I’m glad to have the opportunity to share my latest investment in hopes of inspiring anyone in need of a nudge or offering some valuable information. I recently just closed on an under-performing and value-added commercial real estate opportunity – a self-storage property in Kern County, CA.
I saw the property through an automated email inquiry from LoopNet, based on my criteria.
I know that to some investors, LoopNet is a graveyard for deals, but I like it for that same reason. As some listings can become stale on the MLS (Multiple Listing Service), I feel that my chances of finding a motivated seller is higher.
Plus, I know how to identify the value-added opportunities.
This property is a 100-unit under-performing self-storage REO (bank owned) property on 3.5 acres in Kern County.
The 100 units alone are barely occupying one of the acres, leaving 2.5 acres of flat graded gravel still available for expansion or for RV/Boat storage.
I saw this listing back in September 2014, and what got my attention was that I used to own a multifamily property in that area from 1999-2004.
So, I knew about the area, including demographics, the micro-economic driving forces, steadily increasing population growth, etc.
It Didn’t Meet My Criteria, but…
I didn’t take any action at the time because I felt it was way over-priced, based on its existing financial condition. It was listed at $599k with 40% vacancy factor and an annual Net Operating Income (NOI) of roughly $35,000.
I need to go in at a 10% cap rate to meet my acquisition criteria. At a 10% cap rate, my max purchase price would be $350K. So, I flagged the listing to notify me of any changes, in case there was a price reduction or if it was no longer available.
After a couple of months, I received an alert that it went under contract, so I just went about my business and put it behind me. Another couple of months go by and I receive another alert that it was available again, and that’s when contacted the listing agent to express my interest.
I gave him my perspective on it and why it wasn’t moving at their price. I added that I’m the right buyer for this property, but that it had to be at the right price. I didn’t want to get in already treading against the tide.
I have to get in, where the existing income will be able to cover the operating costs (taxes, insurance, utilities, payroll, etc.) and with enough spread to cover the mortgage payment. I didn’t want to pay for an income stream that wasn’t there.
If I had to create the income by off-setting expenses and filling vacancies, then I should benefit from it.
It took a few months of going back and forth on negotiating a price, mainly because the seller was a financial institution with a board of directors, who all had to agree on the issues.
So, it usually took a week or two to get an answer, but that was okay because it allowed me to line up my financing.
The story behind this property is that it was purchased and constructed in 2006, a time when everything real estate was over-inflated.
This property had a $1,000,000 note that had been called and almost another million in out-of-pocket costs from the previous owner. That doesn’t justify a value, but it does indicate the reason for the under-performance, management inefficiencies, and potential value.
I started my offer with $270K, and after a few months of going back and forth, we finally agreed at $325K and opened escrow in August with 5% down.
So, I got it under contract below my max price of $350K and with tremendous upside.
Real Estate Investing Is a Relationship Business
You see, one of the reasons this deal came together successfully (besides knowing about the area) was that even though I’m a licensed agent and could have submitted my own offer, I would rather have the listing agent represent me and double-end the commission – as long as he’s able to present my offers and provisions effectively.
I always try to use this method initially. I’ll talk with the listing agent, try to build rapport, and see if this is what will help get the deal done.
As I mentioned, during these months of negotiations, I was trying to line up financing and found a lender that specializes in self-storage properties.
One Little Hiccup
Everything was going smoothly with the lending process except that we couldn’t provide the lenders with their required previous three years of tax returns of the self storage business. The inability to get these documents made it too risky for the credit committee to approve the asset, and I was ultimately declined the loan.
So, I Turned to Plan B: Private Investors
I’m a real estate agent and specialize in representing investors, who buy, fix, and flip residential properties.
Throughout the projects, I’m always talking about my other specialty: identifying under-performing and value-added commercial real estate investment opportunities.
This is a great way to set yourself up to find a joint venture partner or private financing.
During the loan process, I knew things were looking bleak, so I reached out to the last four investors I’ve worked with this past year and presented the opportunity to be my lender, just in case the loan didn’t go through.
I wrote down my analysis on the investment opportunity. I explained my plans to stabilize the property, the income and value before and after I stabilize it, how long it would take to stabilize it to refinance the private loan, and how their investment was going to be insulated from loss based on my purchase price.
One of the investors responded within a day, mentioning that it was a coincidence I had brought the opportunity up at the right time because he was considering investing in another asset class.
We Proceeded with Escrow…
I was hoping to get 100% financing and get my down payment back at closing to move into the next transaction that I was looking at, but the private lender insisted I keep my skin in the game.
Instead, they would fund 100% on the next acquisition, and they’ll keep on funding me as long as I perform on the agreement(s). We closed escrow in October 2015 and are already working on acquiring another self-storage property.
Our relationship during our earlier transactions opened up the door for this type of opportunity.