I am considering buying a multifamily property via auction. What pitfalls should I look out for?

In Buying Property - Asked by Jim G. - Oct 20, 2009
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Liz B.
Snellville, GA

Anyone thinking of purchasing through auctions should get a good look at the property beforehand--most companies have at least one opportunity for that, with someone on hand to answer questions. Then get comparables in the neighborhood, so that you don't end up paying twice as much as anyone else has. Check the requirements for bidding--in case you need a cashiers check, or a preapproval from a mortgage company. Find out what the policy is if the contract should fall through--you should be very sure you can perform, and that you aren't going to lose earnest money. Remember, many auction houses have a buyers premium, often 10%, so that what you bid is not exactly what you will pay. It is a good idea to take someone, smart friend, agent, or maybe your accountant, to restrain you if you are prone to bidder enthusiasm, which causes reckless bidding without clear thought. Good luck with your auction! Some of my clients have done very well with auctions!
Liz Bearden, Coldwell Banker

Oct 21, 2009
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Charles A.
Lender/Mortgage Broker
Houston, TX

Unless you can pay cash for the entire property make sure you are pre-qualified as a borrower before you go anywhere. As private money lenders we require the following;
1. Last 2 yrs of tax returns (Unaudited, but we need to make sure you are not bleeding cash somewhere or in trouble with other investments)
2. Stated FICO's. We like to see 700's but will work with guarantors as low as 640
3. Cash to close, whatever the LTV. Does it have to be seasoned? Or can you bring on a silent partner that will bank roll your ventures?
4. Comps for appraisals which Liz B. already addressed.
5. Clean environmentals. Pay a small fee for an ESA or make sure the auction has an out if the property comes back "hot". If "Hot" at what value will they let you out of your committment?
6. Clear title? If the property has been foreclosed on or is pre-foreclosure they owe vendors or people money. Will the foreclosure wipe out all mechanics liens? Slip and fall lawsuits? Each state is different. Ditto on utilities, all inclusive?
7. We very seldom require 6 mos P&I in reserve. Other lenders do. If you go with them, make sure that you have the cash on hand.
8. Our fees are a little higher than a FNMA conduit or bank, 3%-4% to close, but we move a lot quicker. Velocity of money is important. Put the deal together in 30days rather than 60-90 and it can strengthen your bid position.
9. Interest rates are key as well. At 7.5% weighted average on closings last month we are a bit higher than conduits and banks, but again, we move quicker. If the current rate of burn on cash, i.e. expenses is to high, or rents to low, then you won't have the NOI needed to make the deal work at all. Make sure to do a thourogh analysis before you bid.
10. Quality of leases. Have the tenants been paying, but the borrower has not?
Just a few things you can consider before your journey.
Charles Abernathy

Oct 21, 2009
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Gregory G.
San Francisco, CA

Make sure the title is clear...
Gregory Garver - Commercial Real Estate Broker
Broker License# 01716531

Oct 23, 2009
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