Today’s REI Classroom Lesson
Today, Adam Stern shares how the closing process works when closing on a rental portfolio.
REI Classroom Summary
Learn how the closing process on a rental portfolio differs from a closing on a single family property.
Listen to this REI Classroom Lesson
Real Estate Investing Classroom Show Transcripts:
Announcer: Welcome back to the Flipnerd.com REI Classroom, where experts from across the real estate investing industry teach you quick lessons to take your business to the next level. And now, let’s meet today’s expert host.
Adam: Hi, my name’s Adam Stern. I’m president of OwnAmerica. OwnAmerica is the premier single-family rental property portfolio trading platform operating in the United States today. I am the number one single-family rental property portfolio salesperson operating in the United States today. Welcome to the REI Classroom. What we’re going to talk about today is the transaction flow of looking at a portfolio, underwriting on it, offering on it and eventually closing on it.
Announcer: This show was sponsored by Passiverental.com.
Adam: It’s not quite like a regular real estate transaction. There are some nuances. It’s not quite a commercial transaction or a residential transaction. It’s somewhere in the middle so I thought I’d just take you through one since we’ve done a bunch of them.
Usually, when we have a buyer and they look at a portfolio, usually through our site, ownamerica.com, they’ll look at a portfolio and pull down the information and the data including all of the specifics about a property, regular information, bedrooms, bathrooms, year built, square footage. They look at the income that the property’s producing and verify that and get an understanding of what it is. Is it over market rents, under market rents?
They look at what we provide in terms of operating expenses which is usually a pro forma that takes the operating expenses and makes sure that there’s enough built in where any reasonable, knowledgeable operator could operate the property at that level. There’s an underwriting process, which includes the seller or the platform through which the seller’s working offering information to allow the buyer to underwrite.
Then, once the properties get underwritten, a price is offered by the buyer. Seller gets it. There’s some back and forth, offer, counteroffers. If a price can be agreed upon, then they go to contract. The price at which. . .This is a good point. The price at which a buyer agrees to buy a portfolio and the price at which a seller agrees to sell a portfolio has a lot to do with the assumed capital expenditure cost. We call it CapEx.
Seller, through a platform like OwnAmerica, will represent that the homes are in a certain condition, and a buyer’s going to underwrite to that condition and put in whatever figures he thinks are reasonable to allow himself to improve the properties and get them to an operating point where they’re going to get a return that they’re happy with.
When an offer is made and a contract is consummated, a big part of that contract going to closing is the seller being honest about the CapEx and the buyer being conservative enough about the CapEx so that they can get to a price that at the end of the inspections, if a toilet needs replacing or a cabinet needs replacing or there’s a problem with a septic tank, it’s not going to kill the deal because the reduction amount is not going to be huge. That’s an important part.
Once you’re in due diligence, generally what happens is you pick an inspector, you take your appraiser, you create one visit to each property for all of the stuff to go on. Remember, there are tenants in place. You don’t want to interrupt them or disturb their lives too much. You go in. You do your due diligence and your CapEx.
The important thing, when you’re a buyer, is to take pictures. Prove what you’re seeing is real. If you’re going to be asking for a reduction later on, if that’s the case, you want to show pictures and you want to show real, substantial evidence so that the sellers don’t have to go on your word that something needs replacing. I see a lot of buyers that don’t do any of that. They just basically offer an amount, and they don’t believe it because sellers are generally people that need to have things proven to them. They want to substantiate it.
Assuming you’re able to get through due diligence and you’re able to prove out all the things that you think need remodeling or repairing actually do need repairing, you figure out whether or not that correlates to your CapEx. If it does, you move forward to closing. If not, you have a price reduction conversation, which is always fun. But if you are calm and cool and logical and unemotional, it’s a cinch.
We get through it most of the time. I would say in 90 to 94% of the deals we have we’re able to get it to the closing table through price renegotiation because all these things are known ahead of time. You get to the closing table and that’s a whole other story. I won’t talk about the closing process for a big portfolio. That’s the boring part where we [inaudible 00:04:46] insurance companies and the lawyers.
That’s about it. That’s the closing process for a portfolio. If you want to find out more, give us a call at OwnAmerica. Go to Ownamerica.com. We’ll see you later. Thanks for watching.
Mike: Passiverental.com is your source for turnkey, done-for-you rental properties. If you’d like to be an investor and not a landlord, please visit passiverental.com to learn how to purchase cash flowing, professionally managed rental properties in the hottest rental markets across the country. We can also help connect you with financing for your next property. Invest the easy way today and get started by visiting passiverental.com.
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