a lot of cases where it’s not gonna work.

Thank you a couple things come to mind is that even I probably find third party reports that back up your viewpoint and that’s that’s kind of yep neutral it’s not it’s not me this is what this report says other thing that I think about reading is great book called never split the difference is only if you’ve heard the book yeah, oh god it’s great book no but I’d like to prison yeah that’s Chris somebody yeah for you guys don’t know he was like an ex FBI negotiator.

I took time. I have to go through the interesting act, but okay, there’s unrelated go ahead, no go ahead now. I’m gonna ask you one more. I was gonna say that. Yeah, no, but I just wanted to say that split the difference is a phrase that comes up often in the context of mediation or arbitration of disputes.

The parties are trying to negotiate to get to some sort of settlement party a is over here part of B is over here and they just can’t get to the middle and then somebody says okay, let’s just split the difference or sometimes a criticism that I’ve heard about arbitrators is, you know, arbitrators generally speaking are not judgments.

I suppose you could be a retired judge and still lead arbitrator, but often I hear criticism in arbitration. Which is an alternative to a lawsuit we could talk about that probably some other time sometimes the rap is that in arbitration the arbitrator doesn’t do the hard work of telling somebody sorry you lose.

And they split the difference so that you get a little bit and I get a little bit and maybe we’re both equally happy or unhappy at the result but we’re both in the same boat and maybe both of us might one day in the future use that same arbitrary again.

So splitting the difference is basically a way of avoiding the harder process of saying absolutely my way or no way. Yet a god is crazy says the negotiation starts when the other person rather than the person says, no. Games begin. You want to get you first so but yeah never spent the difference, check it out you guys.

Wow, ask people the other corollary the other corollary to that. Cordell is. Tried not to negotiate against yourself. Right? Don’t just be the person who’s tossing up softballs and having the other party just hit him out of the park all the time or specifically in this case, the example is one party says well how much do you want to pay?

Yeah, the other party says X the first time says, nope what else have you got? Okay, why? No, that’s still not good enough. How about Z? No, not good. So, Don’t negotiate against yourself try to use a reasoned or rational or logical or objective approach and that usually is something like when you tell me you don’t like what I’m offering you then I would turn around and say well, what do you like?

It’s going to be trying to get when you like. Why don’t you just tell me what you like? And it’s about questions. I remember. Many years ago. I wanted this real estate bootcamp. It was like a one-day thing that got around LaGrange. Basically it was if you’re going to try to buy something you say, okay, I want to buy some from you and let’s say you of course you don’t want to give it the first price, you know, how much do you want?

And then you can say, okay, I want a million dollars I go. Million dollars. Man. Is that the best you can do? Or what do you say? Okay. There’s something like okay, what’s the least amount you’ll be willing to take without losing sleep at night. Say your friends. So if you don’t get X amount, you’re not going to do the deal.

Okay, what’s the least amount? So if you just ask two questions, they may go from a million to eight hundred thousand just by asking the questions pausing and don’t leaving. So yeah, you’ve heard that expression if you don’t if you don’t ask you, don’t get. Right? All right, and I got our last conversation last topic and then we can wrap it up.

John I know you’re a busy man, but we talked a lot about contracts, but how do letters? Relate to contrast why why are there important you know what to look out for as well when comes a letter of contracts like what’s the whole process there that you can later others well that’s a timely question because this morning I prepared a letter of intent for a client who owns commercial property and they’re about to begin discussions with tenants commercial tenants.

Letters of intent are sometimes also referred to as memoranda of understanding LOIs or MOU’s. Are. Useful tools for. Flushing out these disagreements or issues about the major terms of account attract before you actually start drafting the contract. So it can be a good way to sort of test the other parties seriousness and generally a letter of intent or an MOU or an LOI is a term sheet that’s another way of describing it it’s just a series of line items that says who other parties what’s the property how much is the price how much is the rent what contingencies are there etc etc, and usually it’s one party that prepares the LOI and gives it to the other and says here the terms that, I’m expecting.

Can you live with this or not and so hopefully you cut down on the number of hours and the number of dollars spent trying to negotiate the transaction because you find out quickly you and the other party are just in completely different solar systems, you’re not you’re not even in the same general vicinity as each other and maybe it’s not worth it okay, or you find out that you are close and then you can come to some understanding about the price or some of these other terms.

The important thing. Also to understand about Illinois as an MRUs is that in general they should not be binding contracts. However people make the mistakes of preparing LOIS and not putting in the right qualifying language and unwittingly when both parties have signed the LOI suddenly there’s a contract an LOIS can be, you know short it can be a page it can be two pages at three pages, whereas the contract itself the lease or the PSA the purchase and sale agreement might be forty or fifty pages, but if you write an LOI that doesn’t have the right language that says, hey, we’re just talking here we don’t have a deal until there’s a lead.

Or a PSA that we both agree on that has our signatures on. Okay so important to note that LOIs can backfire if you’re not aware that it could become a contract then you don’t put in the appropriate language and otherwise can be a good thing the flush out issues early quickly and inexpensively before the parties make the commitment to do the heavy lifting then going on to that 40 or 50 page contract.

So a good LOI is like a road map for the person who’s drafting the contract. There are still other provisions in the contract that aren’t addressed in the LY the LOI typically concentrates on the material economic and legal terms but the bill rice okay yeah basically yeah, it’s the yes the the foundation of the contract but there could still be details in the actual contract that the parties might not be able to get over.

So signing an LOI doesn’t obligate anybody there are some other cautions to bear in mind among them is that if the yellow eyes says the parties will negotiate a contract. Then under California law. There’s an obligation in the context of negotiating contracts to act in good faith. Right now you and I sign an LOI and we say in the LOI now we’re going to go out and and you know negotiate the rest of the contract that means both of us have to take you know, somewhat reasonable positions we can’t just suddenly arbitrarily pull out of negotiations.

I don’t feel like talking to you anymore right you could be soon. For that so an LOI in addition to having certain basic terms also has to make it clear whether. It’s binding or not binding whether portions of it are binding other portions may not be binding binding portions might be for example you and I are both going to keep this conversation confidential we’re not going to tell anybody else about this or you the seller agree that you’re not going to negotiate with anybody else while you and I continue to negotiate the terms of the contract.

Okay, so there’s important stuff to put in an LOI in addition to the basic terms that you’re trying to flush out and the additional stuff is to protect the parties against the possibility that they unwittingly have made a contract or that they have somehow bound themselves to continue to talk to the other side and negotiate even when they don’t feel like it.

So. They’re simple, they’re simple documents, but they have like most documents, you know, trap doors and pot holes in them that you also need to be aware of. What I will basket and look the same let me just say in larger transactions you typically see LOIs. In advance of the agreement and if I could just say from a personal point of view.

At least half the time that clients asked me to prepare or review commercial leases or purchase contracts, they’ve already signed the LOI and they’ve already made some sort of commitment on some of those terms. Right, it’s not necessarily a binding contract, but you and I have both agreed that the price is going to be 1.5 million and so.

You know, when you come to me and you say here would you look at this I might say really is 1.5 the right price, maybe it should have been like 1.1 or something else due to these other circumstances. Okay well this is how did the seller need to sign so or the just the buyers like I said one party one party prepares the yellowy for the other party to sign and say yeah, I agree to these basic road map milestones, okay, but my point that I was gonna make is.

Often brokers are involved in the drafting of LOIs, and if you’ve got a good broker that could be good that could be all right like I say at least half the time I only hear about the transaction after the LOI is signed and sometimes in that context. I have to tell the client gosh it’s too bad you made that commitment.

You know, maybe we should have talked at least two days before you signed the LOI so that you had more information going into that. LOI.

The same anyway the two pages opportunities can’t put it back yeah right right all right well thank you for John and everyone thank you small apartment investor calm times and stuff on there. John, how can people get in contact with you with their needs or questions? I don’t know if you have a link on your website to mine otherwise they can find me at the law office of John Gutierrez, that’s g u t i e r, r e z or john at j gut tiara’s law.

Dot com. Right and on the website you guys you can the first episode that I have with John and it’s these out and have other things other videos and. All kinds of stuff. So, thank you all. Hope this has been helpful for you to take some action and but the right action I all action it equals progress.

So just. Thank you for your time. Cornell. Cordell is always a pleasure. Take care everyone. Okay, bye now.

Podcast Series 9: Understanding the Value of Small Apartments With Ed Craine

The Small Apartment Investors Show
The Small Apartment Investors Show
Podcast Series 9: Understanding the Value of Small Apartments With Ed Craine
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Cordell…

All right, hey everyone Cordell Davenport here with small apartment investment.com and I always say mindset the skillset was performance because results and with my show that I’m having I always talk about. What’s the main things that we all need to know about when it comes to apartment investing.  .

Real estate attorney, CPA, the commercial mortgage broker and property management. I have a history with Ed you guys, of course don’t know but probably about 2007. I got my real estate license when I got my real estate license.

Let me back up. I first got introduced to self-improvement. I started learning about self-improvement and I got hooked on self-improvement and from that I decided that I wanted to be able to change my financial situation when I changed my financial situation. I discovered real estate so at the time I bought these bootcamp stuff in San Francisco. Paid too much money for it.

Like foreclosures or expired listings and I did this and that and then I came across apartments and commercial real estate starting learning about certain things and then I heard about CC I am. Stands for a certified commercial investment member that was in the world is that. And then I said, okay.

I want to be able to get into it. I said okay we find this and so I started looking up and I said all right, let me look up the directory online. I’m in the Bay Area San Francisco, I found Ed’s name contacted. Ed says, you know, I’m here and I want to do this.

I want to do that and you welcome me at the time after full-time job and trying to juggle two things about going on back and I couldn’t really give the attention to that I needed but what I was there was this company I learned a lot have a lot of respect for him and his team highly credentialed.

So my website is a small apartment. I have a free book you can download to talk about how to make a cash flow that takes care of your family living expenses expenses, but I want to introduce someone really fast. All right and crane at the CEO of award winning Smith Crane real estate financial San Francisco and its originating negotiating to billions with the B on all tax properties, he has the statewide president of California.

Association once professionals is the end of this as president of the Northern California chapter 6. I am Southwest Regional VP for CCIM and a national board records of the CCM Institute, And this company has won many awards including his being recognized as a California mortgage broker of the year 2008.

Brought his career in has been a speaker instructor and ride for the mortgage and real estate industries is also a concrete offer for the four best-selling business books. It holds the CCM designation and an MBA in finance and marketing from Cornell University is proudest business accomplishment is the fact that he has been able to help thousands of clients get loans they need to buy, build and refinance their properties.

So for everyone, My goal is to have a showcase once a month to talk about certain topics and our topic today is to understand the valuable partners of commercial real estate. And I would before we start getting to the details besides this profile, that’s ready for you. We all know I just read you into Cornell, but how’d you get started in real estate in particular?

Ed..

Well that sounded and interesting thing that I. Long story short, my grandfather was a real estate broker and upstate New York in a small town and my father had an insurance agency. It was also licensed in real estate. I just grew up with it and you know when you grow up with something you don’t always go that direction, right?

You know, you see a lot of people now see your kids don’t want to don’t want to do what you do. They wanted to do just the opposite and I ended up finding it really interesting and real appealing. So I did a couple other things but, Came back to real estate.

Cordell…

So. No I know what it means CCM but you want to talk about what he’s saying is for those that don’t know.

Ed…

Yeah, so it’s it’s designation that you get through the National Association of Realtors, which has a whole spectrum of designations for residential real estate agents. And commercial for commercial sales and investments CCIM is the top designation and it’s unique I think in the world of real estate designations because it’s there’s there’s a heavy dose of academic work and then you have to submit a resume of the actual transactions that you’ve worked on should you know, because they want they don’t want to just have book knowledge.

For you to see them they want you to have practical knowledge and then you have to pass a comprehensive exam. And it’s rigorous. It’s so it’s I actually I’m prouder of my CCIM designation than I am of my MBA, that’s how much I think of it. It’s real , it’s a great program you need and along the way you it’s a great way to network. You meet a lot of terrific people.

It, you know, I’ve done business through the years with many fellow CCIMs and. They don’t necessarily go through and get the designation but they come for the knowledge and have a lot of people and my spirit from that so no when I was you. Actually took. Control.

Cordell…

Do they have to have a real estate license?

Ed…

I think you can still do it. There’s always been a track for people who are non-licenses, but. It’s you know, it’s not for everybody. I’ll just say that it’s it’s but there are corporate and corporate real estate departments that send people to for instance through the whole program.

Or what they want to be their strengths we all know this to real estate. The underwriting process some people may like when we are analytical so it makes a lot of sense for somebody to learn that process. Yeah, by the way, I did this. I was just thinking that one of my fellow CCIM guys, who was a property manager, had met at the.

There was one principal in particular that he did most of it most of his business is doing property management for that owner and he meant the owner NCC on classes because the owner wanted to get more knowledge just for his own for his own sake. That there’s that’s a good example of a non-licensee taking the program.

Cordell…

You just can’t say okay, here’s 20,000 dollars and. I want to be a real estate investor. Anybody here has some money, but what do you do? To stand the numbers it’s the business or even if you’re a method you have a property management company you need to manage that manager so you need to know what key metrics with key words or questions to ask it’s not like buying stocks you click the button boom, here’s money.

You know, real estate is not passive, it’s an active activity. If you want to go that route, of course. Occasionally still you need to understand the numbers. What does it mean so that you can just can’t take what somebody’s saying as true so I don’t want to go off on that tangent but today as I said.

What I try to have my show nothing’s rehearsed. We’re at the bar having a beer and. Have to talk about real estate but in particular this conversation. About understanding the value commercial real estates for those that don’t know anything about five above regards to the apartments that are considered commercial.

You can see that the difference is residential and you base it upon. But so I’ll let you take the floor and we can just you know, just go over the fundamentals for somebody who made like say on a triplex they know about that okay, they know about a four plus whatever might be but they want to step their game up they want to go from the triplex let’s say a 20 unit apartment, but what things should they know about commercial real estate value?

Ed…

That’s a great question and by the way that’s a terrific path for people who want to get into into apartment buildings to own rental homes or two or three or four unit properties because the ownership it and financing and management are a lot easier and and get kind of get your jobs, you know doing that and and then figure out if you if you like it too that you don’t want to just be good at something right you want to really enjoy it because, On if you know life is short into it enjoy the enjoy the trip, so anyway the.

So. Going get started there and then go in from there to to say 20 units as an example is a lot easier because you’re going to be doing many of the things that you’ve that you did when you when you bought your two or three or four unit property, you’re you’re going to be evaluating the what’s the rental market what are the sales comes and what’s the temp profile and what’s the location and what’s the opportunity to add value and you know, a whole spectrum of things that go into.

A bit evaluation of a property well. So do your hands on things to get your experience with the small properties and then when you go out. And I I like to say if you’re 16 units and up. You’re getting some leverage of time typically and because those are properties that you’re going to have on site managers required by state law and California and some other states.

But yet you change the management’s that structure the whole management concept so a lot of us might be self-managing smaller properties. And you could still self-manage a 20 unit property or 16 and above but you’re going to have to have an on-site manager right so now you’ve got to manage a manager not just on the property and deal with the tenants but give them instructional you’re the boss, this is what I want you to do.

To check. But if you don’t know that if you know, that’s yeah yeah and by the way, of course I’m talking about the hands-on investor here, you could also have a professional property management company and you still need to be able to manage that right now. They can’t read , they can’t read your mind and they may not do a good job if they don’t know what you are if you’re not an active person and giving them direction, anyway.

So well you’re also gonna be leveraging your capital break so you’re you’re you’re not instead of having several different properties and different locations maybe and you’ve got every you’ve got all your money or bigger tons of money on one place and that can be more efficient too and it also if you’re if you’re moving from several smaller properties to one bigger property, you’re you’re now also changing your risk profile and, There’s some so you’re taking on greater risk now right and until you build till you build a portfolio a bigger properties, you got all your eggs in one basket right when you go for your three units or your twenty unit or two or three.

Well. Yeah everything from local market conditions like employment unforeseen things we’re right in the middle of covet pandemic right, which has. Who are your tenants? How do they get so impacted by changes in unemployment or employment? How do they get affected by it? Things like pandemic now how do they get affected by ships in the neighborhood, you know, the shifting demographics in the neighborhood.

That’s right for better or worse right shifting demographics can cut both ways, so there are just a number of factors. You have to be cognizant of the fact you’re not taking on a greater risk. So you want to have with these bigger properties as you go up inside you you want to have your rates of return be higher so just this is just kind of theoretical talk right now right it’s talking about what happens when you’re moving when you’re moving from smaller properties to bigger so they say that is background for.

So a few key things the that I want your listeners to really focus in on when they when they go out and they look for something to buy so and these also they apply to the small ones too, but they’re more important with the bigger properties. You need to know your rent, you need to know you need to see so many apartments you need to go shop for apartments and both are prospective rentals let’s say but also are prospective buyers but to the extent you can get in to see properties that’s a whole other topic for another time but.

To be able to walk. Into any unit in the market that you’re going to invest in. On and just to sidebar here get to know the market, pick a market and really get to know it, don’t be chasing all over the place because you know, you’ll be a master of none right you’ll.

Yes. For you. Fresno or you know Portland okay, we’re important, you know, yeah great yeah great point, you know, Berkeley’s probably got 15 or 20 neighborhoods and more than that micro niches, right? Oakland has I don’t know how many dozens but maybe maybe hundreds if you really break it down, but at Saudi rate you should be able to walk into an apartment and say I know I can rent this property this apartment for whatever it is within a very narrow range right and, Each each apartment unit in that in that building.

You should have a good idea of what you can rent it for.

And it is related to this is the whole idea of. Our UMB passive or active investor and what can and can is it is it going to be a value add and not and all that so you have to understand where that property is positioned it in in the in the little market that any market niche that you’re looking at right so are you at the bottom and top end you need to value add?

I don’t know if a lot of people know what to do. Short yeah so value add is that basically buying a fixer upper right and then fixing our upper doesn’t have to be something where you do extensive renovation, although it could be but it could just be cosmetic. Could be designed, you have a better eye for design and than the average person and you make it, you know, you take a plane looking building and make it look really great with just a few cosmetic things.

On. So anyway, so you it’s not good enough just to know what what the what. Rents for that unit. Will be when you when you if and when you own it. But could they be if you did one one improvement or another what could they be if you if you repositioned?

Property as a whole, right? So, um. Maybe you can go there and you know, they’re besides the the the, Just a. Value add in terms of fixing things up there’s a whole value add in terms of especially if you have a neighborhood that’s transitioning towards better, you know more upscale tenants.

How do you position the whole property exterior from the first time somebody sees the property all the way all the way to walking in the unit and what the amenities are and how do you reposition that? So you need to know what the rents could be and what it would cost you to get there, right?

So, When I’m what I’m saying I want you. So you know what the rents are gonna be when you walk in the door. You know what they could be? Whether you want to fix it up or not, it’s a separate question now, but you know what they could be, right?

So, there’s you. You should know more about Reds and the probably even most real estate commercial real estate agents and maybe not property managers but close to it, right? You should have seen so many units that you have a really good amount of my favorite websites for you guys if you want to figure it out.

Cordell…

Rentometer.com  you can go by zip code and it’ll tell you one bedroom two bedroom three bedroom with the need. But you can also call up different properties, you know within a two mile radius say I’m looking to rent what’s rent for you can do your own notes.

You can look at apartments.com and sometimes like it was saying, you know, you want to find out the rents are you can even like have a conversation with a local property management company because they may have some numbers for you. Not to work with it as well. Yeah, we’ll talk a little bit about the one way here about building a team too.

Ed…

This some still talk about your own personal knowledge, right? And the same thing with what’s the property? What other property sells for whether the what are the sales comparables and what what could it sell for when you fix it up what a you know, what are the what are the sales comparables for repositioned properties?

So what’s the so there’ll be a spectrum in any market, you know, what two bedroom one bathroom unit may run anywhere with let’s just say depending on the market of just make up some numbers could be fifteen hundred dollars to thirty five hundred dollars and in a fair. What most people might think of as a market it’s that’s probably they’re probably two, you know, two they’re in two different markets probably but but they could be geographically very close so people are thinking oh it’s you know, it’s West Oakland or you know, it’s with the layout or.

And and now it’s it’s not it’s we’re in Vallejo or we’re in West Oakland, but you could. You know, I don’t want to get too far in the weeds on that but you can get all the ideas. So you’re. You want to know that.

Based on the type of unit that you’re, you know, the units that you’re looking at. Per square foot per gross rent multiple owners of California, that’s a popular thing here, right it’s or by. Great. These are all kind of you know, very rough. Because the details the nitty-gritty is really important with any of these numbers that you’re going to use but um, so you you should have a really you should have a good idea of what?

Whatever the department building is, you want to buy or your system buying it. What other sales comparables are selling for per square foot per unit grossman multiplier cap rate for that particular property in that particular condition, right, so you want to elaborate on.

Yeah, so the gross rent multiplier is you just take the annual rents and you multiply. By a griffin multiplier and you get a value so if you had. You know, the hundred thousand dollars and gross annual rents and you had a ten restaurant multiplier you have a million dollar property right ten times a hundred thousand.

Or if you had a fifteen gross rent multiplier, you’d have a million five. So um, And how would a person know that that number is worth? So you just look at a lot of properties that that are for sale and it gets sold and you talk to you get to know real estate agents and I’d say a particular it’s not I find it’s good to find somebody who you really like and trust and and get to know them and some some of these really knowledgeable and that neighborhood that you’re that you want to be buying it.

Sales agents yeah and and they’ll show you comes and it’s got like all people all people in life summer better. And some are more honest some are not so good some are not so less straight so yeah you want to be really careful when you’re looking number one and number two.

Even if it’s an honest person who’s really good. You might have a difference. Right there, there is personal opinion allowed. So we can make a view and I am looking at the same property we might think it has very similar value or we might be. Part and I’d want to go since I know yet I trust it.

Tell me how what you’re thinking, you know how to come up with that so you want to have a person who can exchange ideas with right you might be thinking of something that I had and even thought of so. So that is kind of going along with the theme of building a good team right so when your team members you can also get to know what praisers.

Work on like brokers who you know, who typically worked for commissions praisers work? You might want to offer. Big you would spend giving them some. Hourly fee for you know, for help helping you understand so just as an idea. It would depend on the appraiser and the property type and I wouldn’t want to hazard a guess but.

You know, it might be a few hundred dollars an hour. I don’t know. Yeah, I know that it’s different designations.

To look for if a person wants to find. Yeah, they are different so MAI is the top tap designation yeah. And then there are some others you know, there are some really good people who don’t have that designation but. And then you know, there are a lot of data sources that are useful loop add co-star companies like that, you can get a lot of data online you can get on the mailing list these mailing list and dating myself right so emailing list distribution lists, whatever you’re going to call for or different apartment agents.

I got all kinds of stuff sent to me. I you know, I’m, I’m interested in and information about apartments more generally speaking that I’m talking about now because I have a finance property for people and a lot of different markets so I don’t I don’t really develop the expertise that it’s somebody who’s really good in their local market gets because they’re really an expert but I want to keep my my kind of my finger on the pulse of what’s going on and.

With cap rates and restaurant multipliers and that sort of thing so I get I don’t know a couple dozen. I agents sent me flyers so you mentioned multiplier,.

You divide the net operating income for a year. By the value of the property. So if you’re buying by the purchase price. So, Let’s go back to this 10 gross rent multiplier, $100,000 value of income in a million value. That $100,000 is gross income. It’s not that it’s not net money that you can use to pay your loan or put in your pocket if it’s pretty and clear.

So cap rate works with net income and that to say a quick rule with them and in the Bay Area’s. It could take 35 percent off of a gross income for expenses and have a net income and take a few percent for vacancy depending on the market you’re in but let’s just say, you know for round numbers well say you’re at 60% by the time you get a vacancy and it’s expensive.

So at $100,000 is really 60,000 from a cap rate point of view. And 60,000 divided by a million would give you a six cap rate. So theoretically if you paid it all cash you would have a bond that’s paying you six percent, right? Or be like putting your money in the bank at six percent interest.

That’s okay, that’s that’s that’s the idea and it’s considered a more accurate way of looking at the property because. Growth multiplier you youth especially in a say a city like San Francisco there are a lot of properties where the owner not only pays for its a water and garbage but they pay for heat and electricity for you know, their master metered properties still and so you could have you could have expenses there significantly significantly higher in one building versus another one right next door based on whether it’s a master meter attendance pay either utilities, so.

So that’s how camp rate came to be, it’s not the only reason why it came to be but one of the main ones. No. The sun investors they look at cash on cash and then look at high arm turn right at the turn. In your opinion is that really in which which from your clients which do they prefer they look at I know we haven’t even talked about cash in cash is or are it kind of talked about that but I’m curious to know what is the preference what what.

Was the gold medal who that way or just do your clients look at multiple things they look at they’ll get this and this and this and how do they do they talked to you about how they came up with the decision to go or not go.

Well the most sophisticated ones like these internal rate of return and that that’s a topic for another day, that’s a that’s a pretty it’s a pretty complex. It’s good I’ll just give a plug for CCIM education if you if you really want to understand this internal rate of return and you and you’re really scaling up your knowledge and you know, your business, your department business, it’s well worth it.

But basically it’s measuring your return based on time value of money and your risk factors, so you can plug those factors into your formula. What’s your cash flow coming in and what ‘s your cash flow sequence by the time the and this is going out like your down payment going out right and then you’re.

You’re annual cash flows and then when you sell so you take all of that whole spectrum of cash flows and you discount them based on a rate of return and the that you want to get for that particular property, so. So you can. If you’re the higher rate of return that you plug in.

The that you want to have that you want to get the the discount we discount the cash the future cash flows by this factor that you put in and hire it as the the the more we’re discounting the future cash flows to compensate for the risk. So you get the idea right that this wanted people to understand you’re trying to get a rate of return that’s that helps measure partly the riskiness of what you’re doing so that’s a little more it’s probably a little more than some people wanted to hear but yeah anyway, it’s just something to know so the sophisticated ones do that and they but they’ve got some real fancy computer programs and you know, they and they look some of them have.

They have a team they have they have analysts in-house, you know, like the the rates syndicated the big breeds all have they have staff of people running numbers all the time. But the people that I deal with a lot just average every day and mom and pop investors, you know using that colloquial term and do any.

Probably most of us on this call here would be much fit in that category, but it’s more like. A look at looking at grosser multiplier and cap rate maybe but it’s more a gut reaction to I’ve looked at a lot of properties and I know this is a good deal which is it, you know, it’s more that kind of criteria that people use and.

Can then they’ll start looking at that’s the first cut and then they start looking at the numbers to make sure that they’re going to get some cash on cash they want to be negative on their cash flow lenders want to let them do it anyway, so. And then that gets them into looking at some of the things we’re talking about price per square foot restaurant multiplier cap, rate.

Of all the apartments I’ve been so experienced here can I go to their county assessor office to look up past sales to do their own research or do they have to pay a fee to a service online service provider for them to do their own research if they wanted out you could you can do it it’s it’ll be arduous but you could definitely do it.

Cordell..

So what do you recommend for the easy way?

Ed…

Get a team so you know, good real good real estate commercial investment real estate agent, good property manager. A good appraiser. Could have a real estate consultant and also somebody who doesn’t really broker but who gets paid hourly. There’s a site I do.

I do work like that sometimes and yeah, it’s not my main thing but there are people who do that right now and then and then use that to use some of the stuff like costar and loopnet and. There’s another one prospect now there are a bunch of yeah a bunch of tools that you can use.

Cordell..

I think that people need to understand when it comes to commercial real estate to team sport. Everybody has their role and you do want to be able to form your team and be aware of how beneficial this is because you’re not going to know everything you don’t want to know everything.

I think that’s very correct you just said and it’s like I listened to a podcast and somebody was saying like a at the end like what’s what’s the biggest mistake you made and I forgot what he said but he basically said that he put he put his team he tried to build his team last set of build his team first.

And depending on where you want to go a lot of times a lot of people say okay find a real estate sales agent, a broker that’s local to the area, not that you want. But the thing is a lot of the times too is. If depending on what the person wants to do and you can go with a real estate agent who may already have networks but you know, you can also go directly to the owner if you want to buy another property.

Can buy mailing lists like from Prospect now or some other ones similar letter in the mail they come back to you and see you they have an interest in buying but now they if they supply which is information say yeah, I want to sell my property you have to be educated on what those numbers are and what they represent.

I think the key to really having a criteria is that you want what is it that you want, what kind of things are you looking for, what kind of areas that you want to do and sell what this I want this this this this and within this area here.

This is what this equals out so as it comes through now it doesn’t work it didn’t work it doesn’t work does work so as I’m talking to you guys. I’m not saying I’m not coming to you like oh I got all this property and I’m big really walking around here with the gold medal, you know, I am learning myself but I do know I have direction or what I want to achieve.

But the team is very very very keen to hear that. The edges said through some other podcasts that I’ve heard that you guys have to develop a team it all depends on what you want to do though too, you know, you’re gonna be a passive reactive. To find a contract.

Find a handyman if you want to go that route now. The NOI is very important. Of course now for yourself and when it comes to underwriting the person wants to understand underwriting. And go through let’s say that a person does want to sell their property, what do you suggest that they do besides contact someone who has experienced but if they wanted to be able to get better handle things understand the process of the whole underwriting process in itself to understand the value of the property, what do you suggest well?

Ed…

I got a few things to invite the way I you when you’re talking I’ve realized I forgot one really good resource people can use. For apartments, join the local apartment owners association and the market that you are really interested in because then you network with not just professionals but with your peers right away and if you develop good relationships.

You people will mostly be truthful about what’s going on with their properties, you know, not a hundred percent people like to put a positive spin on sometimes but you’ll get a lot of knowledge so it may be what I used to view. Journals, you didn’t see them monthly the other day.

But it wasn’t because it was a California apartment association or I forgot. Yeah, you’ve learned a lot just by reading the magazines, so you may have an attorney talking about something you may have a whoever and that’s how you learn. Yeah, so anyway to the underwriting question. I can really geek out on this but I’ll try not to. I used to teach underwriting classes to bankers and CPAs and attorneys and Mortgage brokers and.

Real estate agents but here’s my long story short you look at enough at enough properties that are for sale and and that of sold and get your team to you know, your property manager you appraiser your real estate agent to get you some local knowledge about.

I benchmark numbers if you have a really good CPA by the way, some suits some CPAs are good at real estate and they are very knowledgeable and others are but if you have a good one, they’ll know they’re a good resource also. And then there are some publications that you can get.

Someone some most of them tend to be like for bigger properties and for you know markets that are broader markets, but you can get. Average price per square foot for operating costs different operating costs for different types of apartments and different locations and I’ll just keep you one of the one of the ones that’s like the sister association to CCIMS I REM institute of real estate managers and they put out publications that they go into great detail of.

And I’m not saying those are appropriate for people on this call but you know what you want to do is be able to say okay this this owner is or real estate agent is saying that the repairs. The property is X number of dollars for repairs. I don’t want to pay attention to that because that’s what they they that that’s what they want to show or what’s it’s what they’ve maybe it’s off of even off the tax return that’s what they did one year.

I want to know what every year my repair cost is likely to be right and then with each one of the numbers you want to be able to do that and some of them you can verify you don’t have to go by theoretical numbers like PG&E, you can just have it as part of the contract that you’re you’re going to see.

The last 24 months worth of PG&E belts that you get to inspect them right or the water bills, trash bills, whatever so. So what you want to do is take the numbers and start verifying them because you know the old saying trust but verify. That’s your money, nobody’s going to care for it about it as much as you do.

So please even the number you get from people who are on your team. Just make sure that you that you get back up have them explain have you know, let’s let’s get down into the weeds here and by the way, sometimes in a hot market you’re not able to get as much as you’d like and you’ll you can make a business decision to go ahead with what what your own opinion is because you’ve looked at enough different properties for sale that you know, what what the PG&E would likely be for instance, let’s say anyway, I digress but you want to go through basically line item and reconstruct your own budget.

Right. And that’s what a lender is doing: lenders underwriters when they give them an income and expense statement for a property that you want to refinance your buy and they’re looking at their book. Their iron book or whatever and you know, when. They’re saying now that those of that number are not right, that number is not right, you know, and they come up with their own and they said to debate whatever you present for the refund.

Yeah, let’s not necessarily run but you know, they’re allotted databases again used at that in the world for underwriting right? Banks could have their own in-house lawn, could be iron, could be. You know an appraisal board. So, so how’s it? How does it work? So they have their standards in so you are doing a refi for somebody for an apartment building, but you have your numbers and they have their numbers.

Cordell..

How do you draw a middle ground? Well, when you really are experienced you end up being pretty close. So it’s not that far off. But sometimes we’ll get down to, you know, a discussion about where we’re located. The typical number for repairs would be say three percent say so.

I love three percent from an owner’s point of three percent. On lower rents may be too low of a number and so the blender may be the same for not going to use three percent. I’m going to use, you know, five dollars a square foot or so. That’s some other number that they think is more realistic.

What we do then is we just get into a discussion about well, okay, you know, we understand you’re using this number we’re using this number. But look at the condition of the property and and the condition of the property we just put on a new roof we just did well we rewrite the plate you know, we did it all these different.

 

Upgrades and so we’re not going to have that level of expense for another 10 years, so let’s you know, and we can come up with a compromise. And eight by the way in the end lenders also always go with the more conservative of what they come up with or what an appraiser comes up with.

So you could have this discussion with lender and then the appraised the appraisal comes in and you hit and you can have the whole discussion all over again because the appraisers got a little different view so just saying here it’s a little more this isn’t like you, you know, I one of those like easy glide paths no but with no bumps in the road this the underwriting process is a little bumpy, so.

It’s also for the base. It’s like let’s say that I am underwater at a bank and then you submit an application to me alone. I go through my diligence and then I have to go ahead and present the same thing to my boss or to like a mini board and then from that decision they make that come back to you and say yes we want to go with you is that the process yeah pretty much yeah there’s a lot of there’s a lot of pure review of going on right so because it’s, uh, That’s a team of protein so the idea is you know, let’s have a lot of eyes on this because we want to make sure we don’t make a big mistake.

And and and we it’s the reason for us to have teams ourselves, right let’s get some other eyes on because. We may be missing something people can have valuable, important input for us. Yeah, I do think that the, Route that I’ve heard many many times has been a very good method to buy.

One blank you buy something by a property you fix it up, you rent it out and then you refinance. I’m missing something else but you get that proceed and go to the next you buy who fix up you’re not refinance boom, boom boom boom boom in before, you know it you got to look portfolio and that’s actually that’s my game plan that’s what I want to what my goal is trying to achieve it’s it’s to utilize that and I’m kind of digressing but when it comes to refinancing, What tips do you have for a person does have a commercial property or let’s see yeah you have a commercial property and they want to refinance what what will increase the odds of getting what?

And having property that’s in good shape and and and really good records. And. Being realistic is probably more than anything right because sometimes people want to borrow more than than the lenders are willing to lend them. It’s just getting a good realistic view.

Okay. Well, I’ve got I’m gonna have you back multiple times it, you know, I think this is just like an introduction to know about you and there’s other toppers that we’re gonna talk about later on but do you have any last stops in regards to understanding the value? Just get out get out and do where your shoe leather right so look at properties until you get until you get the experience and then you know, you can have other people who are doing that for you but you yeah again, I think we’re tucked talking mostly to people who are kind of hands-on to just get in started right and that’s it’s how you get the knowledge so that then you can manage people you want to have you want to have that obviously the thing about to because you know for myself I thought about Trying to get my portfolio jumping off in central California.

Because it’s cheaper but like I thought about what’s my ultimate goal and so anyway, I got like I got a list of apartments and I did before I have expressed you like you were representing he was like, okay but these down so I can know what the numbers are so I can know what I call across the deal what’s good was bad.

I mentioned to you early by renting meters, so I know what the rents are so I’m expressing them just zip code for one bedroom and two bedroom three bedroom is this so if I come across something I already know. But I kind of transition I say, you know, I don’t want to really go that route.

I’m going to stick to the Bay area where my home is, you know, some people say best for your ad a lot of people say well California so expensive but my I’m back it up and say what’s called ultimate goal my ultimate goal for me to buy a manage, you know want to be able to be active in it but have systems in place but you reminded me now.

I have more problems. I have more research and projects to do. Where I’m going to get some stuff in Alameda County and start making up my list and one idea that well, somebody can have to those are listening you can hook up with a title company and make a request for go through agent and say I want to buy some properties well, I want to list of properties.

I’ve done it before for like five to fifty units and this county and you get a spreadsheet that’s fresh you have all the you have the address of the property you have where the owner is so you can email them or several letters. And then from that you can develop your own expression.

You can based on city or zip code and then like whatever saying you can start figuring out what’s the growth rate multiplier, what’s the cost per unit, what’s all this stuff and like for me now I’m in that process right now where I’m transitioning. From what I thought about you know, the central valley when we focus on alligator county where I’m at but anyhow how can people get in contact with you?

 

Ed…

So God, easier steps to email me, um, it’s ed at Smith crane.com. And crane is the CRA INEE, so at s m, i t h, c r a i n, e.com. Um, always happy to spend a few minutes getting to know somebody and. See if you know, give them a little coaching and a little guidance and see what they’re up to. Love hearing people’s stories.

Cordell…

Well, thank you and as I mentioned when I first read your profile, I read your biologist today to my wife was like man, he’s accomplished and I was just for those that don’t know. Because I mentioned I worked with Ed for a while I recently got back in contact with him. We haven’t chopped it up, you know, talked just recently but I was telling him.

That I was the conversation before we started it. I said I was driving down the street and I seemed like a contractor, a plumber, an electrician , whatever had this truck up and they’re slowing us. There is no substitute for experience. And air definitely got the experience so my vision of course is once I get my thing going like I want to like I am of course of my reach out to Ed hopefully you guys too can do the same when it comes to commercial financing.

To stuff so well. I’ll talk to you guys later on and hope everything goes well and your family’s safe. And make it happen go to websites fall apart in the best of.com, get my free ebook stay safe be everyone.

Podcast Series 10: Due Diligence When Buying Small Apartments with Francis Fernando

The Small Apartment Investors Show
The Small Apartment Investors Show
Podcast Series 10: Due Diligence When Buying Small Apartments with Francis Fernando
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Due Diligence Process When Buying Small Apartments.  Featuring Francis Fernando.

Cordell

It’s recording all right, hello everyone Cordell Davenport here with small apartment investors and this is my second go-around where I’m bringing across someone who can be very beneficial to you and I and I said before is that my vision of coming up with these shows is not just to let me find somebody let me find somebody new and we find somebody new.

I want to have a core focus of people who really know what they’re doing that can be able to teach and have a message to say and so, Once again those people are going to be a real estate agent University a real estate attorney and a mortgage broker. I’m a property manager and a real estate attorney does say that I think I’ve screwed him up yeah he did yeah yeah, so anyhow so what I try to do.

My ultimate goal is to own and manage a small apartment portfolio and it’s funny that I met Fernando. I am kind of following his steps not knowing I’m following his steps. I listened to an interview with him and learned some stuff about him.

On smallapartmentinvestors.com  I have this free ebook have your family living expenses covered by small apartments you own and guess what that’s my goal and I know that if anything it’s all about mindset so mindset but skill set plus performance equals results and when it comes to property management that’s a huge portion of skillset..

Is going to read his little brief bio and we’re going to learn some more about this his message his tactics and how we can all benefit so Francis bought his first income property 2003 with no formal training or experience in real estate by 2006, he started a property management business that grew to operate 40 million and residential multifamily and represented prestigious clients such as Wells, Fargo, California National Bank in US Bank.

He is the author of a trademark book titled job plus real estate equals wealth. I have that book FYI that serves as a guide on how to invest in multi-family properties while working full-time today after selling his property management business. Francis, they saw after a real estate coaching speaker that helps new and seasoned real estate investors start and grow their portfolios.

He also helps real estate agents become authority figures in their community by creating sales funnels that nurture and convert into sales. Francis also works at auction.com the largest marketplace of distressed real estate he coordinates and helps the auctioning of foreclosed properties. Francis the graduate University of Buffalo, we earned his bachelor’s science and master science and electrical and computer engineering.

Francis is a dad of two incredible sons, ahusband, a yogi and fitness enthusiast and lives in Buffalo New York where its cold, and I’m in California. It is about 80,

 

Francis

Oh man, hey now getting colder every day. The night it’s getting colder, although this week we do have a nice warm week.

Cordell I will start talking about my mantra right and mantras don’t come in as part of who you are as a being. I mean, there are I guess there are certain mantras about your personality that you hang tight to like your down.

But I’m gonna step away from values for a second and talk a little bit about them. The journey and then I’ll tie it back into what my actual journey is but my mantra as it pertains to real estate is I call it hashtag how much will I make right and the reason for that is it sounds like it’s driven purely on how much money I will make and yes that is a component but it’s more a higher level look into it saying if I’m going to get involved in real estate.

Or if I’m going to get involved in a business or if I’m going to get involved in any kind of entrepreneurial endeavor, I might looking back and breaking that transaction and that deal apart from the infrastructure right so from an infrastructure perspective do I have what it takes to take care of or and I get into that end every.

Right now can I facilitate that with the current status and current involvements that I’m doing right now with my family involvement with my current job can I actually take that off or am I getting into a headache where I’m going to get involved and then like below? Just can’t logistically take care and the reason that’s important to me is because as I look back at my journey, I went through those kinds of situations.

I had a job. I got involved in real estate and I logistically blew up a little bit in my real estate portfolio because I didn’t have the, Structure to take care of those. So as I look back, you know, they say, you know hindsight 2020, right? I look back and I go wow.

I wish I knew what I know today. I wish I knew that when I got into real estate. So that’s really what the mantra is, so it’s not as much as it sounds like it’s all about making money really that hashtag how much will I make is really how much of how much do I know is my brain going to learn by getting involved?

So that’s oh yeah and then I’m gonna tie it into a little bit of my journey so really really at a high level. I’m an engineer by profession. I became an engineer because my come from a family of engineers my dad was an engineer we traveled around the globe my dad worked in various minds copper mines in central Africa Southeast Asia, and then eventually in Canada and then you know, I moved to the US.

So that was sort of in my blood engineer but I always say I was an engineer up here not down here. I think I had the want and desire to become a business person or an entrepreneur but I didn’t really know how to do it so my first kind of leap into it was my first formal.

I had a few informal leaps into business but my first formal leap into business as it pertains to real estate was in 2003. From Buffalo, New York to New York. My nine to five job. I was I was an engineer at Verizon my nine to five job moved me out to New Hampshire and I loved the area there was something a unique about that area it was a little bit north of Boston real estate prices were a tad bit cheaper than the big metropolis of Boston, so all your investors were coming from Boston unable to buy in Boston and buying up north in Manchester New Hampshire and, The time I found it attractive to buy real estate, so I was buying I was using my corporate.

Saving it up and I was always one to buy assets, you know, I had red rich dad poor dad and I had learned the difference between a massive versus a liability and that was kind of a you know, wake up moment for me so I was using that money buying acids which my choice was larger apartment buildings, but.

Here it’s actually sorry for the definition of your show it’s smaller. Families and it’s not the two families but I was more attracted to the five to six to eight unit, that was my sweet spot so actually I will redefine that smaller apartment complexes. And so yeah and that’s what I was doing.

I was buying up smaller apartment complexes. I got to a point where I had 22 unit 20 22 units my portfolio sizes changed here and there 22 units and I got logistically stuck and I’ll expand on that later as we get into the show, but logistically stuck in the sense couldn’t manage my job and I couldn’t manage the assets so I decided to take a leap of faith and go, you know, my first entrepreneurial venture outside of buying the real estate was to start it.

He manages the company to manage those assets. You can be a real estate agent in that area to be a property manager. Yeah, yeah so that it’s pre, you know, depending on the state and the local ordinance for the most part most instant this is if you’re managing third-party money.

So if you’re managing your own assets or if you’re working for one individual, you don’t need a license, but if you’re if you’re co-locating what you should be collocated co-mingling funds, but if you’re managing multiple funds for various different owners, then yes you do need.

 

Cordell

Yeah, you know when you were saying something in before about your mantra and everything and how much you want to make and I was thinking is like to me success is to know what you want and to get it. So what is it you want? Whatever it is you want. a person can say well I want to buy this. I want to buy that or personally say, you know, I have a kid and I don’t. Iwant money for college or my IRA right now sucks. I need some money or I’m just tired of working or whatever may be so we.

We do certain things we strive for certain things because of what it gives us we all know that money is just to a vehicle money is important but what is going to give you what’s the end result and I think a lot of it was down the time free time to to pick and choose what you want to do.

 

Francis

I like that you said that because for me it was time until and it still is right because I do value my time very verymuch but I heard something that was really.

Recently that was interesting It was speaking to a young lady and she said you know I asked her why she was getting into real estate So I do some coaching for people that are trying to get into real estate and I do some coaching on people that are trying to build they’ve already got real estate but they’re trying to build up there property management companies.

So this particular young lady was getting into real estate. She had a really good job, so she was really clear on what she wanted to do. She had trimmed her liabilities over the last, you know, 12 months. So that she could free up capital and didn’t have too much expenses.

 

And, She was ready to take that leap of faith. So after the basic question I said, so why is it that you want to get in? Really. And why was she sayingFrancis? I’m always so shocked that every generation has to start from scratch. She’s just recently married and I think she’s about to have kids or probably close in the in the near future she will be having kids and so it could be a thought and in her mind of hey why does every generation meet to start from scratch and she doesn’t she wants to break that cycle in her family and be able to create generational wealth that she can pass down to her children who?

 

It hopefully passes it down to their children and that’s the beauty with real estate; it’s one of those transferable assets.

Cordell

Yeah and unfortunate you know sometimes for people like myself who grew up in the inner city parents and have anything and there is this could they call it a long money, you know, where it’s generational and but if you grew up in the area where your parents and own a home or they were always renters, there’s nothing transferring there’s no life inheritance and it’s great if we can have a whole different discussion about generational wealth, you know, sometimes we could look at back in the civil rights days where they called a red line where you couldn’t get a property because You know, you were you where you were black you’re Latino you were whatever maybe and then you just get black ball so I don’t want to deviate because I have a habit of deviating sometimes no no let’s get them from good but I think that no it’s true so it all points down to okay, what is it that you guys want what do I want what you guys want so great?

Good so I have Francis on a talk today about physical due diligence everyone but before we start talking about that did I interrupt you on your line of thought Francis no no not at all. I’m ready to jump into the content and yeah, all right so everyone when it comes to buying apartments there is a lot of due diligence that needs to happen there’s financial due diligence they look at leases look at the rent rolls look at the t-12 to trailing teeth trailing.

12 months, you have to look at the market with due diligence and understand what’s the norm but when it comes to physical due diligence, that’s a whole different ball game, you know, there’s it involved with. HVAC roofers and the thing about Francis because he’s been doing it. He hopefully can share some insights of the top five things that we should always be aware of when buying a property.

I’ve heard of times where if I want to buy an apartment I can hire property management and say, okay when I pick up this property, I’m going to manage it once you come to the due diligence with us. I’ve heard where someone just says I’ll come and find a general contractor and then have them walk.

I’ve heard. People outsource to third parties but the problem that I see that I’ve encountered is because my niche is 50 units unless a lot of people go for the big bucks, they don’t really go over 50 or they go a hundred. I I was listening to a seminar and it was a niceguy who gave a good presentation on due diligence and he’s his company that takes pictures and does all kinds of things but.

But because my niche is 50 units he’s not gonna even touch it.  That means that how do people who have 50 units unless they get around or what should they do when it comes to doing the physical due diligence?

 

Francis

On a property they want to buy right ready so critical question and and before I even jump into that, you know, you said that there’s that sort of middle of the market, you know, the 50 units and below and that’s sort of the untapped market and this is a call out to all entrepreneurs that see those kind of opportunities right so typically when you look at real estate the the largest size properties, whether it’s due diligence property management or or any aspect of servicing those.

50 units and greater there are I call it the big boys and the big girls that are gonna service those right and then they’re really small ones are either self-managed or the portfolio sizes small enough where it may not make financial sense for you to even get involved in that.

But there’s that sweet spot where most people don’t get involved in right and if you can figure out how to create business within that sort of untapped market right that is you know, it’s a call out to all entrepreneurs that look in that sweet spot because there’s not a heck of a lot of competition it’s exactly what I did in Manchester New Hampshire is there was a speed sweet spot of third party real estate of third-party property managers, most people didn’t want to manage other people’s real estate, especially for residential.

Right then andthere was that sweet spot of that underrepresented market and I said wow this an opportunity there, it’s tough it’s really tough but how can I get into it and make an ad profit from it? That’s just kind of my entry into that. I’m going to touch a little bit on all due diligence but I’ll focus a little bit heavier on the short right and the the reason is I I kind of flows for me the entire due diligence because I think a lot of times when people see properties they get they get hung up on you know, how do I how do I?

And they’ll spend so much time on the spreadsheets analyzing it and by the time they go to buy or put an offer on the property either it’s sold or they make an offer which doesn’t make sense right so I’m gonna go all the way right to the start.

First step of due diligence for me is financial pro forma, right so I’m going to run a financial pro forma on the asset now that the whole section is a whole separate discussion, right? I’ll give you the basic elements of a financial performa how much is that asset going to make right so you’re simply going to have and there’s performance that you can get.

I have a performer reach out to me. I’m sure Cordell you have a version of a pro forma bigger pocket that says versions of profarmac. Essentially in a nutshell a pro forma as your income and your expenses are right and then certain key ratios like cap rates cash on cash return debt service coverage ratio.

So there’s some really important ratios that’s going to tell you what the property is going to perform like. So performa is a sound that is complicated. Word all it says is all it stands for is projected performance. Not real performance projected performance. So it’s your first step into saying hey, it’s even worth doing physical due diligence on this, right?

We want to be disciplined investors so we want to do our first step being in financial performance. I want to just evaluate this idea of a funnel. This is the top of the funnel. I’m filtering out anything that doesn’t make financial sense too. Me. So super important to do that it’s going to tell you based on what kind of returns you want.

This is a good asset. One more thing on the financial performance that I’ll kind of end on that is. A lot of times the philosophical question a lot of times people, you know will look at a property and there’s a sale price on it. Let’s just say it’s an open property on the market.

Let’s say it’s on MLS. It’s an active listing on MLS and I’m gonna make fictitious numbers here. Cordell the sale price is $250,000. Most of the time as buyers, we’re looking at that we’re running our pro forma on $250,000 and then we’re basing our offer on $250,000 or a function there on.

Right? I’m going to offer this much less than 250 right but we’re not offering it based on the performance of the pro forma. So super important to understand is that whenever I do a financial performance. Care what they’re asked. Me I don’t even base it on the asking price

Cordell

Yeah you’re right because when you buy commercial property or buying a business unlike a residential no it is listed for a hundred thousand.

I’m going to offer 33% less and just whatever it is and then buy but knowing you’re buying numbers or you’re buying a business that’s why you have to go in detail go ahead.

Francis

This is not perfect and this is where it takes the emotion out if there’s a real estate agent involved in this transaction right it can get kind of sticky because the agent’s going to push to get the highest price on that, whether it’s whether it’s a buyer’s agent or A seller’s agent, right?

Their primary motive is to make sure that they own the propertycells and rightfully so that their job right is to get the maximum price. So when it takes the emotion of when you give an offer immaterial of the asking price because you’re saying, hey, my offer is based on the performance of this asset and the financial viability to me as a purchase, right?

And you know, take no offense to the offer that’s gonna make So that’s step one for me. The second step was the physical so it’s more about what we’re talking about here is the physical if it passes that litmus test of the financial viability then I’m going to do a physical inspection so I do a couple of different physical inspections the first one is obviously just a drive through but once I’ve gone through and it’s kind of checked off the location the access to schools depending on the type of building so if it’s a if I’m in the B slash lacy range, that’s the market that I want to be in from a renter perspective then I’m going to.

Make sure it’s you know, within all the facilities of what is needed for a B, slash sleek see property, if my intent is to take it from a like doing a reposition so I’m saying I’m taking a seat property and I want to make it a B. A Mayana be location right like am I taking a C property and bringing it into a B physical asset but I also want to be make sure I’m going to be location from the perspective of schools, you know access to amenities and all of that, so I’ll do my quick sanity check on that.

Do a physical drive through but now when I’m going into my actual physical inspection, I’m wearing a couple of different hats right so the first hat is my I call it my my basically my contract a hat, right? I’m looking for deferred maintenance, right so is there anything in this property that in the next five to ten years one year what I didn’t care your time frames are that are going to be exhausted in other words, they’re at the life expectancy or they’re at their maximum life expectancy, so of course the main mechanicals right the roof the windows the the HVAC systems and and then I will do a physical walk through of the units too because if the units are you know in, Decent shape.

You know from a visual perspective but if I get into the internal, you know internal guts of the apartment and I’m looking at you know, really old plumbing really old toilets really old tub surrounds then I know when those tenants move out right my rehab cost is going to be that much more my unit turn costs are gonna be that much more so I’m looking for.

Diffeeral maintenance, that’s my first first thing major mechanicals, that’s my second thing then after I’ve worn that my contractor had I’m then going to wear my elect my my insurance auditor. Right I’m gonna sell yourself doing this process if you have a team with you usually I’m by myself yeah usually I’m by myself I will take a I will take a maintenance contractor with me, you know, usually my own when I ran my own team I had my maintenance contractor with me on occasion if it’s a property that I’m a little questionable about I may take my insurance agent to depending on my relationship with my insurance agent, so I might actually take my insurance agent but I’ve been schooled enough to know what to look for so I’ll wear my insurance hat and now I’m going to walk the property from the perspective of an insurance.

Agent right because typically what happens is when you close on a property you’re going to get a binder for it. Be 30 to 60 days at. 30 to 60 days after the closing the insurance is completely the insurance company’s going to send an inspector to do a physical inspection of the property to make sure that it’s in compliance with what they’re underwriting okay and if they start seeing things I’ll give you a quick example, they see knob and tube wiring right or they see fuse panels right they’re going to write recommendations on your not not even recommendations, they’re actually going to write non-compliance items as a checklist of correction.

So that need to be made if not they’re going to drop your insurance or they’re going to decorate your insurance rates up significantly. Right so you want to go through from an insurance perspective and look like how an insurance inspector is going to look at that property so I’m looking for Northern tube wiring.

I’m looking for electrical fuse boxes. I’m looking for old plumbing, you know old cast iron plumbing and anything that antiquated were insurance agents going to be you know slip and then the slips and falls and all that so of course, I have it so with the insurance company give you like a form you fill it out once you go to the property give it back to them and then They’ll give you a quote on on what will cost to ensure it possibly how does that there yeah, so on the initial they usually just get an address on the initial on the initial for for closing purposes, they’re going to give you an initial they may have a questionnaire for you like what kind of electrical right and you’re just simply answering those right so you might get coverage and you’ll get bound coverage but it’s it’s a you know, it’s it’sit’s contingent upon a 60-day walk through of an insurance inspector, all right, so once the inspector goes through it says a bit.

You know, this is not what we thought it was right there’s a buried oil tank there is not a two wiring there is you know antiquated facilities we’ve got a we’ve got a re-up on these or you’ve got to correct these okay make sense. Yeah, so yeah, so that’s yeah, that’s that’s you know, my next step on the physical inventory is going through wearing my insurance at my third is to make sure that I do an inspection of the inventory.

Right so I a lot of times when you buy let’s just say you’re buying a four fan the listing agreement is going to say four family four bathrooms your four apartments, four bathrooms, four refrigerators four dishwashers, and it’s going to have a listing of all the equipment that you’re going to ultimately own at the transaction number sale.

I am going to walk through because I am ultimately buying those four refrigerators for dishwashers. I want to make sure that you know, I’m looking at cereal numbers. I’m looking at ages of those products. And the relative condition of those right are they near the end of life and if you’re in there looking at those and it’s an occupied unit then likely you’re going to be able to hit up a lot of other things which I’m going to get into next which is speaking to the tenants, hey if you had it have you had any issues with this refrigerator oh yeah this is a fourth time I’ve called the landlord, you know, this thing keeps going out on my it keeps leaking and that’s why you if you go downstairs you’re going to see leaks on the unit below right it starts opening up the quote-unquote can of worms but this is a good can of worms because you want to know this.

Desire mm-hmm, yeah, yeah so from a physical standpoint that’s what I’m looking at if I get really into depth or I’m questionable about certain things then I will get like an engineer in there if there’s certain things about the basement that I’m not liking foundation issues or I see lolly columns, you know sort of recently put up there.

I may have some concerns with you know, settling basements or settling subspurs, so I may get people in there for that but for the most part if everything looks fairly good. That’s that’s it on a on a physical inspection and then let’s say that you do your physical expectation and you say man all these damages you go back to the seller and say, hey you’re gonna give me credit on this or you’re gonna let’s work something out yeah absolutely so I’m gonna I’m gonna write all of those down, you know, I’m taking copious notes as I’m going through this inspection right and my copious notes are going to then translate into you know, how does this affect the overall deal is this something that hey, this is part of my offer this was.

Part of my original Proforma when I ran the pro forma, I knew this was gonna be part of it and then of course I’m looking at you know, sort of from a market perspective, you know, is this something that I can absorb or is this property going to sell with these conditions at that price right if it’s going to sell with the so for example property is listed at 250 and that’s a pretty good going.

Market or properties are selling at 270 right now so 250 is right within the market but I know the reason it’s 20,000 below market is because also it means a new roof which is 15 grand so the owner was smart enough to know to accommodate for that and it’s reflective in his asking.

So I’m gonna do a quick sort of sanity check on that but I’m taking copious notes and I’m gonna translate those copious notes into a dollar per line item, yeah. Of course. I’m going to separate. My capital work is right So these are immediate capital expenses that need to be taken care of and I’ll break those up into what Icall life safety versus long-term improvements and then I’m going to look more into beautification common hallways that need to be painted that kind of stuff through routine maintenance.

That’s all part of performing anyway typically yeah yeah and when I when I make my offer a lot of times I will include that I’ll include a pro forma in my offer so that I’m not offending anyone and I’ll include my breakout of you. Don’t do the breakout of repairs right up front, but I’ll do step one I’ll do my offer.

If I get kicked back then I’ll say the reason for my offer is boom and I’ll include my pro forma and oh by the way, if you want to know further detail, it’s because of and I’ll take my copious notes and say just so you know, I mean, I did observe that your roof is leaking and I’m not here to buy a leaking roof.

I’m here to buy it. Asset that’s producing income hashtag how much will I make right and you know that roof needs to be replaced. Yeah my next one and these kind of like all mesh in together is after the physical inspection.

I’m going to do an occupancy inspection. All right, so my occupancy inspection is who is my tenant base, right? I want to meet all my tenants, right? I want to meet all of my tenants. I want to see all the tenants at least. This is a big part of what people miss the expiration date of leases, right?

I took over a 12 unit building in Manchester New Hampshire, the owner bought it as a 12 or 18 unit building. The owner bought it within six months of owning the building and there was a lot of capital work that he had accounted for but within 12. Months six months of closing the building the building went 50 percent vacant and had he gone through and just done due diligence on the leases and even just one within the leases just one aspect of the lease and that one aspect is what is the expiration date of the least had he focused on that he would have seen holy crow, you know, 50% of my leases come do within six months of me buying this building, right?

This is an expense that I didn’t anticipate because now not only do you have lost income for them moving out you have. Rehab fees for each of those units and then you have releasing fees to your property management company to release those. Problems. Yes. Yes. So, I’m gonna do tenant leases.

I’m gonna meet my tenant base and speak to them. It’s unbelievable what you learn from people when you speak to them. You know a simple question like hey Cordell, yeah everything good at the apartment. No, that’s that’s all I need to say and it’s just gonna blow up into a conversation, although you know, not real.

Or well, you know, I’ve been telling the landlord about this and. You know, it explodes into a great conversation and I’m also gonna look at pending lawsuits are there any lawsuits are there any, you know, potential lead issues, you know lead laws are pretty hefty are there kids in the building is there an ongoing lead inspection or lead violation is there and,

I’m gonna ask a tenant one how tenant two behaves. I’m gonna ask ten at two how tenant one is and I’m gonna do my trust functional look do they when they’re selling do they have to say if they have section eight tenets as you’re doing review yeah it’s going to it’s typically gonna state it on your retro it’s gonna say the source of income so a lot of times they will say section eight and the source of the income okay, and and the lease will typically say to okay?

Yeah so I’m gonna ask for a tenant file for each of the each of the tenants I do review the file to look at any vouchers that are coming in from because also if you go historically, even if they’re not on section eight, there could have been periods of time where the tenant fell into trouble and they needed some form of government assistance to build them out, so I’m gonna look and see if those and that’s not necessarily a bad thing people good people get into trouble but I just want to know historically has this tenant been employed or had they’ve had periods where they’ve lost their job as a seasonal work.

Would vary you know, typically in the wintertime they don’t have they’re out of work and they’re you know, they’re on some form of government assistance, so I want to just know all that well. It’s like a person really needs to have a good checklist, oh absolutely to make sure nothing is good skip go ahead yeah and then my final one is verification, so I’m gonna run through these again first is financialperforma second is physical inspection third is the occupancy and my final one is I call it verification and this is where I go, it’s a phrase that I love it’s trust but verify mm-hmm right when someone says, hey for us is you don’t trust me, oh no, I trust you.

I trust you but I verify, Right so when you verify you’re just keeping an honest person honest, yeah and I’m not that’s that’s my my you know, I I like to be verified upon because I want to make sure that I’m doing my work and anyone checking upon me.

I love the fact that they will verify what I’m doing because it keeps me on it keeps me as an honest person, it keeps me honest and honorable to my role so on the verification. I’m just gonna give you a few ideas on verification back deposits.

Okay so typically if a person is organized with their real estate assets, they’re going to have a separate bank account for that asset or they might have multiple assets, but they’re going to have. One bank account for those multiple assets. Right. I would hope that people are like that and they’re not commending rents with their own personal accounts and all that if that is the case it’s a great way to verify the stated income so if they’re saying, hey, my monthly rents are that I’m getting on this building is 3,000 a month, right or 36,000 if we’re annualizing at 36,000 a year, it’s not hard to ask for copies of bank receipts deposit slips bank receipts or access to the bank statements and they can black out the, Their own numbers and you just want to say hey if it’s 3,000 a month how come I’m not seeing 3,000 a month.

And a lot of times Cordell you’re going to get people that say well it’s really complicated no not really it’s a rent check that comes from a tenant and you go to the bank and you deposit it and you’re going to get a deposit slip that’s that’s it’s complicated as it gets so verified the,

Same bank account you can verify these you go back like 90 days like how far do you go back I’ll go back 12 12 months from outside, yeah, I’ll go back I’ll ask I’ll ask for 12 months because it’s fairly easy to do a quick sanity check because then I can get a trend a lot of times I do get pushed back from that from bank statements a lot of people are uncomfortable with getting vaccinated so I will put it as a contingency in my my PS right contingent upon bank statements or if I can’t absolutely get bank statements because they’re commingling there’s a lot of the owners that kind of ran at all.

Mobile school they have your mom and pops yeah yeah and they just kind of put it into their own checking account then I’ll ask for tax returns schedule yeah, yeah. So you cantrack not only your income but also your expenses so you can look at all the checks that are being written out and just cross-color correlate that with yourprofana okay and then one more check that I do is on any utility expenses that they state.

I’m gonna do a quick phone call to the utility companies to get the account number and just say, hey what’s been the average? Water. Here’s the account number. And if I don’t have permission to do it. I’ll have them, you know, have me on the call and make that phone call so I’m not easy.

I’m not an easy buyer. I’m not an easy purchase. I’m not I’m not very much like to buy this sellers but where where I don’t mess around Cordell is that once I’ve gone through those I make a financial transaction really easy, all right, you know makes sense, um, All right well I have a question like I know there has to be people out there.

Cordell

I know you mentioned you earlier. Provide coaching and things like that but what if someone wants to buy a small apartment but they need some hand holding on a due diligence process does your services include?

Francis

Cordell the three tiers of what I do is the first tier that I offer is if you’ll get it if you’re new and you’re getting into real estate. I’ve created resources right, the first resource being the job plus real estate equals wealth book, right? I also have that as abundle with an online video course right and it is a soup to nuts course that the course sort of encompasses.

I took the 15 years of managing over 40 million dollars worth of real estate, so I get into depth with you know, due to Legends how to analyze properties what type of properties to buy where to buy you know, how to negotiate with people how to surround yourself with the success teams and I give copies of the performer it’s my own version of the Proforma so it’s everything is in that and so that’s sort of my entry level, you know, you get the book and that program.

The next level is if you. ‘d be a solutionfor me like I have a client now that he flips high-end, you know, one to two million dollar homes in Massachusetts. The agreement or the work that I’m doing with them. Properties so I’ve created a funnel for him and I’ve created sort of a marketplace for him that people know if they’re selling a high-end property in the Seacoast or the South Shore of Massachusetts, he is the guy because he’s well he’s well not leverage he’s well financed right he’s liquid right he’s wealthy he’s he’s got cash in hand.

And he’s able to move rapidly on an acquisition so I’ll work with someone like that on a onon a strategy so the point being that anyone who’s got a very specific strategy right and that’s what super important if they’re very specific on what they want to do, so if someone comes to me and says, hey Francis I am thinking I want to get this as soon as I hear that I know they’re not sure exactly what they want to do, but them in your funnel yeah yeah, you know what you you’re probably likely better off reading the book getting some clarity on what you want to do and then when you come to me with a clear strategy.

Hey I am looking at properties on the South Shore of Boston, or the east side of Buffalo, this is the criteria. I’m looking for right? I know you’ve been through. Lack of a better word level one of my programs I know you’ve fundamentals you’ve been through the fundamentals. I like that yeah, so I’m able to work with you so I love projects where it’s like so you know, I don’t like corner people into hey this is I only work with people like this know that second level working with me is you have an interesting project as it pertains to real estate due diligence analyzing a property creating a marketplace for yourself a real estate agent that wants to stand out absolutely.

I’ll work with you. And then my last offering which is really where my sweet spot is is I will work with clients who are seasoned real estate investors that own portfolios small, you know, probably 10 to two 300 units in smaller portfolios but and they have a property manager or their self-managing it but they’re dissatisfied with that that portion of it.

And it’s vertical integration they don’t want any leakage of income in their business they want to create their own property management solution that’s where I come in and I go soup to nuts turn key operations for them to bill their own problems.

Cordell

I’m going to be there in a couple years and we are going to be working together. We will build that together on this show. Yeah, that’s why I do I believe to achieve all right well, um, I thank you for your time, how can people get in contact with you?

Francis

Okay a couple of different ways Instagram, which is how you got all of me. Cordell right my my handle on Instagram is at how much will I make hashtag how much will I make so if you search that you get my Instagram I’m on Facebook Francis Fernando on Facebook, if you email me Francis at Francis Fernando com my website Franciscoanda.com multiple different ways.

I’m on LinkedIn, so I’m everywhere just Google my name.

Cordell

Well, thank you, thank you thank you thank you and we’ll look forward to next time we hook up so we can chat and learn from each other. We’ll learn from you. I don’t know what you learned from me, but I’m learning a lot from you but once again thank you and we’ll see you next time Francis.  everybody like I said go to the website small apartment investors.com .

I am constantly trying to feel that website with a lot of content will see you later bye.