No Time Like The Present

By Natalia Beran, McQuaid Agent

For the status quo people looking at the past, present and future generally seem to focus more on reflecting on the past and the future rather than placing importance on the PRESENT. Overly cautious because of the past and overly anticipating the future is the "soup du jour" and commonly reverberated amongst investors.

Anticipation of what the future might bring whether it's a buyer hoping for prices to fall significantly or a seller trying to sell at past prices, one often neglects the PRESENT. Maybe it's because the PRESENT is a fleeting moment that quickly becomes the past, but it is in that instant that determines the potential for your future. A seller waiting for offers reminiscent of the past will likely overlook PRESENT day offers that are still solid offers. A buyer waiting on the sidelines trying to anticipate the future all the while holding out for better deals down the road will likely miss out on PRESENT day deals to be had.

Take hold of the PRESENT and see what today brings; those deals that exist today quickly become either the past or what your future will bring.

Lending

By Ben Barker, McQuaid Associate Broker

Many of my current conversations with apartment building owners revolve around if their apartment assets have held their value during this economic downturn. This of course depends on many factors including location, gross income, and condition of the building. Buyers are scrutinizing buildings more and do not look at the upside of a building as they did a year ago. Most importantly, lenders have raised their criteria to 60% loan to value which minimizes one of the large advantages of owning apartment buildings, leverage. So, there are two natural ways to keep leverage in a deal: seller finance and assumption of an existing loan.

I recently took a client through the loan assumption process for a University District apartment building which was at least as difficult as originating a new loan. Even though the buyer had very strong financials and was in a better position than the existing borrower, the bank still asked for over a 15% pay down of the loan. This wasn’t acceptable to my buyer. So, even after I had gotten the seller and buyer to come to agreement on price and terms, this began an entirely new round of negotiating. We were able to get Chase to reduce their pay down requirement to about half of what they originally requested. Without our work with the bank, the buyer could not have assumed the loan and the deal most likely would have fallen out of contract.

So that leaves seller financing. Only owners who have owned their buildings for quite a while without pulling any equity out are eligible to operate as the note holder since there is no loan balance to pay off. Since this does not involve a bank and their oversight, the assurance that a broker brings into a deal becomes even more meaningful. What are your goals? As a seller, to be paid off quickly or to have guaranteed long term income? As a buyer, will the additional price of seller financing be capitalized in the buyer’s holding period? How does the note need to be structured so that the seller’s and buyer’s goals are achieved? These are all questions that both the use of an experienced high integrity broker and the open market will best address.

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It Only Happens Twice A Year

As of Tuesday, we have sold an 8-Unit apartment building, now twice in the past year and at an increased price!

The seller had bought this property last June, with a plan to renovate and keep the property as a long-term investment. However in December the owner unexpectedly relocated to Beijing. The renovation plan was only partially completed however some of the rents had increased and overall the property looked much better from the exterior. After determining the likely sales price we brought the property to market and secured a good buyer within about 6 weeks. The buyer decided to pay more money down and assume the existing loan rather than enter into the uncertain new debt market. After the dust settled, the sales price was nearly 12% higher than the price paid 10 months earlier.

The seller, VIP LLC, an entity controlled by Yimin Chen, says that without the determination of the broker this deal would have never happened and it needed to.

The price per unit of $174,375 was considered reasonable due to the higher yield/CAP of 6.68 attributable to the high rents paid by high demand student population seeking close proximity to the UW.

One (Unit) Size Does Not Fit All

By Noah Klika, McQuaid Agent

While every investor has their own personal objectives and criteria for acquiring apartments, one factor that seems to be very inconsistent among principals is the desired or best unit mix for a property. The majority of the principals I speak with are all looking for the same thing: well located, good condition apartments for sale below replacement cost, as close to neutral or positive leverage as possible, lowest GRM and highest cap rate possible, etc. However, introduce the unit mix variable into the equation and the answer varies dramatically. Like anything in life and not to sound vague but the best answer is “it really depends.” More specifically, it depends on the submarket of the property and the demand for specific unit types within that defined submarket. Every submarket arguably has a unit mix or unit type most conducive to that particular submarket and the demand of prospective and current residents within it. I remember when we were marketing a property recently in Pierce County with a very rare and unusual unit mix (all 4 bedroom/2.5 bath units). Despite the fact that the property was only a few years old, in great condition, performing strong financially and offering a new owner a great return on investment, some principals simply could not understand or believe that particular unit type was not only appropriate for that submarket but that there was a strong demand for it. Well, the eventual buyer of the property understood the unit mix and is earning an excellent return on his money especially compared to competing investment alternatives and returns available today.


This week we brought a new property to market on Capitol Hill. This particular property is in an excellent location, amazing condition, features tastefully renovated interiors and offers certain rare amenities such as parking and a pitched roof. It is being offered for below replacement cost, at nearly neutral leverage in light of current financing available, and at a price consistent with recently closed or pending properties on Capitol Hill currently. Some of the buyer feedback we have gotten is that there are no two bedroom(s) in the unit mix. For this particular submarket the unit mix most conducive for a building is studios and one bedrooms (both available in this particular property with a great distribution between the two). The Capitol Hill market, with its higher concentration of singles as opposed to families, should have investors preferring studios and one bedrooms over two bedrooms. As well, Seattle has one of the nation’s highest rates of single person households and with the trend of people preferring to live in the city over the suburbs for a multitude of reasons the demand for studios and one bedrooms is here to stay and will likely be greater moving forward. Long story short, the unit mix needs to fit the neighborhood. 4 bed/2.5 bath apartments may work well in Pierce County but would not fare well in close-in, urban neighborhoods where the demand is greater for studios and one-bedrooms.

Idea

I heard a talk by a past head of the EPA. He was talking about how Puget Sound is in dire need of urgent clean-up, etc. He also mentioned that the Puget Sound Region currently has a population of roughly 4 million people that is expected to grow to 5.5 million by 2020. Begs the question: where are they going to live? This ties into what my wife asked me the other day: where are the people going who are moving out of apartments? I think maybe what we have going on currently is that tenants are converting to ownership due to reduced pricing and that the replacement tenants that come from the revitalized economy that comes from the new home owners has not yet occurred.

It will.

Evidence of The Turn-Around?

I have had several owners and property managers tell me over the past couple of weeks of April that they have received more notices to vacate than usual but that almost 100% of those departing tenants are doing so because they have purchased a place. This is good news from the perspective that people who own tend to stimulate the economy more than those that rent.

I mentioned this to one of my co-workers who replied that both of her best friends have each purchased their first home in the past four weeks because the both the pricing and the interest rates for the mortgages were “at rock bottom”. Obviously these are relatively young people who don’t remember the $15,000 home market in the 1950’s but it doesn’t matter since perception is reality in the marketplace which is exactly my point: the market has turned up (well, at least it has stopped falling). So these new homeowners will hire painters, new cabinets, new furniture, etc. and everything re-starts after the long winter hibernation of 2008.

“Sealed bid”?

I wonder… recently two buildings were marketed in the urban Seattle area by an out of area company not known for Seattle area brokerage work. The properties were owned by a bank via their foreclosure on the condo convertor so I could only conclude that the banker and the broker must be friendly. In any case, I spent many hours and days helping a client evaluate the market for the units as apartments (both buildings were empty, one of them still in need of a great deal of re-construction work) as well as bringing in a general contractor and obtaining bids, etc. all of which was known in advance to be risky since the properties were being marketed without an asking price. We took some comfort in the representation by the sellers’ agent that any and all bids would be sealed and not shopped.

I have come to learn that there were at least 15 bidders, including my client. I was recently told that the winning bidder turns out to be the broker! After 25 years in the business you would think I would see this one coming but I still get fooled sometimes. I am shocked that a bank (that I hear on the street is in dire straits) would stoop so low as to be a part of this type of behavior but, who knows, maybe one of the bankers is in on the deal too. After all, how could an above reproach bank do anything disreputable? Oh wait, I am showing my naiveté yet again.

I know of another bidder who learned of this as well and said “you only get to make your reputation once”. I think this is simply yet another example of why I should only do business (or at least try to) with people of known good character. Doing otherwise is simply my foolishness.