As I stress time and time again to new apartment building investors, before making an offer on any apartment building real estate property be sure that the investment will be a profitable one. Banks and commercial mortgage lenders will only lend money on an apartment building that has a Debt Service Coverage Ratio of at 1.2. Once the investor has done his or her work and found a profitable apartment building to purchase then the next step is to structure a offer.

The Offer Letter

The offer that the investor makes on an apartment building should be in the form of a typed letter detailing the terms and conditions under which the investor is offering to purchase the property. After the buyer has figured out the value of the property then he or should deduct around five percent off of that figure and make that the offer price. The investor should also make the offer contingent upon receiving financing, under specified terms, within 30 to 45 days for an amount of at least 75% of the purchase price. The buyer should also include an expiration date of one week on the offer during which time the seller can review the offer.

How to Make the Offer Stronger

1. Get a letter of interest from a commercial mortgage broker that simply states they are willing to lend 75% of the properties value. This letter of interest should not be confused with a commitment letter. The bank is under no obligation to lend the money if they decide to turn down the deal.
2. Put together a professional sales agreement in simple language that is fair to the buyer and seller. This will ensure that your letter is taken seriously.
3. Include any information that will make your offer appear stronger. If you have a lot of real estate investment experience, include your curriculum vitae. If you are going to pay your down payment with cash on hand then send a copy of your bank statement showing the cash.

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This Post is from the BiggerPockets Real Estate Blog. Copyright © 2008 BiggerPockets, Inc. All Rights Reserved.

Buy an Apartment Building — How to Structure Your Offer

With the recent melt down of the sub prime mortgage market banks are tightening up their lending practices in the commercial sector of the finance industry as well as the residential. What this means for the apartment building investor is that he or she needs to make sure that he is working with a commercial mortgage broker who has experience preparing apartment building loan packages in tough times.

The underwriters at banks are now being especially stringent when following their own guidelines. In the past, when a borrower submitted a loan package to a bank loan program that required the borrower to have a minimum net worth of at least 1 million dollars for the purchase an apartment building for 1 million dollars they may have let the borrower float through with a net worth of only $900,000.000. Those days are over. The apartment building investor now needs to be especially diligent when applying for the loan and preparing the loan package for bank underwriters.

Many loan programs for commercial real estate acquisition and refinance have also disappeared. It is now very difficult to qualify for an 85% loan-to-value mortgage on an apartment building whereas in the past they were more accessible. What this means to the apartment building investor is that he or she needs to be working with a commercial mortgage broker that specializes in apartment buildings or at least a broker that only does commercial real estate loans. The two sides of the lending industry commercial and residential, are so different from another that I have never encountered a mortgage broker that I would consider especially adept in both arenas at the same time.

It is important for the apartment building investor to realize that a commercial mortgage broker will usually only charge one point in fees on an apartment building investment. One serious mistake that many apartment building investors make is that they try to contact the banks directly and submit their own loan packages in an attempt to shave half of a percentage point of the interest on the loan. What these novice investors don’t understand is that all banks who do apartment building investments are actually brokers. This means that they sell their loans to the secondary market.

The investor who tries to place his apartment building loan by himself is actually hurting his chances of finding the best rate and terms on his apartment building loan. Many banks and “direct lenders” only offer one or two loan programs that they are willing to underwrite for multifamily properties. A commercial mortgage broker who specializes in apartment building financing will be able to offer the investor ten or twelve different loan programs to choose from that match his personal financial profile and that of the property as well.

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This Post is from the BiggerPockets Real Estate Blog. Copyright © 2008 BiggerPockets, Inc. All Rights Reserved.

Apartment Building Loans — Should You Do It Yourself?