successful property procurement with michael pierce of prodesse

Michael Pierce, CPM, President

Prodesse Property Group 1065 E. Hillsdale Boulevard, Suite 317

Foster City, CA 94404

Evaluating Rental Properties for Purchase

Presentation to SJREI Members

The Domain Hotel, Sunnyvale

August 7, 2014

• Prodesse Property Group • 20 years in business – established October 1993

• 1,900+ units under management

• B+ to C product

• SFR’s to 100+ unit properties – Santa Clara County

– San Mateo County

– Alameda County

– Santa Cruz County (Capitola, Santa Cruz, Scotts Valley)

• 150,000 sq.ft. Commercial Space

• 70+ Employees

• Career Background – 35 years

– Multi-Family Industry since 1979

• Valley American Properties (Santa Barbara)

• Goldrich & Kest (Bay Area)

• Tan Group (Bay Area)

• Essex Property Trust (West Coast)

• Prodesse Property Group - Co-Founder 1993

• CAA 24+ years – State President 2009

• CAA Tri-County Division – President 1997


Defining Your Search

• Know Thyself

– What can you do?

– What do you want to do?

– What are you good at?

– What have you been successful at?

– What types of properties are you good at operating?


Defining Your Search

• Know Thyself…

– Pride of Ownership?

– Only cash flow matters & do not care what property looks

like or what the neighbors might think?

– Self Manage?

– Hire professional management?

– Return on investment requirements?


Defining Your Search – Property Selection

• What matters?

– Only 2 Things you Cannot Cure in a Real Estate Deal

– What are they?

» Purchase Price

» Location

» All other things can be dealt with in some way

» Good bones – can fix, but really expensive!


Property Evaluation & Due Diligence

• Sale Package

– What is real?

– What can you believe?

– Assume Everything is a Lie!

• Getting into the numbers

– Prove every number

– Build your own operating budget

– Forecast forward

– Capital plan?



• Proving Existing Revenue

– Rent Roll

– Rental Agreements/Leases

– Increase Letters/Tenant Files

– Date & amount of last rent increases

– Estoppels

– Now rebuild rent roll from scratch

Existing Rent Roll

Resident Unit Type Rent Deposit

John Doe A 2x1 $895 $800

Betty Smith B 2x1 $895 $900

VACANT C 2x1 $0 $0

Total $1,790.00 $1,700.00



• Forecasting Future Revenue

– Assumptions re: rent growth, occupancy/vacancy

» Market rents & Rent increases

» Turnover – natural or forced?

– Market knowledge

» Subtleties of neighborhoods & direction

» Remember you cannot control a market!

» You can only chart the best course through it!

Assumptions Year 1 Year 2 Year 3 Year 4 Year 5

Annual Income Growth 0.00% 2.50% 2.50% 2.50% 2.50%

Annual Expense Growth 2.00% 2.00% 2.00% 2.00% 2.00%

Market Rent Roll Per Unit Total Year 2 Year 3 Year 4 Year 5

Studio, One Bath 0 $0 $0 $0 $0 $0 $0

Jr. One Bedroom, One Bath 0 $0 $0 $0 $0 $0 $0

One Bedroom, One Bath 0 $0 $0 $0 $0 $0 $0

Two Bedroom, One Bath 3 $1,795 $5,385 $1,795 $1,840 $1,886 $1,933

Total Units 3 $5,385

Projected Cash Flow

Average Year 1 Year 2 Year 3 Year 4 Year 5

Income Monthly Annual Annual Annual Annual Annual

Rent (Current) $3,585 $43,020 $64,620 $66,236 $67,891 $69,589

Laundry $0 $0 $0 $0 $0 $0

RUBS $0 $0 $0 $0 $0 $0

Other $0 $0 $0 $0 $0 $0

Less Vacancy/Delinquency Loss 5.00% ($179) ($2,151) ($3,231) ($3,312) ($3,395) ($3,479)

Total Income $3,406 $40,869 $61,389 $62,924 $64,497 $66,109



• Proving Existing Expenses

– Verify utility costs

» Copies of prior bills

» Contact utility companies if you can

– Property taxes

– Insurance

– What is missing from seller’s expenses?

– Add back in



• Forecasting Future Expenses

– How will you operate?

» You know better than anyone what your operating

style is for a property.

– Build your numbers based upon your style & goals

– What can be cut or eliminated from expenses?

– Can expenses be reduced/eliminated via capital

investments?

» Trash bins, solar, drip irrigation, RUBs, etc.


Expenses 2.00% Monthly Annual Annual Annual Annual Annual

Advertising $0 $0 $0 $0 $0 $0

Onsite Payroll $0 $0 $0 $0 $0 $0

Landscaping $75 $900 $918 $936 $955 $974

Pest Control $0 $0 $0 $0 $0 $0

Property Taxes 1.20% $677 $8,126 $8,289 $8,454 $8,623 $8,796

Insurance $125 $732 $747 $762 $777 $792

Gas & Electric $0 $0 $0 $0 $0 $0

Water & Sewer $0 $0 $0 $0 $0 $0

Trash $0 $0 $0 $0 $0 $0

Management Fees 5.00% $170 $2,043 $3,069 $3,146 $3,225 $3,305

Other/Misc $100 $1,200 $1,224 $1,248 $1,273 $1,299

Maintenance $250 $3,000 $3,060 $3,121 $3,184 $3,247

Total Expenses 41.03% $1,397 $16,002 $17,307 $17,668 $18,037 $18,414



• Physical Inspections

– Who should be on your team?

» Property Manager or friend in the business

» Property Inspector and/or Pest Control

» Roofer

» Plumber

» Electrician



• Physical Inspections

– Walk every unit

» Talk to tenants

» Ask questions

» Look for issues – occupancy, cleanliness, etc.

» Posture with seller/seller’s agent

– Walk common areas

» Boiler rooms, shops, etc.

– Afterward – adjust budget & assumptions



• Capital Improvements

– What is your capital improvement plan for the property?

» What will you do?

» Timing?

» Impact on existing residents?

– Adjust budget & assumptions accordingly

Capital Improvement Reserves Total Per Unit

Window Replacements $2,925 $975

Signage $0

Landscape Improvements $20,000 $1,500

Unit Interior Renovation $37,500 $12,500

Concrete/Asphalt $5,000

Railing Replacements $0

Termite/Structural Pest Control Issues $7,500

Exterior Painting $5,000

Garages $0

Roofing $7,500

Fencing $7,500

Total Capital Improvement Reserves $92,925 $30,975


Financing

• Develop your financing options for the property.

– What debt level will you carry?

– What type of financing?

– What rates, terms, amortization?

– Will there be a balloon payment or interest rate reset?

• Adjust Budget & Assumptions Accordingly

Financing Options

Yrs. Yrs. Yrs. Fixed Prepayment

Loan Fixed

Amortize

d Variable Rate Pts. Penalty

LTV 65% Single Member LLC 30 30 0 5.45% 0.00% None

Over 417,000

LTV 65% Multi-member LLC 30 30 0 5.90% 0.50% 5 yrs.

20%/yr.

1% of balance

LTV 70% Multi-member LLC 15 15 0 5.30% 0.50% None?

LTV 70% Variable Fixed 7 yrs 7 30 23 4.65% 0.50% 4 yrs.

1% of balance

LTV 70% Variable Fixed 5 yrs 5 30 25 4.00% 0.50% 4 yrs.

1% of balance


Determining (Your) Value

• Finalizing your Budget & Plan

– Review all assumptions

– Recheck all figures

– Develop your Acceptable Price Point


Negotiation Strategy

• What can you ask for?

– Inspection results

– Reports

– Market changes?

• What will the current market environment allow?

• What is the seller like?

– What have you learned for the seller’s agent?

Contract Price $705,000.00

Less:

Termite Report Items 3,720.00

Insurance Repair Items 6,480.00

Buyers Agent Commission 2.50% 17,625.00

Total Deductions 27,825.00

Net Adjusted Price $677,175.00

Net Adjusted Price per Unit 3 $225,725.00


Go Decision

• What do the numbers tell you?

– Have you been honest in your assumptions?

– Is the return meeting your goals & needs?

– Do you need a price reduction and/or credits?

» What if the seller is unwilling to give them to you?

• What does your gut tell you?

• What do other trusted friends & advisors think?

• Time to Decide!


Monthly Annual Annual Annual Annual Annual

Net Operating Income 58.97% $2,008 $24,867 $44,082 $45,256 $46,460 $47,695

- Cash on Cash Return (All Cash) 3.13% 5.55% 5.70% 5.85% 6.01%

Debt Service 4.60% $2,256 $27,078 $27,078 $27,078 $27,078 $27,078

DCR 1.15 0.92 1.63 1.67 1.72 1.76

Cash Flow After Debt Service -7.29% ($248) ($2,210) $17,005 $18,178 $19,382 $20,617

- Cash on Cash Return (Financed) -0.62% 4.81% 5.14% 5.48% 5.83%

Proposed

Total Units 3

Purchase Price $677,175

Price/Unit $225,725

Down % 35.00%

Down $ $237,011 35.00%

Loan Amount $440,164 65.00%

Loan Rate *Note 1 4.600%

Loan Term 360

Loan Payment $2,256

Purchase CAP Rate 2.80%

Proforma CAP Rate 3.67%

Current GRM 33.49

Proforma GRM 15.74

Current Gross Rents 20,220

Current NOI 18,993

Required Funds

Down Payment $237,011

Reserves, Closing Costs, LLC

Formation $116,678 $38,893

Total Investment (Required Funds) $353,690 44.55%

Total Property Cost $793,853 100.00%

Total Cost/Unit $264,618


Negotiation & Execution

• If the answer is yes – Go!

– Present your case for any desired reductions to seller

and seller’s agent

» Know where you are willing to settle, where you are

not.

– Follow your plan

» If you need a price reduction &/or credits and you do

not get them, be prepared to walk away.


Execution

• If you get the deal?

• If the answer is yes – Go!

– You have built a strong budget

– You have built a strong plan

– Now - Execute your plan!

• Good Luck!

Thank You!

• Examples of Prodesse Approach

Thank You!

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