Having a team in place is important for any real estate investor, but as you move into the bigger deals, you’ll need to beef up your team. My real estate attorney David Streeter from Demer and Marniella Law has seen some great deals end up falling apart because real estate investors who are trying to move into multi-family properties are simply unprepared.
It’s pretty competitive out there, and David says that you should have a strong network before you hit the ground running. You’ll need to add a real estate attorney to your team, find a commercial real estate broker with experience, and establish lending relationships so that you can raise capital quickly.
Once you have your team in place, and you finally have a letter of intent accepted, David has some best practices for your acquisition team. Do communicate with the entire team, especially the real estate attorney, throughout the entirety of the deal. Don’t lose sight of deadlines throughout the months-long process, and do take the time to build relationships with the tenants of your new buildings.
A Good Purchase Agreement Sets You Up For Success
A good purchase agreement is going to identify the purchase price, the earnest money, the title company, and have an accurate description of the property. It will set you up for the next step. When you’re talking about a multi-family property, you might have multiple buildings, multiple inspections, or even laundry leases. You really need to do your due diligence to protect yourself and go just a little beyond a good purchase agreement. During a deal we had, we discovered that instead of 735 units, there were only 730, because one of the buildings burned down, but the description was never updated.
Inside your purchase agreement, you need to give yourself some flexibility in the language. In the inspection step, it’s not just the inspection of the physical properties. You’re also going to be looking at the books and the records and verifying their accuracy. Any contracts listed on the property will have to be disclosed, like cell phone towers, or laundry leases. Potentially anything that might impact your cash flow will need to be examined.
In the residential space, you might be familiar with the disclosure form that tells a buyer if the seller knows about anything that might be wrong with the property. On the commercial side of real estate, the disclosure form needs to go further. You need to know if there are any pending lawsuits, city violations, environmental issues, or lead-based paint on the premises.
A strong seller representation and warranties in your purchase agreement is your get out of jail free card if you do come across issues that are deal breakers for you. This is why I think that having a custom purchase agreement instead of an off-the-shelf template is very, very important. This is also why you want a real estate attorney on your team. He will make sure your purchase agreement protects you and your earnest money.
Deadlines, Contracts, and Other Legalese
If you miss a deadline in a commercial deal, it has the potential to cost you tens of thousands of dollars. David says that once you have an executed purchase agreement, you should sit down and write out the timeline of what money is due at what point. If you miss the deadline by even a few hours, you could forfeit earnest money.
Of course, losing $200,000 of your earnest money is the worst case scenario. But the timeline for a commercial space is a lot different. For one thing, an inspection can’t be whipped out in 24 hours. When you’re walking around 20,000 square feet and looking in every single unit, it’s going to take some time to complete an inspection. Keeping a timeline of every deadline will help you stay on top of every step of the purchase so that you don’t make costly mistakes.
One of the other major missteps David sees made time and time again is that investors stop contacting him after the initial purchase agreement is hammered out. Because the numbers are so much bigger in a commercial deal, investors sometimes get nervous about all of the lawyer fees that might add up and they just stop contacting him.
Although you might not need much help from a real estate attorney once the original agreement is written, you might need help to write an extension down the road. If you can’t get something done on time, and your earnest money is on the line, suddenly contacting your attorney after a 2 or 3 month radio silence makes it harder for your attorney to get back up to speed on where your deal is at.
Your attorney is a member of your team, and they need to be in regular communication with you so that there aren’t any surprises for the biggest deal you may have ever been involved in.
Make Your New Tenants Your Allies
The most successful investors who’ve been able to smoothly move into multi-family investing have focused quickly on building relationships with people on the ground. Beyond brokers and lenders, these investors have also connected well with the existing property management company, the maintenance crew of their new buildings, and the tenants.
Capital and funding will only take your project so far. Many times the asset you’re buying is distressed, so one of the very first things you need to do is reassure the tenants and property managers that you’re there to do the right thing. You’ll need their cooperation to make capital improvements.
In the remodeling process, you’ll be able to identify the key tenants of a complex. You’ll need some vacancies so that you can remodel the other units, but you definitely don’t want to get killed by vacancies.
In my experience, many apartment dwellers are long-term tenants. In some cases, they’ve been in their apartments for 10, 15, 20 years, and everybody knows them. You don’t want to go barging in, trying to raise their rent to market prices just because you have your eye on the profit margin. You might be thinking about your equity, your cap rate, and your cash flow, but that long-term tenant might have relationships with everyone in the building. Upsetting them could give you problems with all of the other tenants.
So when you enter a new apartment complex, introducing yourself to the new tenants or sending out a welcome packet will go a long way to finding allies within the complex who are willing to smooth your transition for you.
Building a team and scaling up that team to tackle multi-family units is a great way to scale up your business. One of David’s last pieces of advice is that your number one job is to quarterback everything between the members of your team, and to communicate well. If you don’t, you’re going to find that there’s going to be a lot of chaos and confusion at the end of the deal when decisions need to be made clear.